The implications of a ‘Hard’ Brexit

Will we witness a ‘hard’ exit from the EU? Or will Britain go softly, softly? Now seems to be the time to get thoughtful about the potential implications of the UK voting to leave the EU.  There could be significant repercussions for the way in which commercial counterparties within the European Union choose to contract with each other and for their ability to resolve international disputes. 

In January 2017, the House of Lords’ EU Justice Sub-Committee will hear evidence from two senior UK Judges on the significance of EU legislation designed to facilitate cross-border civil disputes.  However, it cannot be avoided that there is the smell of uncertainty about the detail of the consequences for us for ending the UK/EU relationship, if it ends hard.

For Contracts

At present, EU legislation protects parties’ abilities to choose what governing law there should be for their contractual relationships and the ability to choose forms a fundamental freedom offered by English law.

The current EU framework applicable to contractual and non-contractual obligations is enshrined in the Rome I and Rome II Regulations, respectively. 

It is not beyond the realms of possibility that a decision could be taken to leave the rules as set out in the above regulations intact after Brexit.  A possible consequence being that the English Courts would be the final arbiter of how the rules are applied – ultimately a job reserved for the European Court of Justice as things stand.  If that were to happen, then nothing immediate would change, but it is possible that the interpretation of the two regulations could start to differ between the UK and the remaining EU member states over time. 

If the Rome I and Rome II Regulations were no longer to apply following Brexit, then it is possible that the UK would revert back to the rules in force before those regulations became law.  As such, in regards to contractual obligations, the Rome Convention; which applied to the law governing contracts made between April 1991 and 17 December 2009 could apply, which, of itself, would not materially alter the present position as we know it. However, in regard to non-contractual obligations, the Private International Law (Miscellaneous Provisions) Act 1995 – which is a regime which is unlike to Rome II – could operate so that the parties would not have an express right to choose the law applicable to non-contractual relations between them. 

However, it’s anticipated that when the UK eventually leaves the EU, the courts of EU member states will continue to respect the parties’ choice as to governing law as before; so that on choosing English law the parties to a contract will still enjoy an application of the rules set out in Rome I and II.

Contracts Governed by English Law

The UK government will have to make a decision about what existing EU legislation will continue to form part of English law once the UK has left. 

As to new developments, the way in which English law will evolve will largely depend on what influences international perspective will bring for the UK’s legislature.  The UK would not be obliged to incorporate EU legislation as before and given the reasons behind Brexit happening in the first place; it is not expected that the UK would elect to do so anyway.

The Impact on Contracts

There may be circumstances in which the operation of a contract is wholly dependent upon the consequences for the parties of adherence to particular EU legislation.  Examples such as reliance on various passporting regimes; as in the exercise of the right for a firm registered in a European member state to do business in another member state without the need for authorisation in that country, could be lost – thereby making it more difficult for businesses in different countries to continue having relations with each other.

This in itself could give rise to disputes, and parties would do well now to review their existing commercial relationships to determine whether any issues of this nature could arise.

Shorter contracts stand the best chance of being adversely affected, due to the two-year negotiating window and would start once the triggering of Article 50 of the treaty of the European Union happens.

It would be advisable now though for parties seeking to negotiate the terms of new contracts to consider how those contracts could be impacted by Brexit and to expressly provide for contingencies by reference to certain contractual terms to deal with that.  Options include expressly including clauses relevant to the UK leaving the UK, in or from a force majeure provisions, allowing for more generous termination rights in contracts, providing expressly for specific contingencies and referring to alternative mechanisms for adjudication which should apply once the UK leaves Europe. 

There are of course other things to consider in relation to choice of Court (jurisdiction), service of proceedings out of one’s own jurisdiction, recognition and enforcement of judgments internationally and conflict of laws; meaning that in the context of contracts “hard Brexit” may be less preferable than to leave “softly softly” insofar as those engaged in commerce are concerned.

Ultimately it may take the involvement of already confused politicians and a few choicely selected judges to decide on a framework for European contracts – and some of those people may still be questioning the wisdom of leaving Europe in the first place!

MORE INFORMATION 

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as at January 2017.