Brexit and Commercial Contracts

May 11, 2020 Brexit

Existing and future commercial contracts that include some form of EU-UK cross-border transaction risk being affected by Brexit. This note discusses some of the issues Brexit may give rise to in this regard and offers guidance to companies and other parties.

The United Kingdom withdrew from the European Union on 31 January 2020. The Withdrawal Agreement regulates the terms of the British departure between the parties and entered into force immediately upon exit. The Withdrawal Agreement also includes a Transition Period, during which EU law will continue to apply to and within the UK. The jurisdiction of the Commission and the EU courts also remains intact. The Transition Period is currently set to expire on 31 December 2020 (the Expiry Date). This period can be extended with one or two years, but such an extension must be agreed between the EU and the UK before 1 July 2020.

This guidance exemplifies how Brexit may affect commercial contracts during and after the Transition Period. Although EU legislation does not generally affect contract law per se, it might influence the content of a contract if, for example, the contract contains references to the EU as a territory.

Issues to be considered

A contract may be directly affected by Brexit if it concerns some form of EU-UK cross-border transaction and provided it is in force during and/or after the Transition Period. It is advisable to review all contracts that fall within this scope and evaluate what effect Brexit could have. Moreover, Brexit does not only affect existing contracts, but should be considered when a new contract is negotiated and entered into.

Some issues that are likely to have an impact on contracts with an EU-UK connection are considered below. In general, these issues are relevant for existing as well as contracts yet to be concluded.

References to legislation

On the Expiry Date, all EU law will cease to apply to and within the UK. Therefore, contracts with an EU-UK connection containing a reference to EU law need to be reviewed. This may not only concern directly applicable EU legislation, but also national law implementing EU law. In particular, this review is important for sectors that are heavily regulated by EU law, such as financial services, energy, pharmaceuticals, telecommunication services and agriculture. If the operation of a contract is dependent on legislation that is likely to be affected by Brexit, it is advisable to reconsider the contract in view of this change.

References to the EU as a territory

When the UK withdrew from the EU on 31 January 2020, it ceased to be a part of EU territory. Accordingly, depending on the wording of the particular clause, references to the EU as applicable territory in commercial contracts may no longer include the UK. If it is desirable that the UK should remain a part of the applicable territory, it is advisable to ensure that this is expressed clearly in the contract.

Movement of persons

In view of the UK’s stated position not to be part of the internal market and the four freedoms, it is highly likely that the free movement of EU citizens to and within the UK and UK citizens to and within the EU will end when the Transition Period expires. A contract should be reviewed if movement of personnel from the UK to the EU and vice versa is important for its performance. The restriction of movement of people should also be considered when negotiating a new contract. In particular, companies active in the services sector may be affected by this change of law.

Force majeure

Contracts often include force majeure clauses to excuse all or part of the obligations of one or both parties in the event of circumstances outside of a party’s control which make performance in accordance with the contract impossible or inadvisable. Brexit could have a serious effect on the operation of a contract, and Brexit may under certain circumstances be within the scope of a force majeure clause. To some extent, this will depend on when the contract was entered into and whether Brexit was a foreseeable event or not at that time. If Brexit was a likely event when the contract was entered into, thus at least after the referendum in 2016, it may be argued that the parties could and should have planned for its effects.

Further, it is advisable to consider contracts including a clause which permit renegotiation of terms if the contract become unprofitable or subject to a change of law. Such a clause could be applicable due to Brexit.

Increased trade barriers

Trade barriers between the EU and the UK are likely to increase, for both goods and services, which in turn will result in higher costs for trade. These trade barriers include regulatory requirements, custom duties, fees, VAT changes, required government authorisations and differences in treatment of domestic and foreign goods and services. The commercial impact of these trade barriers on a company’s contracts should be assessed, and the parties’ position may need to be adapted accordingly. New potential trade barriers should also be considered during the negotiation and conclusion of new contracts.

Choice of law

The current EU legislation regulating applicable law for contractual obligations is the Rome I Regulation. Under Rome I, EU Member States are obliged to honour the contracting parties’ choice of law, even if the designated law is not that of an EU Member State. Choice-of-law clauses specifying English law as the governing law should therefor continue to be accepted in EU Member State courts after Brexit. Likewise, Rome I will enter into force as domestic legislation in the UK on the Expiry Date through the European Union (Withdrawal) Act 2018, which would compel the UK courts to respect choice of law-clauses designating the law of an EU Member State as governing law.

The enforcement of contracts and dispute resolution

The Brussels I Regulation Recast (“the BIR (Recast)”) regulates jurisdiction and enforcement of judgments between EU Member States. Under the Withdrawal Agreement, the BIR (Recast) shall continue to apply between the EU Member States and the UK in legal proceedings instituted before the end of the Transition Period. Accordingly, choice-of-court agreements designating a UK court or a court in a Member State will continue to be governed by the BIR (Recast), provided legal proceedings are instituted before the Expiry Date. Conversely, the BIR (Recast) will not be applicable if legal proceedings are instituted after the Expiry Date.

It is currently uncertain what regime common to the EU and the UK, if any, will regulate jurisdiction and enforcement between the parties after the Transition Period. The Lugano Convention 2007 and the Hague Convention on Choice of Court Agreements (“the Hague Convention”), both international agreements which regulate jurisdiction and enforcement of judgments among their respective contracting parties, have been entered into by the EU alone. The UK is not a party to either of these international agreements in its own right and is therefore not covered by them after Brexit (they continue to be relevant to the UK during the Transition Period in accordance with the Withdrawal Agreement – although third countries may take a different view). If no agreement between the EU and the UK is concluded, the enforcement of judgments will depend on domestic rules in the UK and each EU Member State. While most EU Member States enforce foreign judgments by their domestic laws, the type of judgment enforced may be more limited and the procedures more time-consuming and costly then if an international treaty is applicable.

The Lugano Convention 2007 governs jurisdiction and the recognition and enforcement of judgments of courts within the EU and Norway, Iceland and Switzerland. The Lugano Convention 2007 is a parallel instrument to the predecessor of the BIR (Recast) – the Brussels I Regulation – and is therefore similar in scope and character to the BIR (Recast). With that said, there are disadvantages with the Lugano Convention 2007 which were resolved with the BIR (Recast). Notably, the Lugano Convention 2007 does not protect against “Italian torpedo” tactics. Under the Lugano Convention 2007, a court designated by the parties by an exclusive choice-of-court agreement does not have priority over the court first seised and is required to stay its proceedings until the latter has considered its jurisdiction. This tactic could delay legal proceedings significantly.

The UK has applied to join the Lugano Convention 2007 and its accession would mean that a comprehensive regime would regulate jurisdiction and enforcement of judgments between the EU Member States and the UK. However, unless the UK joins the EFTA, a unanimous agreement among the current contracting parties is necessary in order for the UK to be able to accede. While the UK has received statements of support from Iceland, Norway and Switzerland, the position of the EU is less certain. In view of the ongoing negotiations between the parties, it is not unlikely that the EU withholds or delays its agreement.

Another option is for the UK to accede to the Hague Convention, which can be done unilaterally. The UK has signalled its intention to join this agreement and it is likely to enter into force immediately upon the end of the Transition Period. However, the Hague Convention is far more limited in its scope compared to the BIR (Recast). Moreover, even if the UK would accede to the Hague Convention immediately after the Expiry Date, there is uncertainty as to when it becomes applicable for courts in the UK and the EU Member States respectively. Accordingly, the legal implications resulting from an application of the Hague Convention when drafting a choice-of-court agreement must be considered both before and after the Expiry Date.

Finally, it should be noted that if the parties to a contract have included a clause choosing arbitration as their dispute resolution mechanism, this clause will not be affected by Brexit as arbitration does not fall under the scope of EU law.