May
04

Brexit: Impact on commercial agreements between European and British companies

Thanasis Gavos   Thu, 4 May 2017; 12:27

What should a company seated in Milan, Athens of Madrid consider?

By George Dimaras for euGreeka

It is only natural that the Brexit decision and the implementation of Article 50 of the Lisbon Treaty for the exit of the United Kingdom from the European Union (EU) causes great concern to European companies trading with British companies.

One group of companies that are certainly affected by Brexit are the European companies that are located in the UK. In particular the ones to which special regulations apply, such as those dealing with financial services, insurance etc. Companies that benefit from the European legislation for unified/single business licenses and the free movement of workers inside the EU are also definitely affected.

So, what happens to European companies that have commercial agreements with British companies?

Is there a need to examine these agreements considering the impact of Brexit on the relevant legislation?

Is there a chance that an agreement becomes really disadvantageous for one of the parties due to Brexit? Could various costs be imposed on that agreement so that it becomes unbearable for one of the parties?

Unfortunately the answer is yes.

It is possible that huge problems befall the existing agreements, therefore it is necessary for the interesting parties to examine the Brexit effect on them (of course, these results depend on the way Brexit is going to take place) and evaluate the relevant risk.

I did not randomly choose Milan, Madrid and Athens for the subtitle of this article.

I did it for two reasons.

First of all because Italy, Spain and Greece, as states of the southern EU, trade a lot with the UK in a variety of services and goods and secondly, because the majority of the Italian/Spanish/Greek companies that trade with the UK are medium-sized businesses, therefore, they don’t have the necessary structure to conduct a risk analysis, as larger enterprises do.

Furthermore, British companies (medium or large sized) are usually well organised and scrutinise all relevant legal issues during negotiations, therefore most of the times they set terms that work in their favour.

Which are the most important legal issues that arise from Brexit and which problems may be provoked?

1) The first one is related to the law that is applicable to the agreement. For a non-legal expert this may seem of not great importance but it is in fact a crucial matter.

National laws don’t have the same regulations and therefore the Spanish law, for example, may grant totally different rights to one of the parties than the British law.

Regulations Rome I and Rome II are the European legislations that regulate which law is applicable and both of them are in favour of the law chosen by the parties.

After Brexit these European Regulations will not apply to the UK and the above matter, namely which law shall be the applicable one to an agreement, will be determined by the British law instead.

As far as the breach of an agreement is concerned, it seems that there is no such a problem given that common law rules are in favour of the law chosen by the parties as well.

But what happens in cases of torts (civil wrong causing loss or harm)? Or in cases of breach of agreements that also have aspects of torts in parallel, which are in fact very common?

As far as these cases are concerned, there is a difference between the EU legislation and the British law. More specifically, Article 14 of the Rome II Regulation stipulates that the parties may freely choose the applicable law for tort that may happen in the framework of their agreement. However, the British law and in particular the 1995 Private International Law Act does not provide for such a right to the parties.

The results are obvious: a term of an agreement by which the parties have agreed that the Greek law, for example, will be the applicable one for any issue that shall arise in the framework of this agreement, will be annulled by the British Court; if the case is brought to the UK, the British Private International law will apply instead. In such a case, there is a chance that the applicable law eventually will be the British one, which may have provisions that are in favour of the British company.

Besides, I should note that there is a huge “gap” between the two Legislations (the European and the British one) since the former is based on the place where the damage was caused, while the latter is based on the place where the tort took place

2) The exact impact of Brexit on an agreement highly depends on the exact form of Brexit.

For example, in the case of a “hard” form of Brexit, where there will be no Treaty between the EU and the UK or there will be a Treaty that will implement the WTO’s (World Trade Organization) rules, this would lead to a serious change of the existing agreements from a legal and a practical perspective.

A characteristic example is the possibility that tariffs or restrictions or other requirements will be imposed on the movement of goods, which will in fact provoke delays and extra costs on the existing agreements.

It is very important to examine the following question: which of the parties will be forced to pay the extra costs? How will the delay on the movement of goods or other consequences be handled? Which of the parties will have to pay the tariffs? The Greek or the British company?

3) It is obvious that if changes of this kind arise in the existing agreements, the agreements will be unbearable for one of the parties. In such a case, it is under examination whether an Italian company, for example, seated in Milan and having a 5-year agreement with a British company will be able to terminate the agreement or claim other rights of the applicable law. Will the Italian company be entitled to seek legal protection and ask for the British company to burden the extra costs?

From a British legal perspective, there are three main legal concepts related to this issue:

  • Force majeure
  • Adverse change of clause
  • Frustration

The importance of the applicable law (an issue that was addressed above) is highlighted from this example.

What is the meaning of these terms pursuant to the British law? Is their meaning the same pursuant to the Spanish law, the Italian or the Greek law? Perhaps Greek and Italian companies are favoured by the Greek or the Italian law, respectively, as far as their rights are concerned…

Does the British concept “force majeure” has the same meaning as the Italian forza maggiore”, the Spanish “fuerza mayor” or the Greek “ανωτέρα βία”? Which of these concepts is the most beneficial for an Italian, a Spanish and a Greek company?

To what extent does the corporate and civil law of Italy, Spain or Greece have the same provisions as the British law?

It should be noted that the content of the above legal concepts in the British law is restricted enough, however, it also depends on the exact wording of the related term in an agreement.

I should also note that this article does not refer to agreements that include special terms for Brexit. However, these kind of terms are not very usual.

It is clear from the above that the parties of every commercial agreement should carefully examine the existing terms of their agreements and consider the potential impact of Brexit on these agreements (of course after the 2-year period of negotiations provided in Article 50 of the Lisbon Treaty) and try to distinguish these consequences, depending on the various alternatives forms of Brexit.

Under certain circumstances, Brexit could lead to tremendous changes in an agreement. Consequently, it should be examined which of the parties will have to shoulder the burdens.

Finally, the question remains: if that burden is unbearable, to an extent that the Greek/Spanish/Italian company has no gain any longer from the existing agreement or a significant damage is caused to them, what rights do these companies have?

The contract must be carefully reviewed in order to trace all important parts, terms, even specific sentences that guide the interpretation towards the one or the other direction.

It is also noted that every new agreement should take into consideration the above and include special terms so that both parties be equally protected by the Brexit impact.

 

George Dimaras is a Greek lawyer, member of the Athens Bar Association, founder of Dimaras & Associates Law Firm.

He is active in the UK and other countries, specialising on international and cross-border legal disputes.

15 Stisihorou Street (Presidential Mansion area), Athens, Greece

www.dimarasg.gr

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