23 Nov 2018 Are your contracts Brexit-proof?
At the time of writing it is still very hard to predict whether the final outcome of Brexit will be soft, hard or a “no deal”, and so this article takes a look at some of the possible impacts that Brexit may have on your contracts, and makes some recommendations for measures that might help to Brexit-proof future or existing contracts.
The principal impacts to be aware of include:
• pieces of legislation which apply to the contract pre-Brexit (e.g., employment law, immigration law, copyright and IP law) could cease to apply after Brexit;
• resulting changes in meanings of definitions and terminology used in the contract;
• financial consequences arising from fluctuations in currency, as well as new costs (such as tariffs, price variations, taxes, passport and visa costs);
• UK no longer being included in the EU-wide Conventions that apply to governing law and jurisdiction.
Some examples of consequences that could flow from these impacts might be:
• it could become illegal to provide certain services (such as digital services) into EU countries from the UK and vice versa; since much of the recent body of EU copyright legislation has been drafted with border-free licensing and content access in mind, there is a possibility that it may simply no longer apply in the UK;
• contracts that involve licences of copyright or other intellectual property may be affected by changes in definition and terminology. For instance, where the Territory is defined as the EU, this could no longer include the UK after Brexit. Similarly, references to certain EU copyright and software regulations may no longer be valid if they have not been incorporated into UK law at the time of Brexit; and even where they have been incorporated, they may start to diverge over time as UK law develops independently of Brussels;
• imposition of new tariffs, tax, or visa and passport requirements could make cross-border movement of staff and goods much more expensive, time-consuming, subject to delays, or even illegal;
• where the contract does not state which country’s law and courts will apply to contract disputes, certain EU Conventions decide the issue currently, ensuring (amongst other matters) that the court’s decision in one country can be enforced in the other party’s country if necessary. Some or all of those Conventions may not apply in the UK after Brexit, meaning that a judgment obtained in a UK court against an EU partner may not be enforceable in their local court, and vice versa.
Where the consequences of Brexit render the contract impossible to perform, there is a danger that non-performance will be treated as an actionable breach of contract. Unfortunately, it might not be possible in this situation to rely on the force majeure clause to absolve responsibility for breach, unless the contract includes in its list of force majeure events the specific Brexit-related event such as change in law, or imposition of new tariffs/taxes/visa controls (an event as generalised as “Brexit” or “effects of Brexit” is unlikely to be enforceable). The force majeure clause probably cannot be relied either if the contract has become difficult to perform (but not actually impossible or illegal), due to escalating costs or loss of profitability.
One solution to this problem is to include a catch-all Brexit clause in new contracts with EU partners. Such a clause would be based on concepts that appear in large financial contracts, such as “material adverse change” and “hardship” clauses. These clauses tend to define certain specific events that might trigger either termination, renegotiation of the contract, or an automatic adjustment in fees and prices; the trigger event should be specific (rather than a generalised description such as “effects of Brexit”).
If you are entering a new contract with an EU partner in the coming months, or have an opportunity to amend an existing contract, the following measures should be borne in mind:
• governing law and jurisdiction: (a) the contract should specify that it is governed by English law, and is subject to the exclusive jurisdiction of the English courts, since this wording should ensure that it will be possible to obtain an enforceable judgment against an EU partner, whatever type of Brexit is achieved; (b) and/or use an arbitration clause, since arbitral awards are governed by the New York Convention, which has international (rather than EU only) application;
• terminology and definitions: any reference to statutes or regulations should be followed by the words “as amended or re-enacted from time to time”. Check that definitions and references to the EU are followed by the words “and the UK” where necessary;
• Brexit clause: consider the likely impacts on your contract and whether to include a Brexit clause, or whether to adapt the force majeure clause to anticipate the specific Brexit consequences that could cause your contract to become impossible to perform.
For more information and advice, please contact VLT LEGAL on email@example.com or 07887 810020