Commercial contracts and Brexit

With the EU referendum fast approaching, we outline some possible implications for new and existing business contracts if the country votes to leave.

What English law will apply if the UK leaves the EU?

 Whether or not the law which applies will be the law at the date of exit depends on the extent to which the UK government decides that existing EU legislation should no longer form part of English law once the UK has left. The options would appear to be as follows:

• the government may decide that the law will not change retrospectively which would mean that EU regulations and directives that have already been implemented would remain unless or until they are replaced. This would make matters simpler and it would be a more straightforward solution; or
• the UK government prepares legislation, in specific areas, to replace certain EU legislation at, or shortly after, exit.  Given the all-encompassing nature of EU legislation in English law, it would seem unlikely that any UK government would simply repeal the English law that came from the EU without giving thought as to what was going to replace it, given the uncertainty which would ensue.

Effect on contract terms

Leaving the EU may affect contract terms in a way not originally envisaged by the parties for example: 

Geographical definitions

There are contracts which contain references to specific geographical areas such as intellectual property licences, franchise agreements and distribution agreements.

If these contracts currently define the “territory” as the ‘European Union’ or ‘EU’ the question would be if the UK exits would the contract still work for the UK. Take for example, a licence which gave a licensee a right to use a trade mark in the European Union. Following Brexit, such a licence may no longer grant a right to the licensee to use the rights in the UK. The licensee is therefore likely to lose the exploitation rights in the UK and arguably, the trade mark could be licensed to a third party instead.

The parties to any contracts being negotiated between now and 23 June 2016 (and if the UK should decide to leave, between the 23 June and the official exit date), should make certain that they include a geographical definition that ensures the rights will be granted for the UK.

Any existing contracts which contain geographical definitions should be checked to see how they may be impacted by Brexit.

‘Force majeure’ clauses

It is possible that exiting the EU could mean that a contract is frustrated or that a force majeure provision is triggered, depending on the construction of the contract. Therefore any contracts currently being negotiated should expressly state that the UK’s exit from the EU does not amount to a force majeure provision or give the parties any termination rights linked to such an event.

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