Brexit: Implications for Commercial Contracts

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Brexit: Implications for Commercial Contracts

Published 5 January 2017

Countless litres – or should that now be gallons? – of ink have been spilt since 23 June last year on the result of the UK's referendum on continued European Union membership and the implications of the "Leave" vote for both those in the UK and those elsewhere. I doubt there are many left on the planet who are not now familiar with the "in's" and "out's" of Article 50 of the Treaty of Lisbon, and indeed one of my Christmas presents was a spoof Enid Blyton book entitled Five on Brexit Island.

Until recently, it had been understood that the UK Government of Prime Minister Theresa May would serve notice under Article 50 before the end of March 2017, triggering a two-year negotiation process and the UK's exit from the European Union around 1 April 2019. Despite a recent vote in the UK House of Commons authorising this, we must now await the UK Supreme Court's verdict in R (on the application of Miller and Dos Santos) v Secretary of State for Exiting the European Union, which is expected later this month, on whether the UK Government may rely on the Royal Prerogative to serve such notice or whether an Act of Parliament is needed. Watch this space.

For some time now, of course, businesses both in the UK and elsewhere have been thinking about the implications of Brexit, how it might impact them and what, if anything, they can do about it. Whilst we still know neither the form which Brexit will take nor exactly when it will happen, in this briefing we look at some of the implications of Brexit for commercial contracts. (We do not look here at consumer, agency or certain other types of specialist contract, which are outside the scope of this briefing.)

Generally, we do not think that Brexit will affect English contract law itself very much, if at all. However, and clearly, depending upon the form Brexit takes it could have adverse commercial consequences for one party to a contract. Further movements in exchange rates, such as those we saw in the USD:GBP rate immediately following the referendum, or the imposition of customs tariffs could make a contract less profitable, or indeed unprofitable, for one of the parties. The ability to perform a contract could be hampered by customs checks at, or changes in the regime for the movement of the personnel required across, the UK/EU border. And entire contractual arrangements could become unnecessary, for example if a business decides it no longer requires a presence in the UK.

In these circumstances, in the absence of very clear contractual wording parties are unlikely to be able to rely on force majeure clauses and the English courts should be expected to be reluctant to imply provisions protecting one of the parties from a "bad bargain" or other adverse consequences of Brexit. Even where Brexit made performance impossible, as opposed to merely more difficult or expensive, it would seem brave to rely only on a force majeure clause or the contract law doctrine of frustration. Accordingly, when negotiating new contracts which are likely to last beyond the effective date of Brexit, parties should think about express provisions to deal with perceived risks – such as, for example, passing on some or all of a price or cost increase – and/or termination rights or "material adverse change" clauses linked to certain Brexit-related consequences. Similarly, with at least two years to run before Brexit occurs, there is still some time to try to re-negotiate existing long-term arrangements where Brexit-related risks are identified. In addition, and of course, in some situations hedges or other commercial solutions may be available as well or instead.

In similar fashion, references in a contract to "the member States of the European Union" or to "EU laws" may require some consideration. Is it intended that these expressions should include the UK after Brexit and, if not, does that matter?

We do not currently expect Brexit to make English law less attractive to contractual parties as a governing law, nor is it anticipated that the English courts themselves will be affected by Brexit. However, depending upon any agreed "exit treaty" which may be negotiated – and bearing in mind here Canada's own recent experience in negotiating with the EU – it may become more difficult to enforce English judgments in EU member States. This is because, absent agreement being reached on a solution, the UK would cease to be bound by the rules which currently underpin the mutual recognition and enforcement of judgments within the EU (currently as it includes the UK). Arbitration may be a viable alternative in some cases, as it would take place under the arrangements within the New York Convention, and we may see an increase in parties opting for arbitration as their preferred method of dispute resolution. Otherwise, it may become necessary to look at the other legal systems involved and the extent to which, if at all, enforcement of an English judgment may be subject to local procedures and/or re-examination. Where a party has a current dispute which it might need to pursue through the English courts and then enforce in another EU jurisdiction, it would be worth looking at whether to start the process sooner rather than later.


Jonathan Deverill

Jonathan Deverill

London - Walbrook

+44 (0)20 7894 6045

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