On 23 June, Britain will decide whether to end its 43-year membership of the EU. If the vote is to leave, David Cameron will give notice to the EU. A period of unravelling would then begin, likely to last at least two years. The shape of the ongoing relationship between the UK and the EU will depend heavily on the negotiations over those two years. In this note we look at how a leave vote might impact your commercial contracting arrangements.

What would a Brexit mean for your commerical contracts?
Would a Brexit give you grounds to terminate your existing contracts?
How would a Brexit affect the enforcement of your contracts?
Is there anything you should be doing now?

What would a Brexit mean for your commercial contracts?

On the face of it, many commercial contracts would seem to be neutral as to whether the UK remains in the EU or leaves. They are less heavily regulated than many other areas of law, and, as the name suggests, tend to be based on the commercial bargain between the parties. But what if that commercial bargain was in itself significantly affected by Brexit?

  • Increased trade barriers: it seems likely that, even if a free trade agreement was negotiated after an exit, trade barriers, and therefore costs, when trading with Europe would increase to some extent at least. The UK government has highlighted for example that customs checks introduced after the withdrawal of this freedom may make trade into Europe more costly.
  • Free movement of people: a European exit is likely to impact on the freedom of UK nationals to travel within Europe and vice versa, an important consideration for those in service industries particularly.
  • Currency fluctuations: there has been much made of the potential devaluing of the pound. Significant fluctuations in the value of the pound could significantly change the value of commercial contracts for both parties.
  • Territorial scope: many commercial agreements have the European Union as their territorial scope. The extent to which that could result in the UK being carved out of the scope of any agreement is likely to depend on how the agreement has been drafted.
  • UK as a stepping stone into Europe: it is common for non-European companies to use the UK as a stepping stone into the broader EU market. For those who have entered into agreements on that basis, they may no longer be able to move freely into European markets.

From a regulatory perspective, EU laws have largely been incorporated into UK law and so would not quickly fall away, but there could be a gradual repeal of Regulations seen to be burdensome. For example:

  • there may be some relaxation of competition law rules to allow the inclusion of more territorial restrictions than are currently permitted by the EU competition rules; and
  • the UK may decide not to implement laws akin to the new European General Data Protection Regulation (GDPR) after any Brexit were to take effect which would remove the increased regulatory burden imposed by the GDPR for UK companies with non-EU facing businesses (any business with people or customers in the EU would likely still have to comply with the GDPR). However, it would also mean that the UK would no longer automatically be considered to be a safe destination for transfers of personal data and would need to be separately approved by the European Commission, with an additional administrative layer for organisations to consider. For further information see our note on the data protection implications of Brexit.

Whilst deregulation would generally be seen as a good thing, from an administrative perspective, it may make the use of standard agreements for the whole of Europe more difficult. A gradual move into two different consumer protection regimes could have a significant effect over time on the shape of supply contracts in the UK versus those in Europe. Similarly, if the mutual recognition of standards and approvals across Member States were to fall away, UK operators may require separate approvals when selling onto mainland Europe for example.

Would a Brexit give you grounds to terminate your existing contracts?

Whether a Brexit will provide grounds for termination of a contract will depend very much on the particular terms and specific facts. The question will be particularly relevant in those contracts that have the EU as the territorial scope, as mentioned above.

Parties could seek to rely on material adverse change or force majeure clauses as grounds for termination in the event of a Brexit but their success will come down to the interpretation of the particular clause and the particular facts of the case. It is also possible that parties could seek to argue that a contract has become frustrated as a result of a Brexit but again, such an argument will depend on the facts of the particular case.

How would a Brexit affect the enforcement of your contracts?

The English courts currently determine the governing law of an agreement in accordance with the EU Rome I Regulation. The position is unlikely to change in the event of a Brexit as the English courts would revert to English common law principles, which are similar to those found in the Rome I Regulation. For instance, an express choice of law clause is likely to be followed. However, the position is not so clear with regard to the governing law in respect of non-contractual obligations as the Rome II Regulation does not reflect English common law so closely. It could be the case that agreements as to the governing law of non- contractual obligations are no longer effective following a Brexit. There may also be changes for UK companies involved in litigation within the EU – if Rome I and Rome II no longer apply to the UK, courts in other jurisdictions will not be bound by them and may instead apply local rules to matters concerning governing law. For further information see our note on dispute resolution following Brexit.

Is there anything you should be doing now?

Since it cannot be determined with any certainty how the abovementioned areas will be impacted by a Brexit, if a party is seeking to terminate or fears that an adverse party may seek to terminate an agreement on the grounds of a Brexit, it should look into inserting express provisions into such agreement/s now in order to specifically deal with the scenario.

This article is part of our Brexit series.