With the end of the transition period fast approaching (31 December 2020), businesses need to consider what economic implications Brexit will have on their commercial contracts.
Currently the relationship between the UK and EU post-Brexit is still uncertain, therefore there is no definitive answer for commercial contracts. Fortunately, in comparison to other areas of law, commercial contracts will be largely unaffected due to the commercial bargaining power between parties remaining paramount, but Brexit still affects them to a degree. Here Greenaway Scott will highlight key considerations that businesses should be contemplating for their current and future commercial contracts, such as increased trade barriers.
The consequences of Brexit (whether those arise following exit day, throughout the implementation period or beyond), could have a significant effect on the suitability and attainability of contractual provisions relating to numerous matters. This may include (but not limited to) currency fluctuations, pricing, the production and delivery times, purchase targets and resource availability.
The following points should be considered by businesses for both current and future commercial contracts:
- Governing law. Following the transition period, the UK has confirmed that it will be incorporating both the EU Rome I and II Regulations, meaning that parties will be free to choose the governing law of the contract. This means that existing contracts which cite English and Welsh law as the governing law of the contract, and future contracts citing the same will be upheld by EU Member States’ courts.
- The position regarding jurisdiction over disputes arising from commercial contracts is a little more complicated as the applicable EU law will not be incorporated by the UK. Businesses will need to review whether they have stated that England and Wales has exclusive jurisdiction over their contracts, and if so, it is likely that they will be upheld in the English and Welsh courts. This said, it is unclear whether the EU courts would uphold exclusive jurisdiction clauses or may do so inconsistently between Member States, but they are more persuasive than non-exclusive jurisdiction clauses. A further option to overcome such uncertainty would be to rely on/insert an arbitration clause which specifies London as the chosen seat to deal with contractual disputes because arbitration law is not based on EU law, therefore unaffected by Brexit.
- A simple warranty is suggested to provide assurance to each party that the other party has made an effort to consider any potential consequences which may arise as a result of Brexit, to allow some protection under a breach of warranty, if steps haven’t been taken by the other side.
- Financial challenges. Businesses will also need to consider increased financial costs that arise through fluctuations in currencies and increased tariffs, duties and levies. Current contracts will need to be reviewed to determine whether the consideration paid for the goods or services is sufficient to cover such financial costs and whether a renegotiation is needed. Regarding future contracts, businesses need to ensure such financial costs are allocated between the parties appropriately.
- Territory. Businesses need to review their current contracts and negotiate future contracts to ensure that the territory is not defined as the EU and instead the UK has been carved out.
Renegotiating or terminating existing contracts due to Brexit
If the operation of a commercial contract negatively changes due to Brexit after the transition period, the following options may be available to renegotiate or terminate the contract (subject always to specific facts and circumstances):
- Renegotiation: Due to the uncertain future impact of Brexit, both parties may benefit from renegotiating the contract with the aim of overcoming any of the financial considerations caused by Brexit.
- Force majeure event. It may be arguable that a force majeure clause could be used on the ground of adverse material change. This said, caution must be used as the English and Welsh courts have generally not accepted a change in party’s financial circumstances as an event that qualifies as force majeure.
- Frustration. Lastly, if renegotiations fail between the parties, a business could try to bring the contract to an end on grounds of frustration due to Brexit. Caution should also be taken with aiming to terminate a contract on this ground as it is fact specific and not guaranteed.
Any contracts which are currently being entered into should be considering adding clauses will consider Brexit to allow flexibility as and when the time comes.
The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information our commercial team would be more than happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.