Dr. Hendrik Thies, Fachanwalt für Handels- und Gesellschaftsrecht

Brexit and Contract Law: Interpretation, Modification and Drafting of Contracts

To date, when a contract mentions the “EU” as a geographical area, this constituted a clear regulation. Henceforth the question will arise, whether this term will continue to include Great Britain after a Brexit. In order to clarify such questions, existing contracts should be reviewed and modified. When concluding new contracts, the new situation and political uncertainty should be considered in advance and be taken into account by including modification clauses and a right of termination in contracts.

In the event that the UK leaves the European Union, this will have significant effects on the interpretation of contracts, in particular if the contract refers to the EU or the geographical area of the EU. This will be relevant not only but especially for distribution and license agreements. We must distinguish two different cases. A dynamic interpretation would conclude that the member states at the time apply. However, it is also possible that the term “EU” is only an abbreviation for the existing member states at the time of conclusion of the contract. In the latter case, a Brexit would not affect the static territorial inclusion of the United Kingdom. If in doubt, you can most probably assume, although it is not completely clear, that a contract containing the term “EU” will also include the UK after a Brexit.

When drafting new contracts it is therefore advisable to explicitly mention a possible Brexit. A contract should also stipulate who shall in future bear potential customs between the UK and the EU and how a further decrease of the Pound shall be dealt with. This can be achieved by inserting conditions precedent, rights of withdrawal, or by individually defining the conditions for contract modifications.

However, the modification of existing contracts is much more difficult than the drafting of new ones. In the event that customs are imposed between Germany or the European Union and the UK, the calculations on which long-term supply contracts are based would become mostly obsolete. If the contracts do not include a regulation as to who must bear the customs, e.g. by using INCOTERMS, the contract has to be modified. This can be achieved by mutual agreement or through legal action asking for a modification of contract. However, a material change of the situation which is the basis of the contract has to have occurred and has to be so significant that relying on the original regulation would lead to an unacceptable result which is not compatible with law and justice and reliance on the respective regulation would therefore be unacceptable for the involved party. The outcome of the referendum is no more a sufficient reason for contract modifications than the meantime decrease of the British Pound compared to the Euro. Due to the volatility of exchange rates, foreign currency debt always contains a speculative element. Even material changes of the British legal situation or jurisdiction after the Brexit would not per se justify a modification of contract, especially if an exit agreement would provide for a reconciliation of interests for existing contractual relationships.

Hendrik Thies

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