Brexit: con­trac­tu­al obli­ga­ti­ons and risks fol­lo­wing unre­gu­la­ted departure?

The Bri­tish par­lia­ment having rejec­ted the with­dra­wal agree­ment nego­tia­ted bet­ween the Euro­pean Uni­on (EU) and the Bri­tish govern­ment in Janu­ary 2019, an unre­gu­la­ted depar­tu­re by the United King­dom (UK) (so-called ‘hard Brexit’ or ’no-deal Brexit’) is begin­ning to look more and more likely. If the­re is a no-deal Brexit on 29 March 2019, major impacts on cur­rent con­trac­tu­al rela­ti­onships bet­ween Ger­man com­pa­nies and their con­trac­tu­al part­ners in the UK are to be expected.

Impacts on exis­ting contracts

The rein­tro­duc­tion of cus­toms duties and taxes on imports and exports cau­sed by a no-deal Brexit would pro­ba­b­ly con­sti­tu­te the grea­test finan­cial bur­dens as regards exis­ting con­tracts. The­se pay­ments, abo­lished within the EU, would be rein­tro­du­ced for imports from the UK, to be trea­ted as a third coun­try after its depar­tu­re, under the so-called Uni­on Cus­toms Code. Imports into Ger­ma­ny would thus be lia­ble to cus­toms duties and import tur­no­ver tax. In the oppo­si­te direc­tion, imports into the UK would also once again be lia­ble to cus­toms duties, the regu­la­ti­ons of the EU being repla­ced by tho­se of the World Trade Orga­niza­ti­on (WTO), as the UK and Ger­ma­ny are mem­bers of both. The­se cos­ts may have major impacts on the cal­cu­la­ti­on and pro­fi­ta­bi­li­ty of indi­vi­du­al busi­ness rela­ti­onships. As to who has to bear the cos­ts in a given indi­vi­du­al case, that will be deter­mi­ned essen­ti­al­ly by the agree­ments made bet­ween the par­ties – e.g. Incoterms.

If a no-deal Brexit crea­tes bur­dens which a con­trac­tu­al par­ty can­not reason­ab­ly be expec­ted to bear, both Ger­man law and the law of Eng­land and Wales pro­vi­de for con­s­tructs which will at least ren­der it pos­si­ble to amend, revo­ke or even ter­mi­na­te the con­tracts in ques­ti­on if appro­pria­te con­di­ti­ons are met.

Rights of the con­trac­ting parties

If a con­tract is sub­ject to Ger­man law, Sec­tion 313 of the Ger­man Civil Code (BGB) will be eli­gi­ble. Accor­ding to Sec­tion 313, a par­ty may call for adapt­a­ti­on if cir­cum­s­tances which have beco­me the basis of the con­tract have chan­ged signi­fi­cant­ly and it is no lon­ger reasonable to expect the par­ty to uphold the con­tract under tho­se cir­cum­s­tances. If such adapt­a­ti­on is not fea­si­ble or if it is not reasonable to expect the other par­ty to uphold the con­tract, the con­tract may be revo­ked. In the case of per­ma­nent con­trac­tu­al obli­ga­ti­ons, fur­ther­mo­re, the opti­on of ter­mi­na­ting the con­tract for a com­pel­ling reason would come into play (as in Sec­tion 314 of the BGB). A ques­tionable issue, and one that would need to be review­ed from case to case, is whe­ther or not a no-deal Brexit actual­ly con­sti­tu­tes a com­pel­ling reason. A reason is only dee­med to be com­pel­ling if it is not reasonable to expect a par­ty to con­ti­nue the con­tract taking all the cir­cum­s­tances into account.

If the con­tract is sub­ject to the law of Eng­land and Wales, the right to adapt­a­ti­on and / or ter­mi­na­ti­on depends lar­ge­ly on the con­trac­tu­al con­di­ti­ons actual­ly agreed bet­ween the par­ties. For exam­p­le, a par­ty may have the right to adapt and / or ter­mi­na­te if the con­tract con­ta­ins a spe­ci­fic pro­vi­si­on estab­li­shing that right (e.g. force majeu­re or hard­ship clause).

Apart from that, the so-called ‘doc­tri­ne of frus­tra­ti­on’ has deve­lo­ped in Eng­lish juris­pru­dence. The doc­tri­ne of frus­tra­ti­on comes into play if an event or cir­cum­s­tance comes about which was not fore­seeable at the time when the con­tract was con­cluded, and which ren­ders it impos­si­ble to per­form the con­tract and / or brings about radi­cal chan­ge in the con­trac­tu­al obli­ga­ti­ons. If the­se con­di­ti­ons are met, the con­tract is dee­med to have been ter­mi­na­ted and the par­ties are released from their con­trac­tu­al obli­ga­ti­ons. The­re has not yet been any kind of final decis­i­on on whe­ther or not the (eco­no­mic) impacts of a no-deal Brexit would be clas­si­fia­ble as such an event, and that ques­ti­on is curr­ent­ly the sub­ject of court pro­cee­dings in Eng­land (Cana­ry Wharf [BP4] T1 Ltd. and others vs. Euro­pean Medi­ci­nes Agen­cy), the tri­al having been set for March 2019. The out­co­me of that tri­al is being awai­ted with keen inte­rest and will, it is hoped, make things clearer.

Prac­ti­cal tip

Apart from inclu­ding clau­ses that spe­ci­fi­cal­ly cover the impacts of the Brexit in con­tracts that are curr­ent­ly being nego­tia­ted, legal depart­ments are recom­men­ded to review exis­ting con­tracts, in par­ti­cu­lar with regard to any adapt­a­ti­on clau­ses and clau­ses gover­ning deli­very times. This may help to assess whe­ther a default in deli­very cau­sed by impacts of the Brexit (e.g. cus­toms aut­ho­ri­ties over­loa­ded with work) can form the basis for entit­le­ments to cla­im for dama­ges or even rights of ter­mi­na­ti­on for the con­trac­tu­al part­ner. Abo­ve and bey­ond that, it is neces­sa­ry to cla­ri­fy which law is aut­ho­ri­ta­ti­ve and – not least in order to be able to assess any liti­ga­ti­on risks – whe­ther or not any requi­re­ments have been agreed with courts or courts of arbi­tra­ti­on, and if so, which. Bet­ter safe than sor­ry, as they say.


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