March 17, 2017
BREXIT: IMPACT ON COMMERCIAL AGREEMENTS BETWEEN EUROPEAN AND BRITISH COMPANIES
WHAT SHOULD A COMPANY SEATED IN MILAN, ATHENS OR MADRID CONSIDER?
It is natural that the Brexit decision and the upcoming implementation of article 50 of the Lisbon Treaty for the exit of the United Kingdom from the European Union (EU) cause great concern to the rest of European companies which trade with British companies.
One group of companies that are certainly affected by Brexit are the European companies that are located in the UK and especially those companies, to which special regulations apply, such as the ones 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 definitely affected.
This matter is quite complicated due to the multiple issues that arise in each sector and the importance of them, hence I will soon publish another article especially for this matter.
So, what happens to European companies, such as Italians, Spanish, Greeks or other EU 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 the Brexit? Could various costs be imposed on that agreement so that it will be unbearable for one of the parties?
Unfortunately the answer is yes.
It is possible that huge problems be provoked for the existing agreements, therefore it is necessary that the interesting parties examine the Brexit effect on them (of course, these results are depending on the way the 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 South 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, it is known that the British companies (medium or large sized) are usually well organized and scrutinize all relevant legal issues during negotiations, therefore, most of the times they set terms that work in their favor.
Which are the most important legal issues that arise from the Brexit and which problems may be provoked?
With a view to maintain this article short enough and make it understandable for non-legal experts, I have chosen three (3) major issues, in my opinion:
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, both of them are in favor of the law chosen by the parties.
After the 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 regulated by the British law instead.
(Meaning that the British law is going to rule, in a preliminary stage, which law is going to apply)
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 favor of the law chosen by the parties as well.
But what happens in cases of torts? 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 Rome II Regulation stipulates that the parties may 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 had agreed that the Italian 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 favor of the British company.
Besides, I should note that there is a huge “gap” between the two Legislations (the European and the British) since the first one (the European law) is based on the place where the damage was caused, while the other one (the British law) 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 case of a “hard” form of Brexit, namely in case 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 the delay on the movement of goods or other consequences will 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
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 favored 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 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 will also publish soon another article in an effort to compare other laws to the British law with special references to the above terms and how restricted or not they are in each law.
I should also note that the present issue does not arise for 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 the Brexit on their 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 longer gain 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.
15 Stisihorou Street (Presidential Mansion area), Athens, Greece