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.

[March 2019]