How will Brexit impact commercial contracts?

Despite the UK’s position vis-a-vis the European Union still being the subject of much discussion, the next few years will undoubtedly be a period of legal uncertainty as far as the interpretation of legal contracts is concerned. As a result, London law firm Sherrards Solicitors suggests that businesses should start to look at their key commercial contracts (when made under English law) to evaluate the potential impact of Brexit with the following considerations in mind:

Existing contracts

Businesses must consider whether the basis upon which the agreement is established will be affected. For example, is the contract reliant upon particular EU provisions, such as the free movement of goods, making it essential for the operation of the contract and without which that contract would become incapable of being performed as originally anticipated?

It is possible that the doctrine of frustration could be applicable, either at the time of exit or even possibly before once the terms of the UK and EU negotiations become more clear. While there is a narrow scope for the doctrine, a possible exception might be where it is unlawful to continue obligations without EU authorisation and that authorisation can no longer be obtained on the basis that this was completely beyond the parties’ contemplation when the contract was entered into. 

Although it may be difficult to negotiate those terms at this junction, one may wish to check the impact of legal terms such as: 

• The scope of any force majeure clause, allowing for the suspension of performance and eventually termination of the contract? Check the definition and effect of force majeure or any other termination events
• A material adverse change clause (or MAC clause) that could trigger on Brexit, and if so, what the trigger would be?
• Any rights to terminate on notice or not, or to renegotiate? This will be relevant if for example the following is introduced: new laws, new barriers, tariffs, credit risk, insurance terms etc… or the cost of performance increases
• Are there any EU legal concepts or definitions in the contract that will need to be reviewed or updated? For example, representations and warranties on matters such as employment policy. Also, you should consider if it may be relevant to refer to England, Wales, Scotland, Northern Ireland rather than “the UK” or “Great Britain”.

New contracts

Going forward for any new contracts, it may be desirable for parties to include a “Brexit clause” which specifies what will happen in the event of Brexit. Parties should proceed with caution if they are drafting based on local laws of a particular member state. It may appear that such clauses are more certain in the short term, however, it could have undesirable long-term consequences of excluding parties from more favourable enforcement regimes and agreements that could be negotiated between the UK and the EU as part of the post-Brexit settlement.

Alternatively, Brexit could potentially be caught by drafting a force majeure clause to include references to acts of government or a regulatory body.

Jurisdiction and governing law

Currently, various international treaties govern contractual arrangements in relation to jurisdiction and governing law. In the EU, “Rome I” establishes the applicable law for contract terms, “Rome II” deals with non-contractual obligations and the “Brussels Regulation Recast” deals with parties’ choice of jurisdiction. Following an exit, these rules may fall away in their current form, to be replaced by hopefully something similar. On the other hand, if they no longer apply, their replacement may not be what the parties had in mind… particularly when no written contract is in place. 

Lawyers currently anticipate that one of the key areas that is likely to lead to disputes is the uncertainty of the choice of “English law” (or other European laws) as the governing law of a contract; is it to be interpreted at the time of contracting, ie when EU law formed part of English law? Or is it to be interpreted at the time of performance, when EU Law is no longer part of English law….

For existing contracts, it is important to ensure that all contracts include a choice of governing law and a jurisdiction clause with any necessary waivers included. For those that are concerned about enforcement of their English law contract with another member state, parties are well advised to make sure that they have an exclusive English jurisdiction clause. 

A possible consideration for drafting new contracts would be to clarify that the choice of English law means English law as it stands from time to time, subject to variations. This would then include any variations that may arise from the exit. It is no surprise to note that the arbitration clauses are also on the increase…. 

However, it should be noted that whilst the UK will not remain a party to Rome I and II, the courts of the EU member states will continue to respect the parties’ choice of governing law on the same basis as before as they will continue to apply the EU rules. As such, in theory, a choice of English law would be respected if it is specifically set out in a written contract.

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Service of proceedings

With regards to service, the default position under the English court rules is that the party commencing proceedings must get permission to serve out of the jurisdiction. However, the UK currently also has the benefit of the EU Service Regulation which states that there no need to apply for leave to serve out of jurisdiction if service is to be effected in the EU.

Following the exit, this will no longer automatically apply and parties doing business with non-English parties should make sure they include an agent for service of process clause so that they are able to appoint an agent for service in England if they have agreed to the jurisdiction of the English courts. However, it must be noted that in the event that the UK accedes to the 2007 Lugano Convention, a similar exemption will apply for service within the countries that are party to the treaty.

For advice on preparing your business for Brexit

Géraldine Fabre, partner at Sherrards Solicitors, is dual qualified as a solicitor in England and Wales and an Avocat au Barreau de Paris. She runs the firm's French Desk and will help with checking your existing arrangements under French and English laws and provide you with advice on mitigation strategies and on dealing with new projects with Brexit in mind.