Brexit: The effect on commercial contracts

Following the outcome of the EU Referendum on 23 June 2016, the full extent of the consequences of the UK’s possible exit from the EU is not yet known.

If the UK government acts on the referendum results and commences the process for exiting the EU, we are likely to face a period of at least two years of uncertainty. The outcome of negotiations during this period will establish the UK’s new legal landscape and the future relationship with the remaining members of the EU going forward.

Whilst we all wait for the UK government to decide on next steps, businesses would be well advised at this stage to both review their position under key existing contracts and also consider their approach to negotiating new contracts going forward.

Immediate impact

The key point to note at the outset is that the UK’s legal relationship with the EU has not yet changed. EU legislation continues to apply as it did prior to the referendum and will continue to do so for as long as the UK remains a member of the EU. As such, all existing EU laws and regulations are likely to remain in force throughout the negotiation period until the terms of the UK’s exit arrangements have been agreed and brought into effect.

We will continue to monitor developments and assess the position so that we are well placed to advise as and when the UK’s exit terms become known.

Existing contracts

Parties to existing key contracts with terms likely to extend beyond the UK’s potential withdrawal from the EU should consider whether such withdrawal is likely to affect the operation, performance or financial viability of such contracts. For example:

  • Does the contract contain a mechanism for dealing with any change of law? If so, these clauses would need to be analysed carefully to consider the impact.
  • Is contractual performance reliant on a particular feature of EU law, such as the free movement of goods or workers or another EU-wide regime?
  • If so, is the contract frustrated or can performance be excused due to its ‘force majeure’ provisions?

Frustration

The courts have traditionally applied the doctrine of frustration narrowly. It seems unlikely for the vast majority of contracts that the UK’s exit from the EU would be a frustrating event releasing parties from their contractual obligations, even if it renders performance commercially difficult. Any claim that the UK’s exit justified termination in and of itself would have to establish that the UK’s continued membership of the EU goes to the root of the contract and that any exit goes beyond what was contemplated by the parties when they entered into it. Further the UK’s exit from the EU must render further performance of the contract impossible, illegal or make it radically different from what had been contemplated at the time the contract was entered into.

Force Majeure

Unless specifically referred to in the definition of ‘force majeure’, it seems unlikely, but not beyond the realms of possibility, that the UK’s withdrawal from the EU (or its consequences) would trigger a contract’s standard force majeure clause. The definition and operative clause ought to be reviewed closely in any case to determine possible Brexit-related interpretations.

  • Alternatively, if performance is still possible in accordance with the contract’s terms, would the UK’s withdrawal from the EU result in the contract being less profitable for a party. This could be due to, say, import duties being imposed on the sale of goods or services to EU member states. Assuming there is no prescribed method for dealing with such hardship in the contract, are the parties prepared to hold each other to the original terms or enter into any voluntary renegotiation?

New contracts

For new contracts being negotiated between now and the UK’s withdrawal from the EU, the parties should consider any known likely consequences of the UK’s withdrawal and seek to address these in the contract at the outset. For example:

  • Be clear in the contract as to whether the UK’s withdrawal from the EU is or is not a ‘force majeure’ event. The definition should be tailored accordingly, to remove any doubt.
  • Consider whether to include a price adjustment mechanism to take account of performance becoming more or less expensive following the UK’s potential withdrawal from the EU, e.g. by way of import/export tariffs, visa applications etc.
  • Also consider the need for a mechanism to adjust the price or switch currency if the applicable contractual currency crosses certain agreed thresholds.
  • Consider whether any Brexit-related-factors should or should not allow a party to terminate, and expressly state the agreed position.
  • Consider including specific dispute resolution procedures, such as arbitration, as this is likely to minimise the uncertainties surrounding the enforceability of judgments between the UK and remaining EU member states following the UK’s possible withdrawal.
  • Analyse those contractual clauses referencing EU law, compliance with EU law and any changes to such law. Decide which party is responsible for monitoring and ensuring compliance with particular laws and any changes in such laws, and which party bears the costs associated with this.
  • Keep the effect of EU laws on key contracts under review, but do not assume that any laws deriving from the EU will fall away. Norway, for example, has estimated that it complies with 75% of EU law even though it is not a member of the EU.

Questions
Please get in touch with Oliver Kidd, Gustaf Duhs, Maliha Mahmood or your usual S&B contact if you wish to discuss any issues arising out of the UK’s vote to withdraw from the EU.

 

This information is necessarily brief and is not intended to be an exhaustive statement of the law. It is essential that professional advice is sought before any decision is taken.

© Stevens & Bolton LLP July 2016.

Contact our experts for further advice

Oliver Kidd, Gustaf Duhs, Maliha Carey

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