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Brexit: Implications for Commercial Contracts

The exact manner of the UK’s exit from the EU is still unknown, but despite this uncertainty, businesses will benefit from thinking ahead on the possible implications from Brexit, and a key element of this will be the potential impact on commercial contracts.

There are relevant concerns for contracts already in place as well as for upcoming contracts – what are the provisions a contracting party should be looking for, and how can they best safeguard their position? The first section below looks at the most serious concerns where the impact is expected to be most significant. The next section looks at concerns that are noteworthy but not necessarily as pressing, and the final section suggests some lower risk issues.

Significant Impact post Brexit

Generally, when looking at major commercial contracts to gauge how Brexit may affect them, the top priority should be the contracts already in place which fall within both of these two categories (the Key Categories):

  1. the contractual term will run beyond the date of the UK’s departure (expected to be in March 2019); and
  2. the nature of the contract means that it crosses the UK-EU border in some way.

The second Key Category is very broad and can come in many forms. For instance, there may be a supplier situated in Germany and a buyer situated in England, or an English company offering its products to English customers but doing so in reliance on EU regimes and laws. It is worth remembering that for some contracts which superficially appear not to cross that border, perhaps on account of all elements of the contract falling within the UK, or no elements falling within the UK, there may still be underlying ramifications which will be relevant.

The broad possibilities of the second Key Category are further explored under the following subheadings.

References to legislation and to the EU as a territory

If a contract refers to the EU (for example, by establishing the EU as an area of exclusivity or stating that data will not be transferred outside the EU), Brexit could lead to unintended treatment of the UK under that contract – that area of exclusivity will be cut down so that it no longer covers the UK, and any data transfers to the UK are not covered any more.

References to legislation could also be problematic, and not necessarily addressed by a simple check for mentions of EU Directives or Regulations. EU legislation may cease to apply in the UK, but in addition any UK legislation originally introduced to harmonise with EU legislation and policy may also cease to apply, or change significantly. The effect could be particularly pronounced for sectors where significant regulatory measures have been imposed at the EU level, and more generally for parties which have warranted that they will comply with EU rules.

At the time of writing, the UK government has proposed a plan to employ a ‘Great Repeal Bill’ as part of the Brexit process. The intention is that an Act of Parliament will repeal the European Communities Act of 1972 (the Act which originally made EU law part of the UK legal system), but the new Act will also convert existing EU law into domestic law “wherever practical”, then those converted laws could then be repealed or reworked at a later point.

This approach would mean a more gradual process of detaching, with EU-derived legislation not necessarily being disapplied en masse at the point of the UK’s departure. On the other hand, an automatic conversion of law could result in some uncertainties or difficulties where the converted laws refer to non-UK authorities as being arbiters or overseers of the rules established therein. Accordingly, such responsibilities would presumably have to be assumed by equivalent organisations in the UK. There is also no concrete indication of which converted laws would be the prime targets for being rewritten to a significant degree soon after Brexit, as opposed to those which would most likely remain virtually unchanged from their pre-Brexit form. For these reasons, if a contract is drafted on the assumption that obligations and restrictions currently imposed by EU-derived legislation will continue to be in effect in much the same way for years to come, this could prove to be problematic.

Suggested actions are as follows:

  • For contractual provisions dealing with the EU as a territory, confirm whether the relevant definition covers the member states from time to time, or specifically names each country. The “from time to time” wording will not include the UK post-Brexit, but if there is a full list of countries and the UK is named, then the UK should still be covered by the contract even after Brexit. If there is no express wording to indicate which interpretation prevails, various contextual factors will determine whether the UK is suddenly excluded, so the outcome could vary from one case to the next.
  • If there is any legislation key to the operation of the contract which may be affected, check for a clause which says that references are to provisions as modified or re‑enacted. In the absence of express wording to say otherwise, the default position (as established by the Interpretation Act 1978) is that references to repealed laws are construed as referring to the new law where that new law repeats and re-enacts the older law being cited in the document. The combination of the Interpretation Act with the planned Great Repeal Bill could deliver an outcome of minimal effect on references to legislation, with a contract’s citation of an EU law being effectively rewritten as a citation of a newly-converted UK law. Having said that, it would be risky to place significant reliance on the conversion happening as currently outlined, or the Great Repeal Bill’s conversion process producing such a straightforward result.

Force majeure, frustration and material adverse change

It may be that Brexit will have a particularly serious effect on the operation of the contract, and the parties may feel that being tied to commitments based on a different framework will lead to undesirable outcomes. On that basis, it is advisable to check whether Brexit could fit into the ambit of any force majeure clause, or whether there are any other ways to establish Brexit as grounds for ending or renegotiating the contract.

Suggested actions are as follows:

  • Review the definition of force majeure and consider whether Brexit could fit within this definition. If it is feasible that it could, consider the impact on the other contracting party’s duty to perform its obligations, and the potential for it to rely on this to avoid liability for non-performance.
  • Look for a “material adverse change” clause, or any wording which may permit renegotiation of terms should the contract become unprofitable or subject to a change in the law.
  • Consider whether it will be possible for either party to argue that following the UK’s withdrawal, frustration will apply. This would only apply to a contract which creates obligations that have become impossible to observe, with neither party being responsible for the change. Mere inconvenience or the incurring of additional costs would be unlikely to qualify. Conceivably there may be a stronger case for frustration where a contract heavily depends on EU regimes such as passporting.

New burdens when operating the contract

Any cost-benefit analysis of a contract may be completely altered in the new commercial and legislative landscape that develops after withdrawal from the EU. New burdens of cost, risk and compliance will most likely appear and they will have to be borne by one or both of the parties. If responsibility for them is not addressed explicitly, these burdens could sour the relationship, and could even lead to fines or other penalties if neither party addresses what is needed under the new rules.

Suggested actions are as follows:

  • Review mechanisms for pricing, given the potential for new import tariffs, VAT changes and other costs of trading. If the currency of the contract is sterling, look for any wording addressing serious fluctuations in its value. There may also be provisions for both parties conducting reviews and renegotiation of prices, especially in contracts with a particularly lengthy term.
  • Look for arrangements which depend on regimes that may cease to apply, such as free movement of good / services / people or EU trade deals. If new compliance procedures are introduced, is there any indication of which party will have to discharge that duty?

 

Potential Significant Impact post Brexit

There may be less risk for contracts which are not yet executed than for current contracts, because the parties can plan around Brexit and redraft accordingly, rather than being tied to terms concluded before the referendum which now have the potential for serious complications. Nevertheless, once the review of current contracts is complete, businesses should take care when drawing up new contracts which will fall into both Key Categories.

This section revisits topics covered in the previous section, but here the focus is on how to draft new contracts so as to anticipate and accommodate the impact of Brexit. There is also a new topic to consider for both current and future contracts – jurisdiction and enforcement.

References to legislation and to the EU as a territory

Suggested actions are as follows:

  • Consider the circumstances and decide whether the contract should cover the EU as its membership changes, or always include the UK. In the latter case, it may be best to add express wording to say that if the UK leaves the EU, then the relevant territory is automatically extended to include the UK along with the EU.
  • As an additional precaution to address the possibility of Brexit leading to a future change in membership of the UK (e.g. Scotland proceeding with independence), when the UK is mentioned as a territory in a long-term contract, it may be sensible to plan ahead and draft appropriately. Should the territory be the UK as it stands now, or the UK as it changes from time to time? Make the preferred position clear.
  • Decide whether it will be best to incorporate legislation as it evolves or to have references remain fixed at the time of signing the contract. As a precaution where legislation is incorporated ‘as amended’, consider whether the contract should state that changes that have a materially adverse effect on the standing of either party under the agreement are disregarded where possible.

Force majeure, frustration and material adverse change

Suggested actions are as follows:

  • If Brexit is likely to seriously interfere with the contract, include an express right to suspend, terminate or renegotiate terms which will arise upon the particular change that is anticipated (such as, in the case of a contract dealing with goods being exported from the UK to an EU member state, the new imposition of a quota or tariffs on such exporting).
  • The definition of force majeure could also encompass certain Brexit-related events relevant to the subject matter of the contract – for example, EU trade marks no longer extending to the UK, or the EU procurement regime becoming inapplicable.
  • If looking to ensure that the contract continues and the other party will not try to claim Brexit as grounds for any change in position, include an express statement to confirm that the force and effect of the contract (or select clauses of the contract) shall not be prejudiced or diminished by the UK leaving the EU.

New burdens when operating the contract

Suggested actions are as follows:

  • Add express wording to address pricing mechanisms, pricing reviews, fluctuations in value of currency and how newly-arising compliance duties will be fulfilled by the parties.
  • If one party is weighing up the option of either moving their business out of the UK or undertaking some other reorganisation once Brexit happens, consider whether assignment to a group company should be permitted, and whether there should be automatic termination following such restructuring.

Jurisdiction and dispute resolution

Unlike the previous topics, this could prove to be an area of lower impact for current contracts, but equally there could be significant shifts whose effects are widely felt, and so it belongs in this section where the impact is particularly uncertain.

Brexit could introduce further complications to any disputes between parties where one remains in the EU and the other does not. Currently the UK is subject to the Brussels Regime’s rules on determining jurisdiction for disputes which bridge more than one country from the EU Member States and/or the European Free Trade Association states (Iceland, Liechtenstein, Norway and Switzerland), but one possible (or even, likely) future effect of leaving the EU is that the Brussels Regime will cease to apply to the UK.

If this happens, English courts should continue to respect foreign judgments and jurisdiction clauses, but it could cast doubt on whether a clause claiming English jurisdiction will be followed in the courts of every remaining member state, and on whether English court judgments would be fully enforceable in every remaining member state – some member states will be more of a risk than others.

On the other hand, the effect of Brexit could be effectively minimised in respect of jurisdiction, because it is foreseeable that the UK and EU could enter into an agreement that mimics the approach under the Brussels Regime.

If planning around the outcome of not having the Brussels Regime or anything similar in place for the UK, suggested actions are as follows:

  • If a current dispute which relates to the UK and another part of the EU is likely to continue beyond the point of the UK withdrawing, look at taking steps to resolve the dispute sooner, possibly by way of settlement or alternative dispute resolution if faster progress through the courts is unlikely.
  • Prioritise action as soon as practicable on any court judgments which will need to be enforced in another EU state.
  • For any upcoming contract which crosses the UK-EU border in some way, ensure that the contract is explicit on its governing law and the jurisdiction which has been chosen. Given the known risk that judgments from the UK courts may not be easily enforced in other EU member states post Brexit, then it is sensible to include a non-exclusive jurisdiction clause in respect of the UK courts or choose the exclusive jurisdiction of any other appropriate member state. A further option is to consider including a binding arbitration clause or other alternative dispute resolution mechanism.

Lower Impact post Brexit

It should be emphasised that while the position on jurisdiction could be transformed by Brexit, choice of law is less of a concern. Even after Brexit, it is expected that English courts will still honour a clause providing for the governing law to be that of an EU member state, and it will still be unlikely for a court in an EU state to ignore express wording choosing English law.

Beyond this, the “lower risk” label applies to any minor contracts and contracts that are not within the Key Categories. If a contract will end before March 2019, then it should not be a concern, although a prudent approach would still be to consider the likelihood of some such contracts being renewed on the same terms without full scrutiny. If a contract will last beyond that date but does not appear to fall into the Second Category, insofar as none of the topics listed in the previous sections are applicable, the safest approach will still be to exercise caution, and to be on the lookout for new Brexit-related issues coming to light.

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