Britain’s decision to leave the European Union is one that will have wide reaching ramifications across many different sectors, but as of yet the road to Brexit is paved with uncertainty.
Whilst English contract law is on the whole not governed by EU legislation, Brexit – both up to and after it takes effect – will still have implications for commercial contracts, especially those that involve a party outside of the UK.
Considering how your key contracts will be affected by Brexit is a difficult task, given the amount of uncertainty around how it will be achieved and what the landscape will look like once it takes effect. Reviewing how your rights and obligations could change post-Brexit can help you plan for any damaging effects it could have on your business. Below are a few points to consider when conducting an audit of your key contracts:
Increased costs and delay
Exchange rate fluctuations and increased trade barriers could leave UK businesses with greater costs when importing or exporting goods to Europe. Custom checks (if the UK ceases to be part of a customs union) on goods entering and leaving the EU may also result in higher costs and delays.
Consider whether your existing contracts need to be renegotiated to determine who will bear the cost of any new taxes, levies and duties that come into force, or whether you can include protections against exchange rate fluctuations.
Some of your contracts may include the European Union as the territorial scope. Depending on the definition in the contract, this may or may not include the UK post-Brexit.
If your contract expressly refers to the EU and there is any ambiguity as to whether this will include the UK post-Brexit, you may want to seek agreement to amend the contract to avoid any uncertainty in the future.
Free movement of people
It is unclear how the principle of free movement of people will be affected by Brexit, although it seems likely that some form of restriction will be forthcoming. For businesses that rely on workers from other European countries, this could result in a shortage of labour. For other businesses, a shortage of labour may lead to increased wages and therefore increased costs.
Many contracts contain a provision whereby one or both parties can terminate the contract following the occurrence of certain events outside the party’s control (known as force majeure – Latin for “superior force”). Force majeure clauses tend to relate to acts of God and other unforeseen events that are beyond the reasonable control of the parties. Whether Brexit will fall into this category will depend on the drafting of the contract and the specific circumstances around it.
However, the fact that a contract has become economically nonviable for one party due to a change in circumstances, as could be the case with Brexit, has previously been held as not being a force majeure event in English law. On the other hand, a clause that allows termination on a “material adverse change” may allow termination in such circumstances, but again it will depend on the drafting of the contract.
The best way to avoid such a scenario is to negotiate express rights to terminate into your key contracts that may be affected by Brexit. Whether this is possible will depend on the contract itself and the each party’s negotiating power.
Jurisdiction and Enforcement of Judgments
It is anticipated that contracts that are “subject to English law”, and those where the courts of England have exclusive jurisdiction to hear disputes, will be respected post-Brexit by the EU and its member states.
However, it may become more difficult to enforce a judgment from an English court in the EU (and vice versa) post-Brexit. Currently, the recast Brussels Regulation allows UK judgments to be enforced in other member states via a streamlined process. This allows you to obtain a judgment in English courts and enforce it abroad if necessary.
If the regulation ceases to apply, it may be that the ability to enforce an English judgment in the EU will be governed by local laws, which will likely be far less streamlined and far more costly.
Our corporate and commercial team are experienced with drafting, reviewing and auditing contracts from a variety of different sectors, kick starting your preparation for Brexit.