Brexit: Contracts

Given that the exit from the EU will not entail any change in the currency of the UK, there are fewer issues about existing contracts than would be the case if a member of the Eurozone left the EU. However there are still a number of issues for contracting parties to address.

A key question is whether a particular contract can be terminated as a result of a UK exit from Europe, particularly as the changed commercial landscape may prompt contracting parties to reassess their current contract arrangements and look for ways to exit those contracts which are no longer required or profitable. Any right of termination of course depends on the terms of the relevant contract, including any material adverse change and force majeure provisions and any right (express or implied) to terminate on notice as well as the doctrine of frustration. Most general provisions are unlikely to be triggered by any of the stages of the Brexit process. We may see some companies seeking to include a specific provision in new contracts dealing with the effects of the UK’s exit from the EU.

A related issue is interpretation of pre-existing contracts. For example, how will an obligation to comply with a specific piece of EU legislation be interpreted after the exit? How will the use of 'European Union' as a defined term in contracts be interpreted – will it be found to include the UK, or not? Similarly, how will a contract be interpreted if, at the time of contracting, EU law formed part of English law but the time of performance is after the UK’s exit? These are essentially questions of contractual interpretation. In most cases it is likely that a choice of English law will be interpreted to mean English law as it stands from time to time, subject to any variations, including such variations as may arise from Brexit. However, where some key provision of EU law is essential to the operation of a particular contract, in particular where performance of the contract is in the continuing EU, the court may give effect to the relevant EU law so as to give commercial effect to the contract. English courts are likely to take a sensible view and to favour commercial interpretations.

In relation to new contracts, English law has always been a very popular choice for parties doing business worldwide and the UK’s exit from the EU should not generally have any effect on the willingness of contracting parties to choose English law as the governing law of the contract. Appropriate drafting in new contracts can avoid the issues described above in relation to existing contracts. English domestic commercial law has its own well-developed and respected rules which have largely been unaffected by EU intervention and the benefits of using English law are in no way connected to the UK’s membership of the EU.

Finally in the contract area, the validity and effectiveness of any contractual choice of law is very unlikely to be affected by Brexit. In other words, a choice of English law (or Scots law, or any other law) in a contract will continue to be effective, whether in England, Scotland or in the remaining EU Member States. This would follow from the continued operation within the EU of the Rome I Regulation, governing choice of law in contracts, which in effect enforces any choice of law made by contracting parties, whatever law they have chosen. The Regulation will probably be adopted for the UK by the Great Repeal Bill, but if it were not, the pre-Regulation rules in England are to very similar effect and would give rise to the same result ie any expressly chosen governing law will generally be enforced.

Outside the contract area, commercial disputes sometimes involve allegations of liability arising in tort or delict, or claims for unjust enrichment and the like. Such disputes can give rise to considerable uncertainty and risk in international cases, because it may be difficult to predict which law to apply. EU legislation (the Rome II Regulation) presently allows commercial parties to select in advance, by contract, the law to govern not only their contractual but also their non-contractual rights and liabilities. That was not the position under the English common law, however. It is likely that Rome ll will be adopted into UK law under the Great Repeal Bill.

This post comes to us from Herbert Smith Freehills LLP and is based on a Legal Briefing that can be found here.