Brexit is coming - the UK triggered Article 50

Today, March 29, 2017, Sir Tim Barrow, the UK’s permanent representative to the EU, formally delivered the notification to the European Council that the UK withdraws from the European Union pursuant to Article 50 of the Treaty on the European Union. This notification will now be followed by the negotiations of the terms of withdrawal which shall take not more than two years unless unanimously consented by the EU Council. In a so-called White Paper on the Brexit issued by the British government on February 2, 2017 it was made clear that the UK intends to leave the EU single market, the customs union, and the jurisdiction of the European Court of Justice. The UK is choosing for a “hard” Brexit.

Impact on commercial contracts

When the withdrawal becomes effective the UK will not be party to the EU treaties anymore and the EU regulations will not be applicable to contractual relationships with UK based parties. This can already today have a major impact on commercial contracts between parties from the remaining EU countries and the UK especially with respect to mid- to long-term contracts.

Today, in most cross-border contracts one will find clauses on the choice of law and jurisdiction. After the Brexit, the regulations on the harmonization of choice of law clauses, the recognition of foreign judgments and the enforcement of judgments as of today will not be applicable any more in relation to contracts with UK based contractual partners. It is yet uncertain if, and if so, how, these regulations will be replaced.

Pay attention to choice of law and jurisdiction clauses

At the moment (and for the time of the exit negotiations until the withdrawal becomes effective), the Rome I and Rome II regulations and the Brussels Ia Regulation are applicable in the European Union including the UK.

  • The Rome I (and Rome II for non-contractual relationships) regulations provide for a harmonized conflict of law scheme which is of considerable value for commercial contracts. Among others, they provide for which law applies for the interpretation of choice of law clauses and for the situation that the parties do not make an explicit choice of law. After the withdrawal is effective, it is not yet clear if the UK courts will further apply these rules. In order to avoid a conflict on the applicable law it is therefore strongly advisable to pay attention that a choice of law clause is validly included in any contract with UK business partners, future ones or even, if appropriate, by renegotiating existing ones. In a second step, the question might arise if the choice of English law will be acceptable for contractual relationships that have relevance for the time after the Brexit. This should be thoroughly thought through also taking into consideration that English law will in the future no longer be influenced by the harmonized and probably more predictable European law.

  • The ceasing applicability of the Brussels Ia with respect to UK business might have an even greater impact on contractual relationships with the UK. This regulation concerns the competency of a jurisdiction and the enforceability of titles. At present, reliable rules are in place in the EU preventing the parties to obstruct court proceedings by, for example, initiating parallel or concurrent legal proceedings or commencing an injunction procedure in another jurisdiction (“anti-suit injunction”). The Brexit might lead to a rebirth of such legal tactics distracting the parties from the actual commercial matter at hand. Once an enforceable title is obtained, the EU rules provide for acknowledgment of the title in all member states and thus allow a smooth and quick enforcement procedure. It seems certain that those massive advantages of enforcement will come to an end with respect to the UK once the withdrawal is effective. In order to enforce a judgment against assets of the debtor in the UK, a formal acknowledgment procedure (“exequatur”) at UK courts will then most likely be required again which can complicate enforcements significantly.

Recommendations

We strongly recommend parties negotiating commercial contracts with UK business partners resp. business partners with relevant assets in the UK to pay special attention to the choice of law clauses. In addition, due to the uncertainties of the future regulatory framework for business relations between EU and UK partners, it might be advisable to include arbitration clauses into commercial contracts instead of jurisdiction clauses (for example agreeing on ICC or NAI arbitration). This will refer legal disputes to arbitration panels instead of the ordinary courts. The advantage is that with respect to arbitrational awards the 1958 New York Convention will apply which provides for recognition and enforceability of the awards (the UK is contracting state of this convention) – thus bringing relieve for one major uncertainty in connection with the ceasing applicability of the Brussels Ia regulation. Reference to arbitration might be recommendable in many cases to ensure security and foreseeability for the parties.

The Brexit certainly does not need to be the end of making business with the UK – but we recommend to take its implications into careful consideration when negotiating with your UK business partners. Kneppelhout & Korthals is ready to advise you on all legal aspects you may come across when making business with the UK – we aim to contribute to the long-term success of your business.

Other legal issues in connection with the Brexit will be, among others, the effects on the regulated industries including the finance and the food industry, customs and employment matters. We at Kneppelhout will regularly update you on the impacts of the Brexit on these and other topics

Niko Oertel, Corporate and Commercial Law, Head of the German Desk