Brexit and Your Business - Contracts and Commercial Litigation
Practical steps to consider
4 Months on from the UK’s historic vote of 23 June 2016 to leave the EU, what does this mean for you and your business? How will your contracts and their enforceability be affected here and abroad? On 3 November the High Court decided that Parliamentary Sovereignty trumps the Government’s reliance on the Royal Prerogative, and Parliament should debate and decide before Article 50 is triggered. The Government says this won’t delay its timetable of serving the Article 50 notice under the Lisbon Treaty by March 2017 and it is appealing to the Supreme Court.
Whatever the outcome, the withdrawal of the UK from the EU is likely to take some years, but businesses need to be making plans now. Until the shape of a post-Brexit agreement is fixed, the precise legal implications are yet to crystallize. But, the UK's departure will impact on fundamentals for your business like contracts, terms & conditions and potential disputes. Areas to explore from a dispute management perspective include
- Corporate and commercial contracts
- Competition law
- Governing law and jurisdiction
- Issue and service of English proceedings in the EU
- Enforcement of English and EU judgments
2. Risk Analysis
How can you ensure your business stays ahead? Whilst some detailed plans can be left until there is greater certainty about post Brexit arrangements, considering the legal implications should be at the forefront of your strategy. A risk analysis should be implemented to ensure businesses get their ducks in a row and identify the effect Brexit will have on their rights and obligations under existing and proposed new contracts and regarding potential litigation.
As each business is different, the process should be targeted to your needs. Below we highlight typical practical points which businesses should be addressing now, especially if you trade in the EU or have foreign customers, interests or suppliers.
3. Corporate and Commercial Contracts
Businesses should already be reviewing their existing contracts, particularly those likely to be in force at the point of Brexit. Where necessary, contractual terms and conditions intended for use from now on should be amended for when the UK ceases to be a EU Member State.
Many existing contracts and trading arrangements will be affected, referring to a range of EU laws, regulators and territories. A due diligence exercise should be carried out to identify the key contracts and consider their terms. The need for possible amendments and contingent steps should be considered.
- Can the contract be varied to mitigate the impact of Brexit?
- Where the contract price or payments under a contract are made or received in Sterling, Euros, Dollars or fixed to a particular exchange rate, consideration should be given as to whether the currency used is amended to reflect the recent drop in Sterling.
- Does the governing law clause need amending?
- Will Brexit result in a breach of contract?
- Whilst unlikely, can force majeure or material adverse effect clauses be relied upon?
- How can the contract be future-proofed?
4. Existing Contracts
The impact of the UK leaving the EU may affect the operation of existing contracts, potentially beyond how the parties might expect. It is unlikely that they will have foreseen or planned for the implications when entering in to the contract.
Territorial scope. Does the contract include the EU as its territorial scope? On leaving the EU, the UK won’t be covered by that territorial description. Should the contract be amended, or can the contract be terminated by any party invoking a force majeure or material adverse change clause?
Reference to EU legislation. Analyze clauses referring to EU legislation, compliance and any changes. Contracts that refer to EU legislation may need to be amended to deal with the different circumstance.
Force majeure provisions. A force majeure clause may be drafted wide enough for a contract to be terminated. For example, if the contract depended on certain EU legislation (e.g. “passporting” under EU financial services legislation), the contract may be frustrated or force majeure might be triggered by Brexit.
Material adverse change provisions. Similarly, if a contract includes a “material adverse change” provision (MAC), this may permit termination of the contract, although this will depend on a number of factors.
These issues may well result in a dispute, and businesses should consider their existing agreements as to how they maybe impacted.
Shorter term contracts. These are less likely to be affected by the UK leaving the EU, due to the two-year negotiating window after Article 50 is triggered. This should give parties some time to consider how the terms of Brexit might affect their longer term contractual arrangements and to renegotiate where necessary.
5. New Contracts
Notwithstanding “Brexit means Brexit”, new contracts should address the impact of the UK's departure from the EU, and provide accordingly in the contract so far as possible:
- Do your contracts contain provisions which assume that the UK is an EU Member State? This may include references to the EU that are formulated on the assumption that this includes UK, or may be less obvious – e.g. references to rights or obligations arising from specific EU laws which currently apply to the UK.
- Do your contracts rely on or assume the availability of free movement within the EU, or of any EU level consolidation (such as engaging an EU wide regulatory body)?
- Prolonged Negotiations. Specific provisions could be considered on prolonged negotiations to implement the exit or the impact of new trade agreements once negotiated.
- Termination rights. Consider whether to include termination rights in case the new trade agreements will result in an increased burden or negative effects on the intended business transaction.
Force majeure provisions
- Expressly include or exclude the UK leaving the EU in or from any force majeure provision;
- Consider termination rights when the UK leaves the EU (depending potentially on the terms Brexit ultimately takes); and/or
- An alternative mechanism once the UK leaves the EU
- Include notice terms and detailed explanation of the consequences of the right to terminate, and include justifiable Brexit definition and when it can be triggered.
Material adverse change provisions
Similarly to force majeure provisions, consider whether to include or exclude Brexit from the MAC definition. This depends on the outcome sought. Similar considerations will need to be given to how the Brexit definition is drafted and when it can be triggered. A business may wish to consider the inclusion of its own MAC clause, or even a bespoke Brexit clause. This could provide businesses with flexibility to respond to altered circumstances rather than being tied to expensive or inflexible terms. This would require heightened awareness on the part of businesses to work out the ramifications of such clauses, and to be prepared for counterparties seeking to include them also.
- EU law continues to apply in the UK. Substantive UK competition law mirrors EU competition law. As such, competition law continues to apply in the UK as it did before the referendum.
- EU and UK antitrust/competition law has a significant impact on contracts and trading arrangements. Competition law compliance continues to be of prime importance. This will still apply post Brexit, but there will be changes.
- Transitional provisions are likely for Brexit and the UK’s new trading arrangements with the EU. Businesses should be taking steps now to evaluate the impact of Brexit on competition law as it relates to them.
- Private competition law litigation (including claims for injunctions and damages) has been increasing in the UK and Europe. It now represents a significant commercial weapon for businesses of whatever size.
- Brexit raises significant commercial, legal and other issues for businesses. Whilst there may be understandable motives for wanting to discuss this with competitors in various forums, informally or formally, extreme caution should be employed. Confidential commercial information must remain confidential and businesses must avoid offending against anti competition laws. Discussions with competitors should be avoided until advice on competition law is first obtained.
- As with other types of litigation, the impact of Brexit on competition litigation should be considered when planning strategy.
Brexit may impact on litigation affecting your business, including current or prospective cases, such as where jurisdictional issues arise, or when it comes to enforcing a judgment post Brexit. EU legislation governs parties' choice of which EU member state’s courts has jurisdiction over disputes between them, and the cross-border recognition of judgments of EU member states’ courts.
The Court of Justice of the European Union (CJEU) is responsible for the rule of law within the EU. The UK’s right to appear in all cases and to appoint judges to the CJEU will no longer exist when Brexit is implemented. This should not be confused with the European Convention on Human Rights, its council and its court (the ECtHR), which are not affected by Brexit. The European Convention on Human Rights has been incorporated into UK law through the Human Rights Act, and the referendum of 23 June did not involve the UK leaving the Council of Europe either.
From the date Brexit takes effect, litigants will no longer be able to appeal cases to the CJEU and UK judges will no longer be required to follow CJEU decisions (although they may decide to do so), but they will continue to follow ECtHR decisions. Litigants are likely no longer to be able to challenge UK legislation on the basis of incompatibility with EU law alone. They would however retain the ability to mount such challenges to the ECtHR based on human rights issues.
In other respects, the court system in the UK is likely to remain unchanged, with the UK Supreme Court (formerly the House of Lords) as the final Court of Appeal.
Brexit is unlikely to affect the recognition and enforcement of judgments between the UK and EU member states, as the relevant countries are signatories to the Lugano and Brussels Conventions. However, these conventions are more limited than the Brussels Regulation, which currently governs jurisdictional issues between courts of EU member states.
Brexit may mean that the UK falls outside the scope of the Brussels Regulation which created a requirement of “judicial comity”. This means that courts relinquish cases if they are already being heard in another EU member state. Without this restriction, the English courts would be able to accept jurisdiction over more cases and, in appropriate cases, could provide anti-suit relief to restrain parties from pursuing proceedings in the courts of other EU member states. The reverse may unfortunately be propounded by the courts of different EU member states depending on how they view jurisdiction clauses. This would potentially result in considerable uncertainty.
8. Choice of Court
It is fundamental for businesses to be able to agree between themselves where and how any disputes between them should be resolved. This general freedom is subject to some obvious exceptions. The Recast Brussels Regulation sets out which courts of EU member states should have jurisdiction in disputes in civil and commercial matters, and provides for the mutual recognition and enforcement of civil and commercial judgments within the EU. The general rule is that the courts where the defendant is domiciled have jurisdiction. This is subject to a number of exceptions, including:
- Where the parties have agreed that the courts of another member state should have jurisdiction
- Agreements regarding the sale of land in a particular country where the domestic courts of a member state have exclusive jurisdiction
- Contract protection for public policy reasons protecting "weaker" parties
- Cases involving employment, consumer or insurance contracts
It is anticipated that whether the “Norwegian Model” or the World Trade Organization “WTO Model” is adopted, courts of EU member states will generally be obliged to recognise a choice of jurisdiction in favour of the English courts. However this remains uncertain.
In the absence of any international agreement with the EU, the English courts are still likely to respect provisions in contracts which confer jurisdiction by agreement on the English courts. How such clauses will be treated by EU member states will be a matter for the laws of those member states. That would result in considerable uncertainty, depending on how jurisdiction clauses are viewed by the courts of different EU member states.In some cases, the courts of a counterparty domiciled in another EU member state may be reluctant to cede jurisdiction to the English courts, even if that is what the parties agreed.
9. Parallel Proceedings
Parallel proceedings (i.e. where proceedings concerning the same subject matter are commenced in more than one country's courts) are a risk in commercial disputes, particularly where the parties to a contract are based in different countries. Having to defend a dispute on multiple fronts can be time-consuming and costly.
Under current arrangements, if parallel proceedings are brought in the courts of more than one EU member state involving the same or related issues, in general, the courts of the member state first seized of the dispute decide the question of jurisdiction. One exception is that the courts of a member state that have jurisdiction under the terms of an exclusive jurisdiction clause can proceed to determine the question of their jurisdiction over the dispute in question, even if parallel proceedings are already under way in the courts of another EU member state. This greatly reduces the risk of parallel proceedings within the EU.
If the UK accedes to the 2007 Lugano Convention, this prohibition will remain, but the precedence given to the courts of the country that the parties have agreed should have jurisdiction will not apply. That rule was introduced to the Brussels Regulation from the beginning of 2015 to resolve the so-called "Italian torpedo" problem. This is whereby a party first issues proceedings in a country where the judicial process is relatively slow and complicated so as to delay proceedings, and tie disputes up in jurisdictional battles for years.
If the UK does not accede to the 2007 Lugano Convention, there will be no bar on parallel proceedings, provided that the courts in the countries in question are prepared to take jurisdiction over the dispute under their own rules of private international law. For example, at common law, the English courts can take jurisdiction over a dispute where the parties have agreed that the English courts should have non-exclusive jurisdiction and proceedings are pending in a different jurisdiction, on the basis that the parties must have contemplated the possibility of parallel proceedings by agreeing to a non-exclusive jurisdiction clause in the first place.
The English courts would also once again be able to issue anti-suit injunctions to prevent proceedings from being brought in other EU member states, something that they are not able to do at the moment because of the effect of the Recast Brussels Regulation (and its predecessors).
If the counterparty to a contract is in the jurisdiction (or has appointed an agent for service of process in the jurisdiction), it is quite straightforward to serve English court proceedings on them where a dispute arises. The position is more complex, time-consuming and expensive if proceedings have to be served abroad.
Normally under English law, the claimant commencing proceedings must apply to the court for “permission” to serve out of the jurisdiction. The claimant must persuade the English court at the start that it has jurisdiction over the matter. However, there is currently no need to apply for permission to serve out of the jurisdiction if service is to be effected in the EU, and the English courts have jurisdiction under the Recast Brussels Regulation. This provides a clear and relatively predictable basis on which proceedings can be served in the EU without permission. Similarly, EU Service Regulations also set out the procedure and mechanics of effecting service within the EU.
A similar exemption for the need to obtain permission to effect service also applies to service within the countries that are party to the 2007 Lugano Convention. However, if the UK were not to accede to the 2007 Lugano Convention when it leaves the EU, it is likely that it would become necessary again to apply for permission to serve English court proceedings within the EU. This would increase the importance in any contract of having an EU based counterparty expressly appoint an agent for service of process in England if the parties have agreed to submit to the jurisdiction of the English courts.
If parties have chosen the English courts to hear their disputes and one or more of the parties is based abroad, it is always worthwhile including an agent for service clause in a contract.
11. Recognition and Enforcement of Judgments
The Brussels Regulation provides for a streamlined method of recognising and enforcing judgments in civil and commercial matters within the EU, and the 2007 Lugano Convention contains a similar regime for the states included. The bar for refusal of recognition is very high: including judgments contrary to public policy and judgments given in default in certain circumstances. As such, a business contracting with another party elsewhere in the EU can be reasonably confident of being able to
- issue proceedings
- serve the proceedings
- enforce a judgment of the English courts against the counterparty in its home member state
In the absence of any international agreement on jurisdiction and enforcement, the enforceability of judgments of the English courts within the EU would depend on the laws of each member state. This would result in uncertainty. For example, an English company dealing with a French company would need to take French law advice as to the enforceability of English court judgments in France. Potential enforcement issues may hinder jurisdiction being conferred on the English courts by agreement. There is further uncertainty on judgments of English courts being recognised by courts of member states. Money judgments may be straightforward, but the same may not apply to claims for declarations, accounts and inquiries, specific performance, injunctions and interim relief.
The corollary is that the English courts would also no longer automatically recognise and enforce the judgments of the courts of EU member states. This would be a concern for EU based businesses dealing with counterparties based in the UK. Potential difficulties with recognition and enforcement of judgments could affect decisions by businesses as to which courts they elect to have jurisdiction over their disputes. It could also influence how parties decide to pursue dispute resolution, whether via the courts or arbitration, considering the enforcement mechanisms for arbitral awards.
12. Planning Ahead
Whilst parties negotiating contracts now can plan ahead for in case a dispute arises (e..g. by appointing an agent for service of process, and thinking carefully about potential enforcement issues), the position is different for litigation that is currently either imminent or under way. It is difficult to see how possible changes to the rules on jurisdiction would affect proceedings being issued today, because such proceedings will need to be issued in accordance with the rules currently in place.
As explained above, developments during the negotiation period under the Article 50 process may have an impact on decisions on disputes that arise during the process, for example there may be a particular date by which it will be advantageous to commence proceedings. Alternatively it may become clear e.g. that the UK will accede to the 2007 Lugano Convention.
Regarding existing litigation, depending on the circumstances, the fact that the UK will be leaving the EU may buttress reasons to seek judgment as soon as possible, taking advantage of the present recognition and enforcement mechanism in the Recast Brussels Regulation.
The impact of Brexit may also be felt indirectly in future, such as on funding for current civil litigation projects in the UK. Funding for the proposed online court may be at risk, depending on economic factors.
As an EU member state, the UK is a party to a framework of EU legislation which sets out the rules that courts in EU member states will apply to decide the governing law of a contract and of tort (civil wrong) claims and their jurisdiction over disputes. This framework also provides the procedure for serving legal proceedings as between member states and the mechanism for enforcing a judgment from a court in one member state in other member states. This area is therefore likely to be directly affected by Brexit, although it remains to be seen to what extent. In the meantime, businesses should strategically review their contracts and Terms and Conditions to see how and to what extent they can be Brexit proofed, and to analyse the threats and opportunities that arise. Issues such as Intellectual Property, Employment Law and Data Protection are amongst further areas for consideration, outside the scope of this piece.
14. How We Can Help
High-level due diligence exercise on existing contracts
Interpretation of clauses such as termination, force majeure, compliance with law, territorial restrictions and material adverse change
Existing contracts / strategic advice
Drafting new contracts / strategic advice
Cross border litigation including issue, service and enforcement of judgmentsFor further information related to this article please contact Paul Sykes, Director in our Disputes Management department.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.