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How will Brexit affect your commercial contracts?

The recent triggering of Article 50 will have three key effects on your commercial contracts:

Substantive changes

It will have some effect on the substantive contractual law that applies to them, but this will be relatively limited as English contractual law is essentially based on the common law. There are only few areas where there is uncertainty.

One is with regards to the governing law clauses of your contracts. When EU law is repealed, the regulations on the governing law of contractual and non-contractual obligations (Rome I and Rome II respectively) will cease to be in force. In the absence of new legislation with similar provisions, parties will no longer be able to choose the governing law of non-contractual obligations such as tort or unjust enrichment, and the law applicable to such claims may revert to being that of the country in which the tort occurred.

Another is the interpretation of clauses referring to “English law”. Currently, this is construed as “English law including applicable EU law”. Post-Brexit, this will likely change to “English law as is in force from time to time”, which may have a significant impact as some contracts may be substantially different or even impossible to perform in the absence of some EU law provisions.

Specialist areas

The underlying regulatory framework for many specialist areas will change. These include data protection, intellectual property, public procurement, and consumer regulations. We would hope that, generally, the government’s “great repeal bill” will carry many of these frameworks forward beyond Brexit. After that, there will then be a gradual process (possibly extending over years) of changing those frameworks so they become more UK specific. At this stage, it is relatively impossible to accurately predict how and when such change would occur.

Economic effect

Whilst the legal effects of Brexit are still far from clear, what is undoubtedly the case is that it will lead to a radical change in Britain’s international trade arrangements, which in turn will considerably change the economic relationship that Britain has with the EU and the rest of the world. Such changes in international economic relationships will of course impact on cross-border commercial relationships, which will (in turn) impact on the contracts that underpin them.

Where the effects of such a change give rise to a financial hardship to a party, it would be natural for that party to consider that Brexit would therefore give rise to a force majeure situation (entitling it to terminate) or to frustration (releasing each party from further performance). However, in each case this is unlikely - the courts do not consider an event that merely causes inconvenience or hardship gives rise to a frustrating event and, similarly, most force majeure clauses are not drafted widely enough to capture events that make the performance of a contract more costly.

What you can do

Accordingly, currently, the most advisable approach to take is to guard against the potential economic uncertainty caused by Brexit by concentrating on the following commercial aspects of your contracts. This applies to both your international contracts (whether with EU or non-EU counterparties) and to your domestic UK contracts:

  • consider your pricing carefully – are fixed price periods that continue beyond the end of the Article 50 period acceptable? Do you understand what risks you are accepting by doing so in terms of currency fluctuations, inflation and the cost of sales? If not, consider shorter fixed price periods, price change in line with currency fluctuation clauses, and index linking. Remember that the courts are unlikely to come to your assistance to rescue you from a bad bargain;
  • in regulated areas, ensure that your contract provides for an appropriate allocation of the responsibility for, and cost of, dealing with legal/ regulatory change;
  • remember that whatever form of Brexit we have, there are likely to be changes to, or the introduction of, tariffs both in and out of EU and elsewhere. This will affect the cost of importing and exporting and needs to be apportioned appropriately in your contracts. Do not forget that Incoterms apportion import/ export duties as well as title and risk and therefore make sure your business understands the meaning of the Incoterms they are agreeing to; and
  • the likely restrictions on movement of labour that will arise post Brexit are likely to affect both the availability and cost of certain forms of labour – if this is the case are due to restrictions on movement of labour.

Stuart Padgham – Partner
Joshua Schuermann – Trainee Solicitor

Published: 21 April 2017


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