Should we be drafting for Brexit?
With the UK due to leave the EU on 29 March 2019, questions are arising at to whether contracts should now include ‘Brexit clauses’ and how to define terms such as ‘the EU’, ‘EU law’ and ‘English law’ so their meanings are clear in the future.
Parties entering into contracts that will remain in force post-Brexit, or which may be affected by Brexit, should consider what Brexit related issues may affect their contract and how best to deal with these issues. By providing for this in the contract, they can try to avoid any future problems caused by Brexit which may make the continuing performance of the contract commercially unattractive.
It may not be necessary to contractually provide for Brexit if the contract is due to expire before the UK leaves the EU and if there are no future obligations arising under the contract which may be affected by Brexit. Equally, if parties are sure that Brexit will have no effect on a contract regardless of the term, there may be no need to provide additional protection.
The aim of a Brexit clause would be to deal with future Brexit related issues which may affect a party’s ability to perform the contract or their costs of performing the contract. The clause would trigger a change in the rights and obligations set out in the contract as a result of a defined Brexit related event. The clause would need to define a specific trigger event and decide what the consequence would be should the event occur. It would be no different from any other clause which provides protection against future events having an adverse effect on the contract.
Alternatively, parties may wish to consider a clause which requires the parties to attempt to renegotiate relevant aspects of the contract following Brexit. This may be easier for parties to achieve as the consequences of Brexit are still so uncertain, it may be difficult to establish what the effects may be on a contract and to provide specific triggers and consequences. However, an ‘agreement to agree’ may not be binding on the parties and there is no guarantee that a satisfactory outcome will be reached.
It is possible that an existing change clause may provide adequate protection for the parties. Although it is unlikely that Brexit would trigger a standard change related clause in a contract, there are some clauses in commercial contracts which may offer some remedy if a Brexit related event has an adverse affect on the contract. It is worth checking for such a clause before taking any further steps.
When it comes to defining terms, the more specific the better. If the definition of ‘the EU’ is intended to include the UK after Brexit, then it is recommended to specifically include reference to the UK in that definition. If, on the other hand, the UK is not wanted to fall within the definition of ‘the EU’ after Brexit, referencing the EU by its member states from time to time will allow the UK to drop out once the UK leaves the EU. Alternatively the definition could expressly state that it does not include the UK.
Similarly, references to ‘English law’ and ‘EU law’ will need to be drafted according to the parties’ wishes. It will need to be considered whether the law is to include any implementation of successor legislation after Brexit.
If Brexit is being referred to, parties will need to define what this means in the context of the contract. Will it mean the UK leaving the EU on 29 March 2019? Will it mean when the UK leaves the Single Market?
It is important that parties bear Brexit in mind when negotiating and entering into contracts which may be affected by Brexit. Each contract will be different and each party will have different concerns and requirements post-Brexit. Some ideas for future drafting may include:
- Providing a clear Brexit clause and expressly providing for possible commercial impacts of Brexit
- Being clear when defining key terms relating to the EU and relevant law
- Considering express rights to terminate/not to terminate a contract post-Brexit
- Providing a clause which requires the contract to be renegotiated post-Brexit
- What will happen when the UK leaves the EU is currently uncertain. But parties would do well to start thinking about possible consequences of Brexit which may affect their commercial contracts going forward.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.