06 November 2018
Contracts post-Brexit: Are yours fit for purpose?
The UK government has said that the vast majority of EU legislation will be adopted into UK law after Brexit. But there is no certainty until the transition is complete. Rajiv Malhotra, associate in the dispute resolution team, focuses on the effect Brexit may have on important terms in commercial contracts and what can be done now to Brexit-proof our Thames Valley companies.
Territories and references to the EU
If your company supplies and distributes goods or services to the EU including the UK, it’s imperative to review your commercial contracts before Brexit, particularly if it defines a territory as ‘the European Union’. If the same contract is still in place after Brexit, there may be confusion as to whether the UK is still included in that description. To help achieve clarity, one option is to list the UK along with all of the other individual member states that your company does business in. This way, there is less scope for ambiguity, even after Brexit.
Governing law clause
A well drafted contract will have a governing law clause stating which country’s laws will be used to interpret the contract. It’s common for companies across the EU to choose English law because it has well-defined legal principles. The effect of the EU Regulations known as ‘Rome I’ means that, currently, Member States must respect a contract’s choice of law. After Brexit, the UK will no longer be bound by Rome I, and time will tell whether the substance of Rome I will be retained in domestic law.
Therefore, expressly stipulating the governing law (both before and after Brexit) helps avoid costly and unnecessary arguments about how the contract should be interpreted.
A well drafted contract will also have a jurisdiction clause, specifying a Member State’s courts that are to have either exclusive or non-exclusive jurisdiction to hear any disputes arising out of that contract. The English court is an attractive choice in cross-border contracts because it has an excellent reputation for its independence, expertise and wide range of powers.
Currently, the Brussels Recast Regulation provides that courts of Member States have an obligation to respect another Member State’s exclusive jurisdiction if that’s what the parties to the contract have chosen. So, if the contract says that English courts have exclusive jurisdiction, but one party issues a court claim in Germany, the German court has an obligation in most cases to pause that claim and check whether it should be heard in the English courts instead.
After Brexit, this becomes unclear. The UK will no longer be a Member State and so, using the above example, the German court has no obligation to submit to the jurisdiction of the English court, even if that’s what the parties have chosen. This may lead to situations where one party attempts a tactical advantage by choosing the courts of a slower, less established jurisdiction to increase costs and frustrate the other party. A poorly drafted jurisdiction clause can unnecessarily increase costs and the chances of satellite litigation. Clarity is crucial.
Key actions to strengthen your contracts ahead of Brexit.
- Have regular contract audits with a solicitor to help future-proof your contracts.
- If your current contracts do not give you full protection post-Brexit, aim to renegotiate the terms.
- If renegotiating is not possible, and your contract is economically unviable, then termination may be your only solution. Make sure you seek legal advice before moving forward, otherwise it could be a breach of contract.
- Ambiguity in contracts often leads to higher legal costs of resolving a dispute. Legal advice can help achieve a properly drafted contract with clear terms.
For advice, contact Rajiv on 01753 279035 or email firstname.lastname@example.org