The European Commission today published a communication addressing the possible consequences of a hard Brexit. In it, they discuss the long-standing question of the continuity of contracts that straddle the Brexit date. This issue has become an increasing focus of market associations and financial businesses, who have been worried that the lack of an EU licence or registration for a U.K. business might frustrate existing contracts, preventing their performance. The point has been particularly concerning for those in the insurance, banking and derivatives markets. For example, U.K. service providers are worried that their EU clients might use Brexit as a “free pass” to walk away from contractual obligations should these go out of the money. In contrast, EU clients that have policies with U.K. insurers and banks have been worried that they might be legally unable to receive payment under claims or release deposits after Brexit.
In our previous client note entitled “Continuity Of Contracts And Business On A “Hard” Brexit: Human Rights And Reverse Solicitation To The Rescue!” we expressed our firm’s view that any contractual frustration concerns are ultimately overblown, since financial contracts create property rights that are protected under EU and international human rights laws. The EC Charter, the European Convention of Human Rights and international laws concerning acquired rights only allow such rights to be interfered with by governments where to do so is proportionate. We do not consider it proportionate for an EU or U.K. state or regulator to expropriate contractual rights upon Brexit.
Helpfully, the European Commission has announced today that it does not believe there is an issue with contract continuity in a financial services context. Their communication states that:
“In relation to contracts, at this juncture, there does not appear to be an issue of a general nature linked to contract continuity [because] in principle, even after withdrawal, the performance of existing obligations can continue. However every type of contract needs to be looked at separately.”
This wording effectively endorses the Shearman & Sterling position as regards the position on contract continuity. However, it also (in the last sentence) flags that the parties may have agreed to particular bespoke clauses which could create issues under the relevant terms. ISDA has already presented its analysis of standard derivatives documentation, concluding essentially that no material issues should arise. Parties should consider reviewing other clauses and also confirming with their legal advisors whether the contracts are of a kind to which legal protections may attach.
These protections do not extend to new contracts entered into after Brexit, where other regulatory solutions would need to be sought, as is discussed in our other publications.