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Independence Day: What the ‘Leave’ vote means for Commercial Contracts

Independence Day: What the ‘Leave’ vote means for Commercial Contracts

The majority vote for the UK to leave the EU will come as a shock to many businesses and we now embark on a journey of uncertainty in the forthcoming years whilst the legal landscape is determined.

Under the Lisbon Treaty of 2009, the exit mechanism for a Member State to leave the EU will begin, however the procedure is not very detailed. There is a two year period to agree the terms of the exit and this is potentially extendable. Such negotiations are likely to impact on the legislative agenda in England as time will be devoted to working out the technicalities of the exit, particularly in relation to what will happen to all of the EU laws that currently apply to the UK.

Brexit may not have an immediate impact on contracts, but one thing to consider carefully is whether the UK leaving the EU could be construed as a ‘force majeure’ event as this could allow a party to claim that the performance under the contract is impossible and therefore it should be terminated without any liability. Force majeure clauses should therefore be checked to assess whether the termination right could be triggered.

Brexit could also amount to ‘frustration’ of a contract as it is unlikely to have been contemplated by the parties when entering into the contract. Consequently, it could be argued that the purpose of the contract has been negated and therefore the parties are discharged from their obligations. However, frustration is typically construed narrowly by the courts.

In addition, the fall in the value of the pound could have an impact on contract terms relating to ‘material adverse change’, financial covenants and termination. For contracts dependent on EU free movement of goods or people, now may be a good time to consider whether the terms of the contract should be amended to provide the parties with certainty in this transition period.

It is also unclear how references to EU law in contracts will be interpreted going forwards, but we will do our best to keep you apprised of any developments and please do get in touch if you would like Cracknell Law to review any contracts which you have concerns with.

Please note: the content of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in any specific circumstance.