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The Post-Brexit status of Pre-Brexit Contracts

The UK’s exit from the EU is arguably this generation’s most significant political event. Few politicians, businesses or financial analysts foresaw Brexit – which heralded a new era of uncertainty. Uncertainty is a word feared by anyone who has ever drafted a contract; the whole point of agreeing definite terms is to avoid grey areas in a commercial relationship. However, Britain’s departure from the EU has many unknown factors which could impact on existing substantive obligations under contracts. So what is the post-Brexit position of these pre-Brexit commercial contracts?

Once the UK untangles itself from the European Union, the commercial impact could be significant. There could be fluctuations in exchange rates, tariffs applied to imported/exported goods and services and costly customs checks for goods entering/exiting the EU. The workforce of businesses could also be affected by restrictions on the free movement of people. Inevitably, such events could lead to contracts becoming more costly to perform, less profitable and even loss-making. However, it is not likely that adversely affected parties will obtain any relief without express contractual provision.

There is a possibility that some will seek to invoke force majeur clauses. These clauses are aimed to protect parties from ‘unforeseeable circumstances’ that prevent them from fulfilling contracts. However, relief from force majeure will normally limited to obligations that are rendered impossible to perform rather than more onerous. An interesting question for the courts will be to what extent Brexit was unforeseeable circumstance. This is obviously subject to the particular wording of the clause. Some ‘material adverse change’ clauses could be wide enough to catch events like Brexit, however in most cases, performance must be actually or legally impossible. This could apply, for example, where a large financial institution loses its ability to ‘passport’ its employees around the rest of the EEA.

Another option is to look to the law of frustration. This could be relied upon where a change is so fundamental that it is regarded by the law both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered the contract. The courts will construe this narrowly and much will depend on the individual case – it may be that a change in law and consequent illegality could frustrate a commercial contract but mere inconvenience or economic hardship will be insufficient.

How a court would consider force majeur clauses poses more general questions about interpretation of contracts post-Brexit. The UK Courts will be reluctant to give a more favourable interpretation to a clause merely because it helps a party avoid hardship. In Arnold v Britton [2015] UKSC 36 it was emphasised that commercial common sense was (i) not to undercut the importance of actual words used and (ii) not to be invoked retrospectively just because the contractual arrangement had worked out badly (or even disastrously) for one of the parties. The court was not to reject the natural meaning of a term simply because it seemed imprudent for the parties to have agreed it, and it could only take into account facts or circumstances known to both parties when the contract was made. Consequently, there will be limited relief for those who have made a bad bargain or are adversely affected by Brexit.

Another potential difficulty relates to references in a contract to EU law – will this be taken to mean the successors to EU law (made by Parliament)? Theresa May has announced that the next Queen’s Speech will include a Great Repeal Bill to repeal the European Communities Act 1972. The UK must then disentangle itself from the great swathe of EU laws, regulations and directives which have effect within Britain. Over the past 50 years Parliament has not needed to legislate on laws covering the same subject matter as those made in Brussels. As such, if EU law is repealed/removed too suddenly, there will be vast gaps in the UK’s legal framework. One suspects that the short-term solution will be to enact UK laws which mirror EU laws whilst Parliament decides if/how it intends to make substantive changes to existing EU law. This could lead to a dispute. One party might, for example, argue that VAT is only strictly payable pursuant to the Principal VAT Directive (2006/112/EC). The other party might counter that a successor post-Brexit tax regime in the UK would apply because the purpose of the clause (i.e. payment of VAT) should trump its strict literal meaning. Audacious parties may thus seek to avoid the terms of a bargain by relying on the non-existence of EU laws to which the contract made reference.

Now that we know the UK is definitely leaving the EU, contracts could be drafted with this in mind. The best way to future-proof against Brexit is therefore to include express provisions to cater for the above. This does not, however, alleviate some of the difficulties for those contracts already in force. Of course, as opposition politicians love to argue: ‘We know that ‘Brexit’ means ‘Brexit’, but what does ‘Brexit’ actually mean?’ – the point is that we do not know to what extent a party’s obligations will change until after March 2017. If there is a ‘soft’ Brexit, whereby the UK becomes part of the EEA, join a customs union or obtain some sort of associate membership status, the effects on existing contracts will less dramatic.

ARNOLD AYOO
23 ESSEX STREET

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