Cross Border Contracts Post Brexit
At present, no trade deal has been agreed and businesses all over the country are preparing for “No Deal”.
At 11pm on 31 December 2020 the European Union Withdrawal Act 2018 will incorporate the vast majority of EU Law then in force into domestic law so that the position between the UK and the EU will be largely harmonised.
After that date and depending on what, if any, trade agreement is reached with the EU there is a strong likelihood that the legal position between the UK and the EU will diverge. The UK may well choose to implement different standards or requirements and not to implement updated or new EU rules, regulations or standards.
This has the potential to create difficulties where contracts created prior to the end of the transition period refer to EU laws or regulations. For example, consider a cross-border vertical distribution agreement which refers to the Vertical Agreement Block Exemption (“VABE”). After the end of the transition period, should that reference be construed as a reference to:
- the VABE as it is incorporated into UK law, including any subsequent revisions?
- the VABE as it remains in force in EU Law, including any subsequent revisions?
- the VABE as it was in force at the date of the contract, ignoring any subsequent changes made by either the UK or the EU?
More generally, many contracts require a provision requiring the parties to comply with all laws and regulations relating to their activities without specifically referring to a specific piece of legislation. Even a provision such as this has the potential to cause difficulties in the event of a divergence between UK and EU laws in due course. Again, to which laws is the provision intended to refer?
It is highly doubtful that existing contracts will make this clear and this causes the potential for serious difficulties, particularly if a significant divergence between the UK and EU regimes emerges over time.
In-House Counsel would be well advised to consider the terms of their existing contracts and consider whether any:
- specific reference to any EU Law; or
- reference to compliance with laws which could apply across different jurisdictions;
requires amendment or clarification to avoid uncertainty.
The nature of any amendment that might be required should be considered having regard to:
- Where the contract will be performed after the end of the transition? This is because the parties are likely to have to comply with the local law at the place of performance, whatever that may be.
- If different, where will any goods or services produced be used or consumed at the end of the transition? Again, the parties are likely to have to comply with the law in force at the place of use or consumption.
- Is it necessary for both parties to comply with the same standards, or would a divergence of laws make little difference to the substance or performance of the contract?
- The fact that EU Law which requires reciprocity with other EU states will be immediately revoked after its retention. Will this radically change the nature of the contract? Do a different or specific set of obligations need to be imposed instead of an obligation to comply with a specific rule or regulation?
- Is it necessary to differentiate between the law as it might apply differently between the four nations of the United Kingdom – e.g. if the place of performance is Scotland or Northern Ireland?
- If there is a significant divergence of the law, which party will be responsible for complying with any changes and how should the costs of complying with that change be borne? If such changes cannot be agreed, do the parties want the contract to continue?
Thereafter, and if necessary In-House Counsel should try to reach an agreement on these issues with their opposite numbers as soon as possible, before any potential divergence has the opportunity to cause disruption or disagreement between the parties.