BREXIT “To Do” List: Contracts & Disputes

Contract and Commercial Litigation Priorities

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Following the UK Supreme Court’s historic 8:3 ruling on 24 January  that an Act of Parliament is needed before Article 50 can be triggered –  what due diligence and risk analysis should businesses be undertaking now?


Practical steps to consider

1. Introduction

Triggering Article 50 needs Parliamentary approval rules the Supreme Court, but what does Brexit mean for you and your business?

How will your contracts and their enforceability be affected here and abroad?

The Supreme Court has upheld the High Court’s  decision that Parliamentary Sovereignty trumps the Government’s reliance on the Royal Prerogative, and Parliament should debate and decide before Article 50 is triggered. The Government says this won’t delay its timetable of serving the Article 50 notice under the Lisbon Treaty by March 2017.

Whatever the precise timetable, the withdrawal of the UK from the EU is likely to take some years, but businesses need to be fine tuning their plans now. Until the shape of a post-Brexit agreement is fixed, the precise legal implications are yet to crystallize. But, the UK’s departure will impact on fundamentals for your business like contracts, terms & conditions and potential disputes. Areas to explore from a dispute management perspective include

  • Corporate and commercial contracts
  • Competition law
  • Governing law and jurisdiction
  • Issue and service of English proceedings in the EU
  • Enforcement of English and EU judgments

2. Risk Analysis

How can you ensure your business stays ahead? Whilst some detailed plans can be left until there is greater certainty about post Brexit arrangements, considering the legal implications should be at the forefront of your strategy. A risk analysis should be implemented to ensure businesses get their ducks in a row and identify the effect Brexit will have on their rights and obligations under existing and proposed new contracts and regarding potential litigation.

As each business is different, the process should be targeted to your needs.

Below we highlight typical practical points which businesses should be addressing now, especially if you trade in the EU or have foreign customers, interests or suppliers.

3. Corporate and Commercial Contracts

Businesses should already be reviewing their existing contracts, particularly those likely to be in force at the point of Brexit. Where necessary, contractual terms and conditions intended for use from now on should be amended for when the UK ceases to be a EU Member State.

Many existing contracts and trading arrangements will be affected, referring to a range of EU laws, regulators and territories. A due diligence exercise should be carried out to identify the key contracts and consider their terms. The need for possible amendments and contingent steps should be considered.

  • Can the contract be varied to mitigate the impact of Brexit?
  • Where the contract price or payments under a contract are made or received in Sterling, Euros, Dollars or fixed to a particular exchange rate, consideration should be given as to whether the currency used is amended to reflect the recent drop in Sterling.
  • Does the governing law clause need amending?
  • Will Brexit result in a breach of contract?
  • Whilst unlikely, can force majeure or material adverse effect clauses be relied upon?
  • How can the contract be future-proofed?

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4. Existing Contracts

The impact of the UK leaving the EU may affect the operation of existing contracts, potentially beyond how the parties might expect. It is unlikely that they will have foreseen or planned for the implications when entering in to the contract.

Territorial scope. Does the contract include the EU as its territorial scope? On leaving the EU, the UK won’t be covered by that territorial description. Should the contract be amended, or can the contract be terminated by any party invoking a force majeure or material adverse change clause?

Reference to EU legislation. Analyze clauses referring to EU legislation, compliance and any changes. Contracts that refer to EU legislation may need to be amended to deal with the different circumstance.

Force majeure provisions. A force majeure clause may be drafted wide enough for a contract to be terminated. For example, if the contract depended on certain EU legislation (e.g. “passporting” under EU financial services legislation), the contract may be frustrated or force majeure might be triggered by Brexit.

Material adverse change provisions. Similarly, if a contract includes a “material adverse change” provision (MAC), this may permit termination of the contract, although this will depend on a number of factors.

These issues may well result in a dispute, and businesses should consider their existing agreements as to how they maybe impacted.

Shorter term contracts. These are less likely to be affected by the UK leaving the EU, due to the two-year negotiating window after Article 50 is triggered. This should give parties some time to consider how the terms of Brexit might affect their longer term contractual arrangements and to renegotiate where necessary.

5. New Contracts

Notwithstanding “Brexit means Brexit”, new contracts should address the impact of the UK’s departure from the EU, and provide accordingly in the contract so far as possible:

  • Do your contracts contain provisions which assume that the UK is an EU Member State? This may include references to the EU that are formulated on the assumption that this includes UK, or may be less obvious – e.g. references to rights or obligations arising from specific EU laws which currently apply to the UK.
  • Do your contracts rely on or assume the availability of free movement within the EU, or of any EU level consolidation (such as engaging an EU wide regulatory body)?
    • Prolonged Negotiations. Specific provisions could be considered on prolonged negotiations to implement the exit or the impact of new trade agreements once negotiated.
    • Termination rights. Consider whether to include termination rights in case the new trade agreements will result in an increased burden or negative effects on the intended business transaction.

Force majeure provisions

  • Expressly include or exclude the UK leaving the EU in or from any force majeure provision;
  • Consider termination rights when the UK leaves the EU (depending potentially on the terms Brexit ultimately takes); and/or
  • An alternative mechanism once the UK leaves the EU
  • Include notice terms and detailed explanation of the consequences of the right to terminate, and include justifiable Brexit definition and when it can be triggered.

Material adverse change provisions

Similarly to force majeure provisions, consider whether to include or exclude Brexit from the MAC definition. This depends on the outcome sought. Similar considerations will need to be given to how the Brexit definition is drafted and when it can be triggered. A business may wish to consider the inclusion of its own MAC clause, or even a bespoke Brexit clause. This could provide businesses with flexibility to respond to altered circumstances rather than being tied to expensive or inflexible terms. This would require heightened awareness on the part of businesses to work out the ramifications of such clauses, and to be prepared for counterparties seeking to include them also.

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6. Competition/Antitrust

  • EU law continues to apply in the UK. Substantive UK competition law mirrors EU competition law. As such, competition law continues to apply in the UK as it did before the referendum.
  • EU and UK antitrust/competition law has a significant impact on contracts and trading arrangements. Competition law compliance continues to be of prime importance. This will still apply post Brexit, but there will be changes.
  • Transitional provisions are likely for Brexit and the UK’s new trading arrangements with the EU. Businesses should be taking steps now to evaluate the impact of Brexit on competition law as it relates to them.
  • Private competition law litigation (including claims for injunctions and damages) has been increasing in the UK and Europe. It now represents a significant commercial weapon for businesses of whatever size.
  • Brexit raises significant commercial, legal and other issues for businesses. Whilst there may be understandable motives for wanting to discuss this with competitors in various forums, informally or formally, extreme caution should be employed. Confidential commercial information must remain confidential and businesses must avoid offending against anti competition laws. Discussions with competitors should be avoided until advice on competition law is first obtained.
  • As with other types of litigation, the impact of Brexit on competition litigation should be considered when planning strategy.

7. Litigation

Brexit may impact on litigation affecting your business, including current or prospective cases, such as where jurisdictional issues arise, or when it comes to enforcing a judgment post Brexit.

EU legislation governs parties’ choice of which EU member state’s courts has jurisdiction over disputes between them, and the cross-border recognition of judgments of EU member states’ courts.

The Court of Justice of the European Union (CJEU) is responsible for the rule of law within the EU. The UK’s right to appear in all cases and to appoint judges to the CJEU will no longer exist when Brexit is implemented. This should not be confused with the European Convention on Human Rights, its council and its court (the ECtHR), which are not affected by Brexit. The European Convention on Human Rights has been incorporated into UK law through the Human Rights Act, and the referendum of 23 June did not involve the UK leaving the Council of Europe either.

From the date Brexit takes effect, litigants will no longer be able to appeal cases to the CJEU and UK judges will no longer be required to follow CJEU decisions (although they may decide to do so), but they will continue to follow ECtHR decisions. Litigants are likely no longer to be able to challenge UK legislation on the basis of incompatibility with EU law alone. They would however retain the ability to mount such challenges to the ECtHR based on human rights issues.

In other respects, the court system in the UK is likely to remain unchanged, with the UK Supreme Court (formerly the House of Lords) as the final Court of Appeal.

Brexit is unlikely to affect the recognition and enforcement of judgments between the UK and EU member states, as the relevant countries are signatories to the Lugano and Brussels Conventions. However, these conventions are more limited than the Brussels Regulation, which currently governs jurisdictional issues between courts of EU member states.

Brexit may mean that the UK falls outside the scope of the Brussels Regulation which created a requirement of “judicial comity”. This means that courts relinquish cases if they are already being heard in another EU member state. Without this restriction, the English courts would be able to accept jurisdiction over more cases and, in appropriate cases, could provide anti-suit relief to restrain parties from pursuing proceedings in the courts of other EU member states. The reverse may unfortunately be propounded by the courts of different EU member states depending on how they view jurisdiction clauses. This would potentially result in considerable uncertainty.

8. Choice of Court

It is fundamental for businesses to be able to agree between themselves where and how any disputes between them should be resolved. This general freedom is subject to some obvious exceptions. The Recast Brussels Regulation sets out which courts of EU member states should have jurisdiction in disputes in civil and commercial matters, and provides for the mutual recognition and enforcement of civil and commercial judgments within the EU. The general rule is that the courts where the defendant is domiciled have jurisdiction. This is subject to a number of exceptions, including:

  • Where the parties have agreed that the courts of another member state should have jurisdiction
  • Agreements regarding the sale of land in a particular country where the domestic courts of a member state have exclusive jurisdiction
  • Contract protection for public policy reasons protecting “weaker” parties
  • Cases involving employment, consumer or insurance contracts

It is anticipated that whether the “Norwegian Model” or the World Trade Organization “WTO Model” is adopted, courts of EU member states will generally be obliged to recognise a choice of jurisdiction in favour of the English courts. However this remains uncertain.

In the absence of any international agreement with the EU, the English courts are still likely to respect provisions in contracts which confer jurisdiction by agreement on the English courts. How such clauses will be treated by EU member states will be a matter for the laws of those member states.

That would result in considerable uncertainty, depending on how jurisdiction clauses are viewed by the courts of different EU member states.

In some cases, the courts of a counterparty domiciled in another EU member state may be reluctant to cede jurisdiction to the English courts, even if that is what the parties agreed.

9. Parallel Proceedings

Parallel proceedings (i.e. where proceedings concerning the same subject matter are commenced in more than one country’s courts) are a risk in commercial disputes, particularly where the parties to a contract are based in different countries. Having to defend a dispute on multiple fronts can be time-consuming and costly.

Under current arrangements, if parallel proceedings are brought in the courts of more than one EU member state involving the same or related issues, in general, the courts of the member state first seized of the dispute decide the question of jurisdiction. One exception is that the courts of a member state that have jurisdiction under the terms of an exclusive jurisdiction clause can proceed to determine the question of their jurisdiction over the dispute in question, even if parallel proceedings are already under way in the courts of another EU member state. This greatly reduces the risk of parallel proceedings within the EU.

If the UK accedes to the 2007 Lugano Convention, this prohibition will remain, but the precedence given to the courts of the country that the parties have agreed should have jurisdiction will not apply.

That rule was introduced to the Brussels Regulation from the beginning of 2015 to resolve the so-called “Italian torpedo” problem.

This is whereby a party first issues proceedings in a country where the judicial process is relatively slow and complicated so as to delay proceedings, and tie disputes up in jurisdictional battles for years.

If the UK does not accede to the 2007 Lugano Convention, there will be no bar on parallel proceedings, provided that the courts in the countries in question are prepared to take jurisdiction over the dispute under their own rules of private international law. For example, at common law, the English courts can take jurisdiction over a dispute where the parties have agreed that the English courts should have non-exclusive jurisdiction and proceedings are pending in a different jurisdiction, on the basis that the parties must have contemplated the possibility of parallel proceedings by agreeing to a non-exclusive jurisdiction clause in the first place.

The English courts would also once again be able to issue anti-suit injunctions to prevent proceedings from being brought in other EU member states, something that they are not able to do at the moment because of the effect of the Recast Brussels Regulation (and its predecessors).

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10. Service

If the counterparty to a contract is in the jurisdiction (or has appointed an agent for service of process in the jurisdiction), it is quite straightforward to serve English court proceedings on them where a dispute arises. The position is more complex, time-consuming and expensive if proceedings have to be served abroad.

Normally under English law, the claimant commencing proceedings must apply to the court for “permission” to serve out of the jurisdiction. The claimant must persuade the English court at the start that it has jurisdiction over the matter. However, there is currently no need to apply for permission to serve out of the jurisdiction if service is to be effected in the EU, and the English courts have jurisdiction under the Recast Brussels Regulation. This provides a clear and relatively predictable basis on which proceedings can be served in the EU without permission. Similarly, EU Service Regulations also set out the procedure and mechanics of effecting service within the EU.

A similar exemption for the need to obtain permission to effect service also applies to service within the countries that are party to the 2007 Lugano Convention. However, if the UK were not to accede to the 2007 Lugano Convention when it leaves the EU, it is likely that it would become necessary again to apply for permission to serve English court proceedings within the EU. This would increase the importance in any contract of having an EU based counterparty expressly appoint an agent for service of process in England if the parties have agreed to submit to the jurisdiction of the English courts.

If parties have chosen the English courts to hear their disputes and one or more of the parties is based abroad, it is always worthwhile including an agent for service clause in a contract.

11. Recognition and Enforcement of Judgments

The Brussels Regulation provides for a streamlined method of recognising and enforcing judgments in civil and commercial matters within the EU, and the 2007 Lugano Convention contains a similar regime for the states included. The bar for refusal of recognition is very high: including judgments contrary to public policy and judgments given in default in certain circumstances. As such, a business contracting with another party elsewhere in the EU can be reasonably confident of being able to

  • issue proceedings
  • serve the proceedings
  • enforce a judgment of the English courts against the counterparty in its home member state

In the absence of any international agreement on jurisdiction and enforcement, the enforceability of judgments of the English courts within the EU would depend on the laws of each member state. This would result in uncertainty. For example, an English company dealing with a French company would need to take French law advice as to the enforceability of English court judgments in France. Potential enforcement issues may hinder jurisdiction being conferred on the English courts by agreement. There is further uncertainty on judgments of English courts being recognised by courts of member states. Money judgments may be straightforward, but the same may not apply to claims for declarations, accounts and inquiries, specific performance, injunctions and interim relief.

The corollary is that the English courts would also no longer automatically recognise and enforce the judgments of the courts of EU member states.

This would be a concern for EU based businesses dealing with counterparties based in the UK. Potential difficulties with recognition and enforcement of judgments could affect decisions by businesses as to which courts they elect to have jurisdiction over their disputes. It could also influence how parties decide to pursue dispute resolution, whether via the courts or arbitration, considering the enforcement mechanisms for arbitral awards.

12. Planning Ahead

Whilst parties negotiating contracts now can plan ahead for in case a dispute arises (e..g. by appointing an agent for service of process, and thinking carefully about potential enforcement issues), the position is different for litigation that is currently either imminent or under way. It is difficult to see how possible changes to the rules on jurisdiction would affect proceedings being issued today, because such proceedings will need to be issued in accordance with the rules currently in place.

As explained above, developments during the negotiation period under the Article 50 process may have an impact on decisions on disputes that arise during the process, for example there may be a particular date by which it will be advantageous to commence proceedings. Alternatively it may become clear e.g. that the UK will accede to the 2007 Lugano Convention.

Regarding existing litigation, depending on the circumstances, the fact that the UK will be leaving the EU may buttress reasons to seek judgment as soon as possible, taking advantage of the present recognition and enforcement mechanism in the Recast Brussels Regulation.

The impact of Brexit may also be felt indirectly in future, such as on funding for current civil litigation projects in the UK. Funding for the proposed online court may be at risk, depending on economic factors.

13. Summary

As an EU member state, the UK is a party to a framework of EU legislation which sets out the rules that courts in EU member states will apply to decide the governing law of a contract and of tort (civil wrong) claims and their jurisdiction over disputes. This framework also provides the procedure for serving legal proceedings as between member states and the mechanism for enforcing a judgment from a court in one member state in other member states. This area is therefore likely to be directly affected by Brexit, although it remains to be seen to what extent. In the meantime,

businesses should strategically review their contracts and Terms and Conditions to see how and to what extent they can be Brexit proofed, and to analyse the threats and opportunities that arise.

Issues such as Intellectual Property, Employment Law and Data Protection are amongst further areas for consideration, outside the scope of this piece.

Updated from a previously published version 4. 11.16 http://bit.ly/2fpcBcb

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The Battle of the Forms: Part 2

  • Tips
  • 15 Practical Steps

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In Part 1 “Terms Agreed – but whose terms?” http://wp.me/p4DFLr-8x we examined the perennial problem of the steps necessary to include your companies’ standard contractual terms and conditions (T&Cs) in to a contract.

This was the issue recently covered by the Technology and Construction Court in the case of Transformers & Rectifiers Ltd v Needs Ltd. In that case, neither party to the contract had done sufficient to ensure that their T&Cs were drawn to the attention of the counter party. The court applied the law deciding that in a sale of goods contract where neither the seller’s nor the buyer’s terms and conditions have been incorporated, the relationship is governed by the implied terms of the Sale of Goods Act 1979. Accordingly, the seller of the goods will not be able to exclude or limit its liability for defective goods, which a seller can normally restrict by contract subject to the reasonableness test in the Unfair Contract Terms Act 1977.

In the preliminary discussions between parties, a “battle of the forms” can arise when two businesses are negotiating the terms of a contract and each party wants to contract on the basis of its own terms. A typical example is where, e.g., a Buyer offers to buy goods from the Supplier on its (the Buyer’s) standard terms and the Supplier purports to accept the offer on the basis of its own standard terms. In this scenario, the battle is often won by the party who fired the “last shot”, i.e., the last party to put forward T&Cs that were not explicitly rejected by the recipient.

A business should ensure that its terms are incorporated into its contracts. To achieve this, terms and conditions should be provided with and/or referred to in pre contractual documentation, such as quotations and orders. A business that relies upon printing their terms on delivery notes or invoices (post contractual documentation) runs the risk that it will not be able to rely upon those terms if there’s a dispute.

Below are a series of practical steps that could be considered to gain the advantage, the key theme being that parties must be clear about the terms on which they are doing business. Although these steps won’t guarantee your company’s standard T&Cs prevail, they may give you an advantage. There is no single overriding rule that trumps all in battle of the forms cases, but the following should help:

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Negotiating Tips:

“Prevail clauses”

Consider including a “prevail clause” in your T&Cs, stating e.g. that your standard T&Cs are incorporated in to the contract to the exclusion of any other parties’ T&Cs, and that your standard terms prevail. This won’t necessarily succeed alone, e.g. where the other side makes a counter-offer, your standard T&Cs including the prevail clause will be by-passed and won’t form part of the contract. This is because your T&Cs will have effectively been rejected by your counterparty and replaced by their counter-offer.

“Prevail clauses” are still used, including as a means to pressurize the other side in to taking the line of least resistance, and accepting the standard terms as a fait accompli. However, a belt and braces approach is safer. Where the other side aims to rely on such a clause it is perfectly reasonable to reply by reiterating that your T&Cs apply.

  • Written records should be kept of all contract negotiations. Ideally, minutes of meetings should be signed by all present.
  • Emphasize that no contract can be agreed until any disputed terms are ratified. Stipulate which terms are outstanding.
  • A contract can be concluded verbally. Ensure that any meetings or telephone calls are confirmed as being conducted on the basis of your company’s T&Cs, or “subject to contract”; to prevent any agreement before a written contract is signed.

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Practical Steps

  1. Always send the other side a clear and legible copy of your T&Cs together with your order/acknowledgment / supply forms and state clearly on the face of your order/acknowledgment that you rely on those T&Cs.
  2. When writing to the other side to agree an order, include a copy of your T&Cs with the letter or email. Stipulate that you are offering to contract on those terms.
  3. Don’t take for granted that your T&Cs apply. Although you may have been doing business with the other side for several years, don’t assume that a court will accept it’s on notice of your standard T&Cs. Whenever you enter into a contract, ensure that your T&Cs are included.
  4. If you send a purchase order/invoice electronically, make sure you don’t omit the back page setting out your standard T&Cs. Ideally, attach a copy of your T&Cs as a separate document.
  5. Actively bring the counterparty’s attention to your standard T&Cs.
  6. Alert the other party on the front page of your pro forma documents such as purchase order/invoices, email or letter footers, to your standard T&Cs and where they are found, e.g. on your website, and / or as attached.
  7. Clarify in writing that your T&Cs are the only terms upon which you are prepared to do business.
  8. Avoid a battle of the forms. If the other side responds with their T&Cs, clarify by return firstly that you don’t accept their terms and secondly, your T&Cs represent the only contractual provisions on which you will proceed.Respond to / reject counter-offers.
  9. If the counterparty replies to your offer ambiguously or doesn’t accept your offer, the court may later treat their communication as a counter-offer, which if it is treated as the last shot, could prevail.
  10. Contracts can be concluded by performance. Avoid premature acceptance of the other side’s T&Cs by conduct. E.g., terms of a contract can be finalized by one side unintentionally accepting the terms of a draft agreement before formal approval or signature. This could be by supplying or paying for the goods or services, accepting delivery of goods, or acting otherwise in line with the terms of the counterparty’s draft contract.
  11. Be aware that if one side proceeds without a clear written agreement and performs the contract, they risk a deemed acceptance of the other party’s terms.
  12. Fire the last shot in the “battle”! The other side’s T&Cs could prevail if they were the last shot, or where they were sent to you and, they weren’t rejected, answered with a counter offer, or where the contract was performed without more.
  13. A tactic that worked in B.R.S v Arthur V. Crutchley Ltd was where the supplier delivered whisky to the buyer’s warehouse. The delivery note set out the supplier’s T&Cs. However, the buyer’s warehouseman stamped it  “Received under [the buyer’s] conditions”.      The Court’s decision was that the warehouseman’s rubber stamp constituted the last shot of the battle. The buyer’s T&Cs prevailed. The stamp represented a counter-offer which the supplier was taken to have accepted by its performance in handing over the goods.
  14. The safest policy is to identify and resolve any dispute about T&Cs directly in negotiations with the other side. However, there may be the temptation not to jeopardies a prospective deal or future custom by risking controverersy. This involves what may be a greater risk down the line of the T&Cs being unclear, with an argument as to whose apply, or whether neither applies.
  15. Specifically negotiating the terms avoids the uncertainty of putting this off. If the seller’s T&Cs are accepted, then agreed variations can be set out in a side letter. On the up-side, when agreement is reached in this way, everyone knows where they stand legally. The down-side is that negotiating the contractual terms may be costly and time consuming. 

A well drafted set of terms and conditions will take into account the manner in which a business operates, and what it hopes to achieve. Your legal adviser should take the time to understand your business to ensure that your contracts achieve what you want them to.  

Advice at the beginning can avoid pitfalls down the line, which could be expensive and involve court proceedings.

 Cases:

Transformers and Rectifiers Ltd v Needs Ltd [2015] EWHC 269 (TCC).

British Road Services Limited v Arthur Crutchley & Co Limited ([1968] 1 All ER 811).

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