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Arezou Rezai | 4th October 2016

Brexit: three months on – the impact on commercial contracts


Arezou Rezai | 4th October 2016

Brexit: three months on – the impact on commercial contracts

Brexit: The Impact on Commercial Contracts

It has now been just over three months since the UK voted 51.9{ba3215b0bf35eaeb06be458b3396ffbfc50bb9db10c9ff1594dfc3875e90ea48} to 48.1{ba3215b0bf35eaeb06be458b3396ffbfc50bb9db10c9ff1594dfc3875e90ea48} in favour of leaving the EU, but as of yet, not much appears to have changed. Whilst the result of a referendum is not legally binding on the Government, it does indicate the nation’s view on a matter and puts significant pressure on the Government to act.

Under Article 50 of the Lisbon Treaty a Member State of the EU can decide to withdraw by notifying the European Council of the same. The Council and the State in question will then seek to negotiate a withdrawal agreement. EU Treaties will cease to apply to the withdrawing State from the date on which the withdrawal agreement takes effect, or failing the Council and the State reaching agreement, two years from the date of notification under Article 50.

As you are no doubt aware, the UK is yet to formally notify the Council of the UK’s decision to withdraw from the EU and the Prime Minister, Theresa May, has said that although “Brexit means Brexit”, it is not a matter that can be rushed. Article 50 will not be triggered before the end of the year.

So, where does this leave UK businesses now and during what might possibly be a two-year negotiation period once Article 50 is formally triggered?

In terms of EU law and how that is affected in the UK by Brexit, there is currently no change to the status of EU law in the UK and there may not be any significant change for some time. EU legislation either has direct effect in the UK (e.g. Regulations), or requires domestic legislation to give effect to it (e.g. Directives). Once the UK does eventually exit from the EU, all directly applicable EU law, including Treaty provisions and Regulations will cease to have legal effect in the UK. Directives that have been given effect in the UK by way of implementing domestic legislation will, however, continue in force but the UK statute will no longer need to comply with the Directive from which it derives. Until such time as the UK does formally exit from the EU, the UK will continue to be bound by any new EU legislation which will include the much talked about General Data Protection Regulation which comes into force in May 2018.

The full effect of Brexit on UK businesses is currently unknown as this will depend on the relationship the UK will have with the EU going forward post-Brexit. Many possibilities as to what that relationship might consist of have been debated, ranging from membership of the European Economic Area to trading under World Trade Organisation rules.

Cross-border contracts should in theory continue in force. Whether or not a contract can be terminated as a result of Brexit will depend on the facts of the case. A party may argue that the contract has been frustrated as a result of Brexit, especially in relation to those contracts having the EU as the territorial scope, or may seek to rely on a material adverse change or force majeure clause. Some contracts may provide a ground for termination in circumstances such as one of the party’s withdrawal from the EU. There is no guarantee that such clauses will, however, provide a ground for termination and each case will turn on its own facts. It is important to remember that currently the UK is still a member of the EU.

Commercial contracts are not a heavily regulated area of the law and usually the main focus of such a contract is the commercial deal between the parties. It is possible that the commercial deal itself will be impacted by Brexit. Since 23 June the value of the pound has been in a state of fluctuation and this has, and will continue, to impact the value of existing and future cross-border contracts. Until we know the nature of the relationship between the UK and the EU post-Brexit it is difficult to determine what, if any, trade barriers will develop. It is possible that the UK will face increased taxes, duties and similar levies which will ultimately impact upon prices and is something that UK businesses will need to consider when entering into new contracts with EU based businesses.

The full impact of Brexit will in due course become clearer, and for now we continue to face a period of uncertainty. Once Article 50 is triggered and negotiations commence we may have a clearer picture of the future for UK businesses but, until such time as an agreement is reached with the Council, or failing that the two-year withdrawal period comes to an end, businesses should consider it ‘business as usual’. It would, however, be prudent for any business operating in the EU or doing business with another Member State to start thinking about how it can seek to minimise the impact of Brexit on itself.

If you have any questions or would like to discuss this topic further please contact me.

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