October 20, 2016

Commercial Contracts Post-Brexit

Eric N. Fidel

Introduction

British voters recently announced that they want to leave the European Union (EU). Prime Minister David Cameron stepped down. The pound hit a 30-year low. The Tory Party, which led the vote, saw a political backstabbing straight from the script of House of Cards. The opposition Labour Party took advantage of the Conservative Party’s collapse to try to depose its own leader and resign en masse. Scotland is thinking of revisiting its own Leave referendum. Regardless of what one thinks about the vote, only one thing is certain: everything is uncertain. As with any uncertainty, American attorneys (and their global counterparts) must adapt their thinking and their contracts to protect their clients.

Now that the United Kingdom (UK) voted to withdraw from the EU, the UK will soon invoke the Article 50 notice mechanism of the Treaty of the European Union, which will trigger a period of at least two years of unpredictability as the UK and EU hash out the terms of the UK’s withdrawal. Withdrawal may take any number of forms. The UK may elect to remain a European Free Trade Area state, or the UK will develop a series of bilateral agreements with the EU. Alternatively, withdrawal could end in a total divorce between the EU and the UK, or it may not even be up to the UK if the EU seeks to hold a hardline stance in negotiations in order to keep its remaining members in line. As such, many commentators believe that finalizing the terms of UK’s withdrawal within those two years is ambitious.

How are deal lawyers to prepare for such an extended period of uncertainty?

They must first identify which of their clients’ contracts contain the following provisions and amend them to avoid any unnecessary issues going forward. Additionally, when negotiating and drafting future contracts, they should keep the following in mind.

Governing Law

Governing-law provisions that stipulate “English law” must be revisited post-Brexit. Such provisions currently are interpreted as including applicable EU law; however, this would no longer be the case post-Brexit. One possible outcome is that the courts construe the term “English law” as meaning “English law as in force at the time of this Contract’s execution [or conversely, 'at the time of this Contract’s dispute'].” This could lead to a different outcome than the parties intended, and it is possible that the absence of a particular piece of EU law would substantially change the nature of a contract or even make it impossible to perform. Of course, the courts may interpret these clauses differently—they may interpret that it was the intention of the parties to include EU law with English law, but the issue is that now there is uncertainty. Contract lawyers should consider amending agreements that mention English law by explicitly including or excluding reference to EU law.

Territorial Provisions

Many contracts, such as distribution agreements, joint venture agreements, and franchise and license agreements contain territorial provisions. What is the effect of Brexit on these provisions? It really depends on the deal the UK reaches with the EU, but again the issue is the uncertainty. Would the UK continue to fall within the scope of territorial provisions post-Brexit (e.g., provisions like “an exclusive right to operate in the EU”)? If the UK will be considered excluded, then would that interpretation mean that the contract could no longer be performed as anticipated? Ultimately, the answer likely is to be a matter of construction for each agreement and depends on which path the EU and the UK choose in the future, but such provisions will give rise to a great deal of uncertainty, and parties should revisit their contracts and clarify their position by amending those agreements.

Purchase Prices

Another issue that becomes uncertain due to Brexit is provisions regarding contract value and invoicing. Of course, choosing any currency involves some risk if relevant provisions chose the euro or the pound, contracting parties may have bargained for more risk than they initially thought. Parties may wish to amend agreements that contain these provisions to include clauses to reprice or switch currency if the currency applicable to the contract crosses certain thresholds. In certain circumstances this could be anticipated as a trigger for termination.

Force Majeure

Existing contracts may have force majeure or material adverse change clauses that could be triggered by Brexit. It is even possible that parties may seek to rely on the doctrine of frustration, claiming a contract has become incapable of performance due to Brexit (e.g., due to no longer being economic or due to the emergence of employment issues now that free movement between the UK and EU may cease). Either way, these clauses and concepts may be seen as grounds for termination. Naturally, there is no guarantee that such provisions or principles would actually allow for termination, and each case will come down to a question of interpretation of the particular clause or consideration of the relevant facts. Regardless, to protect against the risk the triggering of such clauses can cause, attorneys must check existing contracts for the definition and effect of a force majeure event or material adverse change (and any contractual requirement for the affected party to try and work around them) and ensure that, when the UK finally, if ever, leaves the EU, such a clause is excluded (or specifically included).

Enforcement

Finally, there could be an impact on a party’s ability to enforce a UK contract in the remaining EU states and even against assets held in other EU member states. In light of this uncertainty, it is advisable to keep in mind when drafting or negotiating the terms of a new contract how that contract might be affected by the UK’s eventual departure from the EU and provide accordingly to the extent possible.

Conclusion

Despite whether one thinks the British people made the right choice, the consequences of the vote have thrown previously established guidelines out the window. The economy, not just in the UK and the EU, is in massive flux. The pound and the euro are uncertain, and hundreds of laws must be reexamined and rewritten in the wake of Brexit. Transactional attorneys must examine their clients’ contracts for any mention of the EU and amend it to also include the UK or to specifically leave it out. Attorneys must comb through contracts in order to ensure that any number of representations, warranties, or other provisions remain true after Brexit. In short, there is a lot of work to do. When people ask who won with the EU referendum, the answer is probably not Leave or Remain. The answer is probably the lawyers.

Eric N. Fidel

Eric N. Fidel is an associate in the Fox Horan & Camerini corporate department. He joined the firm following his graduation in 2014 from the University of Michigan School of Law, where he served on the editorial board of the Michigan Journal of International Law.