Potential impact of Brexit on commercial contracts
We still do not really know what will happen after the UK voted to leave the EU last year. However, we have put together some thoughts on the impact this might have on commercial contracts which we hope might be useful.
One key thing to remember is that the Referendum actually has no legal effect. However, the Prime Minister seems to feel honour bound to comply with the outcome of the Referendum and has sought to give effect to the result. Even though the UK has now formally given notice of its decision to leave under Article 50 of the Lisbon Treaty, the UK still has two more years to negotiate the terms of its exit and future relationship with the remainder of the EU. In the meantime the UK still remains an EU member. The timing on triggering Article 50 means the UK looks set to leave the EU by Summer 2019.
There will therefore be no change in the short-term from a legal point of view and the overall impact on commercial contracts will probably be very little, at least for the foreseeable future. So there is no immediate need to panic as far as commercial contracts are concerned.
However, some aspects of commercial contracts that may be relevant to consider are set out below:
- Pricing
- Fluctuations in the value of the pound and other currencies may affect the profitability of existing contracts but, in the absence of an ability to terminate on notice without cause, there may be little that can be done unless the other party agrees to accept a price variation.
- For new agreements, parties may want to consider setting charges in currencies that are likely to have greater stability or building in express provisions which allow for price variations or a right of termination if the exchange rate moves outside certain stated parameters.
- Force majeure
- The principle of force majeure only applies to a contract governed by English law if there is an express force majeure provision. Whether it is applicable to the particular circumstances in issue depends exclusively on the exact wording of the clause in question.
- Force majeure events giving rise to a right to terminate are usually defined as acts, events or circumstances beyond the reasonable control of the party concerned. In this sense Brexit would seem to qualify. However, force majeure clauses typically only provide relief if the relevant event prevents or delays performance. Another condition often inserted in such clauses is that the event or circumstance must not have been reasonably foreseeable. Particularly given the long lead-in time that we anticipate, it is difficult to see how Brexit would constitute a force majeure event under such a provision. The affected party is also often under a duty to take all reasonable steps to mitigate the effect of the event or circumstance before being able to invoke the clause.
- Note as well that a change in economic or market circumstances affecting the profitability of a contract or difficulty in obtaining financing was not regarded as being a force majeure event in a case a few years ago – a claim that an “unanticipated, unforeseeable and cataclysmic downward spiral of the world's financial markets" triggered the force majeure clause was unsuccessful (Tandrin Aviation Holdings v Aero Toy Store [2010]). (See also Gold v BDW [2010] where in the context of the slump in commercial and residential property prices during the credit crunch in 2008, the Court would not intervene to allow a party to escape from a bad bargain.)
- We therefore think it unlikely that force majeure provisions will be relevant so as to excuse performance or give a right to terminate but each case will turn on its own facts and will require consideration of the individual clause wording.
- Changes in law
- Most public sector and some other long-term agreements expressly include ‘change of law’ provisions which provide who will bear the risk and cost of any changes in law. These may need to be reviewed as and when it becomes clearer what, if any, changes in law are likely to be made.
- More common are standard ‘boilerplate’ provisions which expressly provide that any contractual references to a statute are to be construed as references to that statute as amended or re-enacted. This effectively means that the party who has the responsibility for compliance remains responsible for it even if compliance becomes more onerous or expensive.
- For new contracts it may be that contracting parties pay more attention to change of law clauses in future. Rather than just being waived through without too much thought, parties may want to scrutinise such provisions more carefully and perhaps include express rights of termination to guard against the current uncertainty. The problem here is that drafting any such clauses may be extremely difficult and, as a result, it may become more common for parties to simply elect to include rights of termination without cause at short notice in order to provide a safe ‘escape route’.
- The most significant impact going forward is likely to be ‘regulatory divergence’ between the UK and the remainder of the EU. This will probably have an impact on the overall cost of doing business if it is necessary to comply with regulatory regimes both in the UK and the rest of the EU that are no longer entirely consistent.
- Choice of law
- We would always advise that where there is an international element to a contract the parties should make an express choice in relation to both governing law and jurisdiction. Where such choices are made, Brexit should have no impact to both current and future contracts and what the parties have chosen will be given effect to in almost all cases (at least in business to business contracts).
- Where such a choice has not been made, currently English Courts determine the governing law for contractual disputes in accordance with the EU Rome I Regulation. It remains to be seen whether the UK elects to continue to be governed by Rome I. Even if the UK does not and the English Courts revert to common law rules, these rules are very similar to the provisions of Rome I anyway. This means that in the absence of an express choice, generally the law that will apply will be that of the country where the party that is to perform the contract is habitually resident (for a company, this is where it has its central administration).
- Where contracts provide that ‘English law’ is to govern, it is highly likely that going forward the European Court of Justice (“ECJ”) will no longer have jurisdiction over the English Courts. The English Courts will also not be able any more to refer questions of interpretation of EU based legislation to the ECJ. Instead, they will have the final say and therefore over time English law and the law derived from the ECJ may diverge. What is uncertain is what ongoing relevance past (and indeed future) decisions of the ECJ will continue to have in relation to English law. In this respect we will simply have to wait and see.
- Jurisdiction
- Should there be a contractual dispute, in the absence of an express choice of jurisdiction in the contract, the general rule under EU law (Brussels Regulation) is that the Courts where the defendant is domiciled (ie where it has its principal place of business) have jurisdiction. (There are certain limited exceptions to that rule.)
- If this rule is no longer applied after Brexit, the UK may nevertheless adopt a position which is similar to the current EU regime.
- Data protection
- The Data Protection Act 1998 continues to be the UK’s data protection legal framework and, until anything is agreed otherwise, this will continue to be the case. The new General Data Protection Regulation (“GDPR”) is due to come into force from 25th May 2018 but following the decision to leave the EU, it is likely that the GDPR will be live before this departure has taken effect.
- But query after the UK leaves the EU, whether it will be inside or outside the European Economic Area? If it is outside the EEA it will be subject to the rules about the transfer and processing of personal data ‘overseas’. This would mean that either the UK’s laws would have to be formally certified by the EU as being comparable in terms of the protection offered (formally known as proving ‘adequacy’) or UK companies would have to get used to routinely executing the so-called ‘model clauses’ which permit data transfers to an overseas data processor or controller (referred to in our article on the EU-US Privacy Shield). It is inconceivable that the UK government would not want to ensure ‘adequacy’ and therefore UK based activity will, we believe, effectively be subject to the GDPR in any event. Moreover, the Head of Policy Delivery at the Information Commissioner's Office posted a statement last July that the GDPR is still relevant for the UK. (Also see our article on The Impact of the GDPR.)
- Definition of ‘EU’ as Territory
- Some contracts with existing territorial provisions, such as distribution agreements, may refer to ‘the EU’ as the applicable territory. For existing contracts of this type, the definition of ‘Territory’ may need to be amended to expressly include or exclude the UK once it has formally left the EU.
We will provide further comments once the implications of Brexit in relation to commercial contracts become clearer but in the meantime, if you would like any further information or advice, please contact us at info@TRGlaw.com.
30th March 2017