Brexit’s Impact on Contractual Relationships with UK-based Companies

dwf_brexit_3dfabprint

A huge number of contracts used in different industries, for instance, in the field of additive manufacturing, refer to EU laws or have the EU as territorial scope. Great Britain’s decision to leave the EU leads to considerable legal uncertainties, especially regarding questions of what law is applicable or how to interpret certain contractual clauses that refer to the EU.

By Klaus M. Brisch, LL.M. and Marco Müller-ter Jung, LL.M., DWF Law

In Great Britain, European primary law will no longer be applicable; neither will EU regulations or guidelines. Thus, it remains unclear if Great Britain will keep its current position of drawing up valid standards in contract and tort law throughout the EU.

Consequently, the future of (currently still) valid clauses defining Great Britain and its scope implications in contracts is still unclear. In EU member states, EU law is either directly applicable or has to be implemented by national law first. Brexit could mean that it would no longer be possible for EU law to be directly applicable and the obligation to implement EU law in national law would become invalid. If Great Britain decides to retain existing legislation but does not implement new regulations, a gradual disassociation from EU law will occur.

Furthermore, there would be no obligation for judges to participate in judicial trainings on how to interpret EU law provided by the European Court of Justice. Treaties the EU (on behalf of its member states) entered with third countries will no longer be effective for Great Britain either and would need to be renegotiated. Relationships with EU member states would need to be renegotiated as well.

Affecting contractual relationships

Brexit will also affect existing contractual relationships. Agreements, which explicitly define the scope of applicable law, will remain effective. If the scope of applicable law was made in favour of British law, this clause will not imply EU law and thus might lead to substantial changes within the rest of the contract, depending on the subject of the contract.

When negotiating new contracts, it is advisable to thoroughly check if English law should be chosen or if it might be more reasonable to choose another applicable law. Should the contract not contain any clause concerning the choice of law, the Rome I Regulation will no longer apply to the contract; instead, the national private international law determines which law is applicable.

“A huge number of contracts used in different industries, for instance, in the field of additive manufacturing, refer to EU laws or have the EU as territorial scope. Great Britain’s decision to leave the EU leads to considerable legal uncertainties.”

There are also questions as to how to interpret a contract resulting from clauses referring to a territorial scope. If a contract determines granted right to sell products ‘throughout Europe’, the question arises if Great Britain is still included in that term post-Brexit. Depending on the specific contractual relationship, the parties need to define if the territorial scope has a purely geographical meaning or if the term refers to EU member states only. In extreme cases, this decision might mean that the contract is no longer valid at all. Subsequently, potential stipulations regarding the allocation of liability among the parties are of decisive importance.

If Brexit determines that contract enforcement is impeded or not possible at all, a reoccurring option would be to terminate the contract. Common grounds for terminating a contract are extraordinary termination reasons or due to the cessation of the transaction’s basis. But, are these grounds promising? This might depend on the circumstances; if the subject of Brexit was under discussion when the contract was entered into then the contractual parties should have determined particular clauses in case of a Brexit.

Regarding long-term contracts, it is more probable that the parties cannot be accused of missing clauses. If the basis of the transaction ceases, this might trigger the right to modification or lead to the possibility of being permissible to withdraw from the contract. If Brexit was unforeseeable when concluding the contract and the specific contract or rather its enforcement are even slightly affected by Brexit, the cessation of the basis of the transaction and its resulting consequences might be possible.

How the legal situation with respect to the above-mentioned issues will evolve, might not be clear before Brexit has really taken effect and initial judgements ruled by English courts indicate how to interpret contracts with connection to EU law or Great Britain. The considerably high legal risk resulting from Brexit will lead internationally connected companies and parties of cross-border contracts to an increased need for legal advice. It is important for companies to find out about any specific legal implications resulting from Brexit and find a solution for them.