Is Your Contract Brexit-Proof?
We look at how certain elements of contracts may be affected by a Brexit and consider the contractual protections that can be put in place to help minimise the potential negative effects.
Brexit and contractual obligations For some contracts
Brexit could have the effect of making it significantly more difficult (or costly) to perform the contractual obligations. For example, a contract for the international supply of goods could become subject to tariffs or the goods may no longer benefit from mutual recognition of regulatory authorisations. In some cases, under English law, it may be possible to argue that Brexit has frustrated the contract. However, there are certain measures that parties can include in their contracts to provide greater certainty of what will happen in the event of a Brexit. Parties could expressly provide that a Brexit gives a party the right to terminate the contract or, alternatively, provide that specific terms need to be renegotiated. Parties may also expressly include or exclude a Brexit from the definition of a force majeure event. Existing contracts should be reviewed to consider whether Brexit would fit into the force majeure definitions of those contracts. In each case, these clauses could be drafted to trigger automatically following a Brexit in any event, or only if certain specific events occur, e.g. the imposition of tariffs on goods that form the subject matter of the contract.
Territorial application of contracts
Certain contracts, such as intellectual property licences and distribution agreements, often grant rights in relation to a specified geographical area. For any contracts where the ‘EU’ is specified as the territory, businesses will need to consider whether after a Brexit the contract will still grant rights for the area originally contracted for. For example, after Brexit, a patent licence covering the territory of the ‘European Union’ would likely be interpreted to no longer grant the licence for the UK. In such circumstances, the licensee would lose exploitation rights in respect of the UK and the licensor may be able to license the patent to another bidder.
For any contracts being negotiated between now and 23rd June 2016 (and, if the UK votes to leave, contracts negotiated between 23rd June 2016 and the eventual exit date) which are to be made in relation to the EU territory, parties should consider expressly stating whether the UK will be included after Brexit. If the UK is not to be included, then it would be prudent to include a provision reducing the fees payable under the contract.
Jurisdiction and governing law
Brexit is not likely to constitute a major deterrent for businesses considering contracting in English law or choosing the English courts to have jurisdiction, as many of the attractions of English law and courts are not dependent on EU membership. In addition, it seems unlikely that there will be major changes to the rules that courts apply to determine the governing law and which courts have jurisdiction. Businesses are therefore unlikely to need to change their approach on these matters. However, it should be noted that some of the current simplicity in these respects could be lost as the rules applicable to determining these factors are mostly set out in EU legislation. For choice of governing law, parties can take comfort in the fact that the EU legislation that currently determines applicable governing law will continue to be applied by Member States, so a choice of English law will still be respected across the EU.
As rules determining jurisdiction are generally based on the principle of reciprocity, it is less certain whether Member State courts will continue to recognise a choice of English law. Additionally, the exact rules applicable will be more dependent on what treaties the UK is party to. For example, the Hague Convention, which the UK would likely sign up to in its own right (currently it is bound by the convention through its membership of the EU), only applies to exclusive jurisdiction clauses. Parties may therefore wish to ensure their jurisdiction clauses are made to be exclusive to ensure these benefit from the Hague Convention.
When negotiating contracts in the run up to the referendum (or in the period from 23rd June 2016 to the eventual exit date, if the UK votes to leave), businesses should consider whether any of the above issues will affect their contract and exactly how any negative impacts can be mitigated. Businesses should also review their existing contracts to consider how these may be impacted in light of the points set out above.