The impact of Brexit on Contractual and counter-party risk

Will choice of law agreements continue to be effective?

An express choice of law in an agreement will continue to be upheld. Before Brexit, English courts determined the governing law of a contract in accordance with the Rome I Regulation. The Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019 (the “Regulations”) were approved by Parliament in February 2019. Under the Regulations, the rules of the Rome I Regulation are almost completely incorporated into domestic law. Accordingly, apart from some minor changes, the same rules continue to apply to an express agreement on choice of law.

What about choice of law provisions extending to non-contractual obligations?

Under the Regulations, the rules of the Rome II Regulation are almost completely incorporated into domestic law. Accordingly, apart from some minor changes, the same rules continue to apply to an express statement on choice of law.

Will an agreement stipulating ‘English law’ be construed differently post-Brexit?

A contractual provision stipulating English law as the governing law of the contract would currently be construed as meaning English law including applicable EU law. Now the implementation period has ended, this would no longer be the case. Most likely, the term ‘English law’ would be construed by the English courts as meaning ‘English law as in force from time to time’. However, not only could this lead to a different outcome to what the parties had previously understood, but it is possible that the absence of a particular piece of EU law substantially changes the nature of a contract, or even makes it impossible to perform.

Many contracts have territorial application – how will such provisions be construed post-Brexit?

Many types of contract contain territorial provisions, such as distribution agreements, joint venture agreements, franchises and licence agreements. Where the relevant territorial provision refers to the ‘EU’, such as ‘an exclusive right to operate in the EU’ what would be the position following Brexit? Would the UK continue to fall within the scope of such a clause post-Brexit or if not, would the change mean that the contract could no longer be performed as envisaged? Ultimately, the answer is likely to be a matter of construction for each agreement, but such provisions may give rise to uncertainty and parties may well be advised to revisit their contracts and look to clarify the position by agreement.

Could Brexit provide grounds for terminating an existing contract?

Whether or not Brexit provides grounds for termination will of course depend on the terms of the particular contract. This question will be particularly relevant to parties to contracts with territorial application for the reasons mentioned above.

For existing contracts, parties might try to rely on material adverse change or force majeure clauses as grounds for termination. However, there is no guarantee that such clauses, provisions or principles will allow for termination and each case will come down to a question of interpretation of the particular clause having regard to the relevant facts.

It is even possible that parties may seek to rely on the doctrine of frustration, claiming a contract has become incapable of being performed as a result of Brexit. Again, it will depend on the facts of each particular case as to whether such an argument could succeed.

For contracts entered into after the Brexit referendum, it is unlikely that these termination mechanisms would be available, as Brexit would not be an unforeseen event.

How can contracting parties protect themselves now?

For new contracts, Brexit would not be an unforeseen event and so contractual termination mechanisms such as material adverse change, force majeure and frustration are unlikely to be available. Parties should consider express clauses in their agreements to deal with any envisaged Brexit possibilities that could affect performance.