With less than one month to go until the end of the transitional period within which EU law continues to apply to the UK, Brexit trade negotiations continue to determine its future relationship with the EU. Despite this ongoing period of uncertainty amidst the backdrop of global economic strain caused by the Coronavirus outbreak, businesses must think ahead to assess the impact of Brexit on their current and future commercial contracts.

This blog will consider what Brexit means for existing commercial contracts and how Brexit will affect their interpretation, whether a contract can be terminated as a result of Brexit, and considerations when auditing current or negotiating new contracts.

What does Brexit mean for commercial contracts?

EU legislation with direct effect will remain in force in the UK, but on a different constitutional basis. At some point after the end of the transition period, each EU-inspired measure remaining in force as UK law will be reviewed as appropriate, and a decision taken as to whether to retain, modify or withdraw it.

Therefore, Brexit will have very limited impact on English contract law (which is largely derived from English common law), but it will likely have significant commercial ramifications which may affect the profitability of individual contracts, such as the imposition of tariffs, restrictions on the free movement of people or further changes in exchange rates. The wider impact may result in businesses suffering from financial difficulty and hardship. However, in the absence of express contract provisions, parties are unlikely to have any legal entitlement to relief.

How will Brexit affect contract interpretation?

Parties will largely be bound by the words of their contract, with very limited relief under common law for those who made a bad deal or are adversely affected by Brexit, as addressed below.

As discussed in our recent blog on Brexit and contracts, questions may be raised over the interpretation of contract provisions, for example whether references to “the EU” will continue to include the UK: it will depend whether the EU is defined as its member states “from time to time”. If so, this strongly indicates that the definition does not include the UK after Brexit. If the definition instead specifically names each country including the UK, then the UK should be covered, even post-Brexit. If the definition is not clear and simply refers to “the EU” – then the wider commercial background and commercial common sense becomes more relevant and will vary case by case.

Enforcing an English judgment in an EU Member State could also become more difficult as current arrangements fall away or the status of the UK thereunder changes.

Is Brexit a sufficient ground to terminate an existing contract?

It will depend on provisions of your existing contract and the facts of the specific case as to whether Brexit is a sufficient ground to terminate.

Looking ahead: what to consider when auditing current or negotiating new commercial contracts

Businesses need to consider how their contracts will be affected by the commercial and economic implications of Brexit. Although there is no one-size-fits-all approach while negotiations go on, each business should consider various factors such as location, regulatory environment, location of its customers and suppliers and composition of its workforce.

The options to manage contractual risk are likely to be unique to each contract. Some contracts contain a significant amount of flexibility, for example, they are terminable at short notice, or are purchase contracts with no volume commitments. Other contracts might contain long term commitments. Flexibility can be good or bad depending on your position but is an important factor when determining whether the contract should be left as is, amended or terminated.

It would be prudent to consider the following points when auditing current or negotiating new commercial contracts:

Summing up

In practical terms, we recommend most businesses should review their current contracts with third parties to assess the impact of Brexit on these commercial arrangements and should continue to “future-proof” their contracts against Brexit if that has not been done already.

If you would like to discuss this blog or any other commercial contract query, please contact a member of the Commercial team and we will be delighted to assist you.

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This update was co-authored by Lucy Andrews, Trainee Solicitor and Emily Sadler, Associate.