Brexit: implications for commercial contracts

January 9, 2017

Until recently, it had been understood that Theresa May’s Government would serve notice under Article 50 before the end of March 2017, triggering a 2-year negotiation process with the EU and the exit of the UK from the EU around 1 April 2019.

However we need to wait until the UK Supreme Court’s decision in R (on the application of Miller and Dos Santos) v. Secretary of State for Exiting the European Union, which is expected later this month, and which will rule on whether the UK Government may rely on the Royal Prerogative to serve such notice or whether an Act of Parliament is needed.

Although we do not know the form that Brexit will take, a lot of legal experts have been thinking about potential implications of Brexit, including on commercial contracts, which is the object of this post.

Generally Brexit will not affect English Contract Law in itself very much, if at all.

The issue is that Brexit could have adverse commercial consequences for one party to a contract: for instance, the exchange rate or the imposition of customs tariffs could make a contract less profitable, or indeed unprofitable for one of the parties. In these circumstances, in the absence of very clear contractual wording of the force majeure clause of a contract, the parties are unlikely to be able to rely on it as the English courts should be expected to be reluctant to imply provisions protecting one of the parties from a ‘bad deal’ or other adverse consequences of Brexit, whether with the force majeure clause or with the Contract Law doctrine of frustration.

When negotiating new contracts from now on, parties should think about express provisions to deal with perceived risks, for example:

-passing on some or all of a price or cost increase to the other party, and/or;

-inserting termination rights or material adverse change clauses linked to certain Brexit-related consequences.

Another way to proceed would be, for long-term existing contracts, to try to re-negotiate the arrangements where Brexit-related risks are identified.

Anyway, English Law should remain very attractive to contractual parties after Brexit, so will remain English Courts. However it might be more difficult to enforce English judgements in EU member States. This is because we do not know if the UK will still be bound by similar rules as the procedure for the mutual recognition and enforcement of EU judgements, which currently applies in the UK (cf BL precedent post).

 

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