As part of our ThinkHouse Brexit webinar series, David Lowe and Clark Sargent provide an overview of how to approach and mitigate some of the potentially 'interesting' contractual issues/risks that could be caused by Brexit. They discuss the challenges that may be encountered with existing contracts before discussing elements to be considered when drafting new contracts in a post-Brexit world.
Transcript
David Lowe: Hello and welcome to our webinar on Brexit and Contracts. I am David Lowe I am one of the organisers or ThinkHouse and I lead our commercial contracts team and our Brexit Unit and therefore I spend my time negotiating drafting contracts and advising people of contracts they want to make.
Clark Sargent: And I am Clark Sargent I have worked for a long time as a Partner in a Commercial Litigation team I am still doing litigation work but not as a Partner now one of the things I am doing is thinking about the firm's own Brexit planning and issues for client's arising from that.
David: And so today what we are going to try to do is gather together the contract issues that come out of Brexit. What are they issues that I am thinking about when I am advising people on creating contacts or indeed from Clark's point of view what are the issues that come up when contracts start to fall apart and so here on this slide I have set out today's agenda with the key issues we are going to tackle. Obviously the big issue is the border that is the big thing that makes a massive difference on contract the hard boarder between the UK and the European Union. We are going to go through force majeure as we get a lot questions about is Brexit force majeure and then we are going to talk about issues that are coming up like regulatory divergence, territory, Clark is going to talk about claims and litigation, privilege and at the end we will wrap up with a brief actions list.
So as I said the big issue in Brexit is the border this is the key change that is going to happen when we exit the transitional period and properly leave the European Union. At the moment the border between the UK and the rest of the EU is no different than crossing the English and Scottish border, you simply drive your truck onto the shuttle or onto a ferry, you travel over to France and you carry on, there are no custom posts, there are no forms that need filling in, it's just a normal journey. Post Brexit that all changes, that border becomes a real hard border, we don't know exactly where that is going to be because that is a subject of negotiation but certainly the indications from the UK Government is the expectation that it will be quite a hard border.
Export declarations will need to be filled in, import declarations will need to be filled in, goods might be inspected, certificates might need to be provided, duties might need to be paid, it will feel like the border we have between us and say the USA or Japan or South Africa. All of the formalities of crossing the border will apply. So what does that mean for us and our contracts. Well the obvious first step is the risk of duty, tariffs and similar measures like quotas.
That brings a cost and a responsibility unlike any other cost or responsibility, you want your contract to be clear, who is responsible for any export duties and tariffs, who is responsible for the import duties and tariffs, who's problem is it if they are not paid are all the kind of questions that you would want to be in your contract.
Then there is also time and delay, we are used to at the moment as long as the weather is good the trucks can travel and so we don't really concern ourselves very much about worrying about the risk of delay between the UK and the EU border but of course that will change, the border will become harder even in the long term it will take more time to cross that border and the short term there is a risk of at least congestion at the border while we adapt if not total chaos depending on the level of change required so there is going to be a significantly higher risk of delay at the border and again in our contracts we want them to be clear about whose problem and cost that is.
Costs of crossing the border are going to go up, logistic carriers will charge more as they will have more to do and it will take more time and therefore they will need to pay their drivers more money etc. So again the carriage costs are going to become more significant and then finally the big question for everyone is just practically how do you cross this border.
How will you fill these forms in, who is going to fill those export import declarations, will customs brokers need to be appointed, well we don't really know who's going to be appointed. Well you don't really know whose responsibility for the duty, the tariffs, the time delay and costs. So that is why delivery point is really important, here is a picture showing on the left hand side the seller's premises on the right hand side the buyer's premises, where the delivery point along this line is going to make a huge difference.
You are the seller and you deliver on the left hand side you have got less to do and you have less responsibilities but if you are the seller and you are delivering on the right hand side into the buyer's premises you have a lot more to do and you are going to need to concentrate. Now it is going to be really import in your contracts and making it clear where is the delivery point along this route.
Currently it is not uncommon for people to be very unclear in contracts between the UK and the rest of the EU because it doesn't really matter at the moment. Going forward it will begin to matter if your contract isn't clear where on this journey the parties responsibilities hand over then you are almost certainly going to have a dispute because it will be worth having an argument because there will be money and time and cost and risk involved.
Though what that means is it is really important that you make the delivery points in your contract is clear that is the beginning of this, is it on the left hand side, the right hand side or somewhere in the middle, it needs to be clear and if you make it clear then you are significantly reducing the risk of dispute.
It would be a good idea to consider using Incoterms, Incoterms are international trade terms published by the International Chamber of Commerce which are designed to help with international deliveries. By using an Incoterm like free carrier FCA that means it is being very clear who is responsible under FCA the seller is responsible for loading the goods onto the truck of the buyer at the seller's premises and is responsible for clearing export and the buyer is responsible for everything else. So with those three letters FCA you suddenly add a lot of the magic that you need into your contract.
Now there has been a new addition of Incoterms that were published in January 2020 So now you have two good reasons to review your contact. One, to make sure the delivery point is clear for post Brexit, secondly to consider using the Incoterms. Now some of the issues we are seeing already coming up on this whole point about delivery point is of course as we got to every cliff edge the last two years people have started to worry about where the delivery point is and their responsibility and we have already seen plenty of questions from people where it is just not clear in the contract where the delivery point is which is always going to be awkward trying to work out who is that cost to risk at the border.
We are also seeing people who are regretting the delivery points set out in their contract so say for example if a buyer is committed to deliver duty paid that means they have all of the responsibility of the border, all the responsibility for the tariffs and so forth and those kind of buyers are now regretting those contracts because they are now worrying about the border so if you are a seller and you have committed to sell deliver duty paid that means you have to deliver the goods all the way on the right hand side of this picture, that means you take the risk of the responsibility of the border and we are seeing people regretting that because they are now realising that they have now got the risk and the costs of the duties of the tariffs and the borders and they have been trying to get out of those contracts. They have tried to claim it is force majeure and we will come onto that shortly. They are difficult arguments to make succeed and those contracts will become distressed because of this costs and the risks of delivery are significant enough, then the seller might simply refuse to deliver regardless of what the contract says.
Now I mentioned force majeure and frustration and Clark is going to lead us through whether Brexit is frustrating.
Clark: That is a good question to start with actually. Is Brexit a frustrating event and we probably find ourselves in a position where only a lawyer can answer that question. No! No Brexit is not a frustrating thing. The issue of course is in contracts that have been around for a while. Brexit has brought issues into those contracts that might not have been foreseen and dealt with at the time and therefore can you now get out of contracts because of the new things that Brexit brings with it. Actually the starting position is generally that is going to be very difficult because largely Brexit is about money and frustration and force majeure do not help you when it is just about it is more expensive.
Now, there has been a big case in relation to frustration and Brexit in 2019 and it is the Canary Wharf and European and Medicines Agency case.
That was a case about the head office of the EMA, which was in London. That was under an agreement for lease. It was signed in 2011. A lease that was entered into in 2014 and then of course, two years later in 2016, the UK voted to leave the EU. The EMA, and EU Institution, took the view that it could not be based outside of the EU - which is fair enough. It therefore tried to get out of its lease.
It said it was unprecedented that it should be asked to stay in London as the head office of an EU Institution and when the UK was leaving. It claimed that release had been frustrated. Now the court said no. &It was not frustrated. The court said, yes it was entirely unprecedented. It might even have been, to some extent, unforeseen that this was going to happen. But it was not a frustrating event.
Now, the reasons for that - at a technical level - were because the argument frustration was that it was outside the powers of the EU to have a head office outside of the EU. The court said, look that just is not going to roll it, because the EU cannot own buildings outside the EU and that is fine. There is no impossibility in owning a building outside of the EU. What you want to do with it, is a different matter but you can own buildings outside of the EU.
In relation to an argument on common purpose, the court said yes, we understand that it was the common purpose that this was going to be a head office, but it is also a common purpose that you are going to rent a building and that, you have managed to achieve and it was not a common purpose that it would be the head office of the EMA forever and ever and ever. And the reasons for that is because this lease dealt with some of the issues about stopping the lease early, so there were rights to assign, there were rights to sub-let. The EMA had, itself when it took the building, sought a break clause. Which obviously meant that it had in mind that it would not be the head office forever and ever. The court said, look you foresaw that you might need to leave and you have some contracting provisions in there. What you are really saying is that it is difficult to sublet this building right now and you want to get out of it right now, well that was not the common purpose.
There is a underlying issue here that the EMA had obviously had the building purpose built and the agreement for lease, so it was proving very hard to sublet because it had things like a United Nations style forum on one of the floors because of the nature of the business that the EMA does.
So the court said, look - not frustrated. Now, stepping back and looking on a wider basis, there is a whole issue that if this case, this EU versus the UK style case was not good enough for frustration, then nothing is good enough for frustration arising from Brexit. It is sort of like, you will not get more Brexity than this and this was not good enough.
There is also quite an interesting dialogue in the case about - for frustration you need two things. You need impossibility of performance. i.e. the thing has become a wholly materially different level of performance which the EMA could not get over here. There is also the issue about foreseeability. Is the thing that has happened, unforeseeable at the time of the contract so that it is understandable that you did not provide for it in your contract and it is not just that you left the risks to fall wherever it falls.
The court looked at that here and it did say that in 2011 it accepted that Brexit was not foreseeable because that was just so far ago. But it would undoubtedly be the case that Brexit was foreseeable - well certainly when we got to 2016 because in June 2016 we had the vote, we knew we were leaving and that means actually also 2015 when the Tory government got in on the back of a manifesto in which there was going to be a referendum. At that point it is foreseeable that the UK could have been leaving and indeed even before that in 2014, the Tory party were saying that this would be in its manifesto.
So what you end up with is actually the idea and there is no date formally set in the Canary Wharf case, but it is clear that once we get to 2014/2015 Brexit is a foreseeable event and you are not going to be able to argue for frustration as a matter of common law relief for something that was foreseeable and the court will say, it was simply down to you that you did not provide for this event in your contract. So frustration does not give you a get out of jail card.
The outcome of this case and general thinking is Brexit will not – almost certainly will not get parties out of their contracts on the basis of frustration.
Now, that does not necessarily deal with the issue if you have got a specific clause in the contract and we will go on and look at that in a minute, but frustration it is going to be very difficult.
David: I think Clark, I think you would agree with me. I think part of the reason for the court's decision was to send a message to say, they are not particularly open for policy reasons effectively to a wave of claims claiming that Brexit is frustrating people's contracts because here was a contract where it could not have been anticipated that Brexit was going to happen. Where Brexit has had a big impact undeniably, but the courts were not willing to have that discussion at all and I think that is a signal from the courts is it not?
Clark: Yes, this is one of many cases over the last five years where claims for frustration and force majeure claims have largely always failed. The courts are very keen now to find and support contracts in accordance with the simple words and provisions used in the contract. So, finding ways to get out of what the contract says you will do have, over the last few years, been difficult. So we have had that with contract interpretation and the pullback from the business common sense. You know, I can read a contract to be business common sense and therefore allow myself to do something that it does not sort of say in the contract because it would make sense that I could do it that way instead of the way it says in the contract. Those types of claims of failure we are going back to a much more literal interpretation which in a previous ThinkHouse where we talked about Arnold and Britton and Ward and Capita - those cases and in accordance with that theme, a lot of cases that are claims mis-stay, rectification, frustration, force majeure have all been consistently failing.& So this is in that screen, which is - you look at the contract, you see what it says and that is what you do.
David: So this is a good point for me to take on force majeure because many contracts have a force majeure clause and the reason many clauses have a force majeure clause is, frustration has always been a very limited right. Occasions where frustration have been successful are sort of ancient cases to do with coronations being postponed and suchlike and as Clark said, very rarely succeed and therefore many people in their contracts put a force majeure clause in. So a contractual, express contractual remedy in the contract where certain events happen.
Now that is a contract right and therefore it depends what the contract says. It is not a - you say the word force majeure - wave a magic wand and a load of words are added into your contract automatically - not at all.& You only get it if you say it. And every force majeure clause is different in my experience. They always have slight differences.
Let us take a normal force majeure clause. It will usually start by asking whether there is an event beyond the reasonable control of parties and so many people go, well Brexit is beyond the reasonable control of the company. It just got done to them. It is the government making a political decision that has had its consequence. That is an event beyond reasonable control, therefore it must be a force majeure and that is correct.
I do not think you could say Brexit is within the control of many companies. However, it needs to then go on to prevent or hinder somebody and in a way in which they could not reasonably participate. This is where the courts are quite restrictive in their interpretations - as Clark has just said. Where there are a few cases on force majeure, but where there are cases on force majeure - the courts tend to take a narrow interpretation and although they might go, well yes Brexit has happened, but firstly if it was a contract that had been entered into - certainly after the referendum in 2016, then you could have reasonably anticipated it. So you entered into this contract knowing that one day there was going to be a hard Brexit. So then come back and complain there is now a hard Brexit. Should have thought about that in your contract. And we are going to assume that you did think about it and we are not going to let you off for it. That is one challenge.
The other challenge is pointing to how Brexit actually makes performance impossible or very difficult to justify a force majeure as well. And simply because it is a bit harder across the border, or that it is a bit more expensive, just is not enough. Therefore we do not expect from many force majeure clauses that Brexit is going to be an event that will justify a force majeure clause but it does depend on the wording of the clause. And I emphasise the wording because we are seeing occasionally people adding into force majeure clauses, express reference to Brexit and that might make a difference.
Now, that takes us to Brexit clauses really. There was a lot of discussion following the referendum about let us just add a Brexit clause to the contract and then we have dealt with it.
Of course that makes sense because every previous significant change in the law, usually the response has been, let us add a clause. Modern Slavery. GDPR. Contracts Right of Third Parties Act. I am now showing my age because I remember when that came in.
The response every time has been, let us add a clause. However the challenge with Brexit clauses and Clark and I have talked about this before at previous ThinkHouses is firstly, what will be the trigger? Those Brexit clauses I have seen are often referring to the UK leaving the European Union. Well in that case, that has happened already. We left the European Union in January 2020. It is just that we are now in a transitional period which feels much the same as being part of the EU. So if your clause said, on leaving the EU then, well you should have already have been implementing that.
So that is one of the problems about what is the right kind of trigger. But then the other problem is, well what is the consequence? Nobody really quite knows what the impact is, so it is difficult to anticipate and actually neither party is going to want to give ground. Most of the clauses that I have seen that specifically deal with Brexit, usually refer to having a bit of a chat and having a discussion and coming to some kind of agreement, which is an agreement to agree.
Have you got any comments on those clauses Clark?
Clark: Well I agree with you. I do not think they take you anywhere because by definition if you are going to have a Brexit clause that is of any effect it is really just a break clause. I.e. when Brexit happens, we can break and one party is almost by definition not going to agree to that, which is why you just have a chat. And if you just have a chat, well that's not entirely enforceable and actually you do not need a clause to have a discussion. You can just pick up the phone and have a discussion and seek a variation and if you agree one you can, and if you cannot, you cannot.
I have never been persuaded that they are going to be particularly useful to a party really.
David: Yes and it is interesting - I have occasionally seen Brexit clauses in contracts over the last couple of years but it is really rare. Very occasionally see it added as a force majeure event I think. Really rare. Pretty unusual because I think most people have gone through the same thought process and concluded it added little value.
Clark: It is also worth bearing in mind is not it then when we talk about force majeure and we talk about frustration, the courts are in a mind-set of thinking about radically different or impossible now to perform. That is what they are looking at. And they have consistently been saying, that it is more convoluted to perform - it is not impossible to perform and that it is more expensive to perform, is not really a concern of theirs. Expense goes to price and price is an issue for the parties to sort it out so that does not go to radically different. You can always make a loss on a contract, it does not go to impossibility to perform. Which is actually - and I know this would be a different podcast, which is why the corona virus we are seeing at the moment are different because they are actually imposing an impossibility to get across a border or to get a workforce together to make a thing or whatever. But these are about price and pricing convolutedness which is why generally they are struggling to make any impact.
David: And I think it is really interesting about the Europeans Medicine Agency case is the emphasis the courts did about on the issue that a contract allocates risk between the parties and we should not disturb that and with a lease there has been an allocation of risk between the parties as to what happened if either tenant no longer need this building and the European Medicine Agency decided to take that risk by having a long term lease and as you said Clark by adding subletting and assignment clauses to it to allow that to happen so therefore the risk was with the agency.
Clark: And as part of the negotiation, they have sought the break clause. They had not been able to get that but they had had their expensive rights to specify the fit-out of the building and they had been able to negotiate the rent and stuff they just had not got their break clause. They had taken different things the courts had. Instead of having the break clause - that was part of the allocation of the risk. You did also just very briefly mention the Krell Henry case which I do think actually if you now bought Krell and Henry back, the coronation case I want to rent a room looking over the Pall Mall and you look at the way the common purpose, the common intended purpose of the lease is discussed in the Canary Wharf case. Mr Henry would probably have won that case and Mr Krell would have been bound by his letting. He would have still had to take the letting. He could have still have taken the room. He would have had a lovely view of the Pall Mall whatever was going up and down it, be it a King in a coronation carriage, or be it just ordinary pedestrians. The purpose was met which is, you have got the lovely view of the Pall Mall. So I think if we had that case 90 years on now, it would have been decided a different way. There we go.
David: And a separate podcast will come your way on COVID-19 and coronavirus because of course force majeure and frustration is going to feature in that.
Clark: I do think if you really want to challenge a contract the way to do it is, material adverse change clause is more likely to give you a remedy and the other one is change in law. And we very rarely look at change in law but change in law provisions might be the way to get some form of relief because you frequently get an obligation to look at amendments if there is a change in the law and Brexit is lots of changes in lots of laws.
David: Yes so if you have a long-term outsourcing [unclear 28:30] which has a change in law clause and that is pretty normal, the way those clauses work is they work out who is going to bear the costs of that change in law and of course a judge is just going to read the clause and apply it - to reallocate the costs accordingly in accordance with the contract. It does not have to worry about whether it is a force majeure or not. So I agree with you Clark, we might see change of law clauses bubbling up as Brexit happens and imposes costs.
Material adverse change clauses I also agree will be useful or will be effective. Having said that, you rarely see them in English law contracts. Usually it is a change of law clause as opposed to a more general material adverse change. You do see material adverse change more in other legal systems/contracts because they have that concept in their own contractual code and that is probably a point worth emphasising - is that what we have been talking about so far about frustration of force majeure is very much from an English law perspective. If your contract is subject to another law, then it might well be different because other laws in other countries approach this subject differently.
Now, we had better move on. Our next area is regulatory divergence. You will have heard from Kieron and some of the other speakers in our Brexit ThinkHouse about what is going to happen on regulatory divergence. Are we going to chlorinate our chickens and Europeans are not and what does that mean.
&But what does that mean in a contract? Well, in many contracts you have an obligation on the parties to comply and fulfil their obligations in accordance with all laws which normally is not usually an issue. Usually that is fairly obvious but think about how this might work if you have a contract between a UK company and a German company. One is subject to UK law which has diverged - its regulations have diverged from European Union and the German company is subject to European regulations. And the contract says you must comply with all laws. Well, just what does that mean?& Which laws?
One of the things we have done with our precedents is we have gone through them and stripped out the references and compliance of laws clauses to European directives and regulations because we do not want to accidentally find that we have committed a UK company to complying to a set of laws which no longer apply to it. But even if you have done that, you have just got that contract between an English company and a German company requirements to comply with all laws. You are going to risk a debate about which laws and Clark, I do not know how you see that would turn out?
Clark: Worth saying is it not that an English law contract looked at by an English court will normally apply English law. So it will read that as English law. So generally you might get away with it, but it is the issue that if you have somewhere referenced, you know, EU directives or EU regulations - whatever it may be &- or EU standards, the court will obviously enforce those because that is the choice of the party to specifically reference them. So, that is quite a challenge. We have also got the issue about exactly how much EU standards - how many EU standards will come in through EU retained law. Quite how that is going to work we do not really understand that yet and you have got to be thinking about that as well.
So there is quite a bit in this in looking both backwards at old contracts and worrying about what the standards and looking forwards on your new contracts. We have seen a dispute over specifications and standards in the Eon and Hojgaard case that we have referenced in the notes there where an obligation to supply goods to a satisfactory standard prevailed over everything and that is going to remain good law so you can specify compliance with regulations, compliance with standards and if it is still subject to the over-riding duties of supplying something to satisfactory quality, unless you specifically say otherwise. What you need to be careful of course is what you end up building up in the contract, is a hurdle of standards that you have to hit and that simply means that you will end up having to hit the highest one.
David: Yes so I think the Eon case is interesting because that was where the front event had this general obligation to comply with satisfactory quality and other requirements and in the back-end in very detailed specification, which potentially conflicted and the message from that case is the courts will try really hard to read the contract as an entirety, so we have discussed about how it is important to stop and think when you say compliance of laws - which laws. Make that clear and then you will not have an argument about it. But also look carefully at the specification. See if you can introduce compliance of another law by the back door. Look at the standards and specifications. Are those ones that actually will be able to fulfil in the future if there is regulatory divergence. Should you be referring to an EU standard. Maybe you want to refer to a UK standard. Try to make the front and the back end consistent so that you are not leading the court to have to weigh-up how to read them in the round, whether it is everything or just one of the other.
Now, so far we have been talking a lot really about goods and how you get the goods across a border and we have just been talking about specifications. Very much with goods. What about services? Obviously services are a bit easier and that is a bit - you do not have to carry them across a border but bear in mind local laws, regulatory divergence could have an impact on services. It might be that you need the services to be certified by an EU certifier. Ask yourself whether as a UK company - if that is what you are - whether you are actually going to be able to get that EU certificate.
It might be that you have to use a professional whose qualification is accepted by the local country. Well, post-Brexit, a UK professional qualification may not be seen as equivalent in another country like Italy or France so you may have problems there. You may have problems about moving people quickly across the border to provide service support because there may be visa restrictions and other controls. So, Brexit is not just about goods, it is also about the services that are provided and therefore you do need to think through what is the impact and how you could provide it in a post-Brexit environment.
You see that particularly obviously in financial services which is very heavily regulated and that clearly gives you an example of how services post-Brexit can be difficult. You know, can somebody in London provide financial services to somebody in Germany and that is exactly the kind of debate that will be going on between the UK and the EU to agree that and if they fail to agree, then it will become difficult to provide certain services.
Clark: We are going to have a look at territory. This is just an existing contract, probably now quite an historic contract. You simply have a definition of territory as The EU or Members of the EU. What might that mean?
Well what it might mean is you jolly well wish that what you had written was "all members of the EU from time to time" because that will certainly see you through. But if you have not written that, and you simply have "all members of the EU" well, do you mean all members of the EU when you wrote it? Or all members of the EU now that you are having a dispute about it or an issue upon it? And the answer there in that circumstance is, it would almost certainly be "all members of the EU then". Obviously the court will look for the intent at the time of the contract but it seems to us that it must mean "all members of the EU then" because otherwise, for example, you could have say, a Croatian manufacturer with a distribution agreement into the EU for members of the EU/countries of the EU from before Croatia was a member itself. It then joins. Does that mean that that manufacturer can no long sell within its own country when it never expected that at the time that it made the distribution agreement with the EU distributor. So we are thinking it would mean "all members of the EU then" at the point of the contract. Obviously a wiser one views is of that is the EU from time to time, because we do know that people can join and people can leave. We might have thought only people could join but now we know that people can leave as well.
David: And certainly best practice has been really since the referendum is to be - in the distribution agreement for example - to be very clear whether the territory is meant to include the UK post-Brexit or exclude the UK. Actually, we are worrying about Brexit but there is a risk of other country - we have had the risk in the last 5 or so years about whether Greece was to leave for example, or indeed new members were to join. So, it is important really in drafting contracts to just think how - do you want it to flex or do you want it to stick as is on the day you have signed the contract and make sure the contract deals with that.
Clark: Yes I mean if you were the UK distributor for an American manufacturer within the EU, you certainly would not want to lose all that distribution territory because of our Brexit would you. So important to say exactly what you mean.
David: Yes and I think that is where we will see disputes. UK based distribution of key EU distribution rights suddenly realising they have lost the most important part of their sales potentially. If the US manufacturer then wants to appoint a new distributor for the UK.
Clark: Yes that would be funny would it not.
David: Yes and that is where I will predict where the disputes will be over the next year or two in that area.
Clark: Yep.
David: So now, we have been talking really about contract drafting/contract terms but what we also need to think about is, are claims. What happens if a dispute arises post-Brexit. So, Clark.
Clark: Yes. Okay. These are topics that have been with us since 2016. Issues of governing law. Issues of jurisdiction. Issues of services. Issues of enforcement actually when we get onto the next slide. All of this at the moment has been dealt with in EU regulations. We have always hoped that they would be replicated in the final deal. Now that we are having a conversation about a harder Brexit, the reality is they might not be and we will not carry on with the close co-operation with European judiciaries on governing law and jurisdiction on the topics.
None of that means that any of this stuff cannot be done when we are in contract between a UK company and an EU company. It can all still be done. It will all still work. There will be a solution. It is just that it is all going to be a bit more clunky and a bit more time-consuming and actually a bit more costly probably than it has been under what has become quite a slick set of EU regulations that facilitate all of these things.
So, governing law - still really important that we put governing clauses into contracts. It is the case that most courts in Europe, in the UK will still enforce contracts in the words that they use. So if you put the governing law will be French law, it will be French law and you should still expect that. It is just that it is not as quite as - it is up for dispute whereas under the EU regulations it is not up for dispute. There we go.
Jurisdiction - there is an issue here about having to think a bit more about whether you do want the courts of England and Wales or whether you will want the jurisdiction of an EU court because you are thinking about where the problems might arise but particularly where the enforcement might need to take place. Jurisdiction clauses - exclusive jurisdiction clauses will still be enforced by UK courts and the EU courts under the Hague Convention that we have just signed up to - that the UK has just signed up to. But it is exclusive jurisdiction clauses.
Non-exclusive jurisdiction clauses - there will be more room for fighting - that is simply a fact when we have these UK to EU contracts. Jurisdiction also raises the much more - or brings back into focus the issue of do you want a court jurisdiction or do you want an arbitration jurisdiction. Which forum do you want to use for disputes. And there, that takes you straight into the question of enforcement where one of the great advantages of arbitration is under the New York Convention. Arbitration awards are generally enforceable in most places in the world without much issue. Courts in most countries will recognise arbitration awards and enforce them under the New York Convention.
Under not having EU regulations, our UK court judgments will not be necessarily readily enforceable in European jurisdictions. It is going to be like enforcing judgments in the rest of the world and that is much more difficult. So important to think of that at the contracting stage 'do I want a court jurisdiction or do I want an arbitration jurisdiction?' Also at the contracting stage I have mentioned service. We do not think about service very much but it is something that is facilitated again under EU regulations. We can pretty much issue a claim form anywhere in Europe, pop it in the post, it will be served. That is fine. Much more costly, clunky and under Hague Conventions again and actually we are going to be going back to using a 1965 Hague Service Convention potentially which means that service will be months or years not weeks essentially going forward so I do think that when you are at contract stage, it is very important to think about the parties being asked to appoint service agents in the relevant jurisdiction that you have selected for disputes.
David: If I can just ask a question - so if we had a contract between a UK company and a French company and it was subject to the exclusive jurisdiction of the English courts, if there was a dispute.- First problem is serving the court papers on the French company if you have not got something to do with process agents in the contract, you are then this Hague Service Convention, therefore it might take a long time, yes? Step one is that correct?
Clark: Yes. You would end up taking - having to check with a French lawyer how you would serve proceedings in France under basically local French law. It is just a bit more clunky than now because it is almost like two separate stages rather than just one stage of relying on the EU regulation.
David: Okay so it just becomes - not impossible - but it just becomes harder and more expensive.
Clark Well, just becomes a bit more timely really. It is time. It is time. We are very used to - we issue a claim form and anywhere in Europe now we can be pretty confident that will be served within two, three, four weeks but now we might be thinking two, three, four months and if you have got a claim, you want to get on with it. You do not want to issue a claim and then wait for two months or three months or four months where you are worrying about getting it properly served. You just want to get on with it. And it is - it is friction is it not? It is friction again. Friction of borders.
David: Okay. And then - continuing with my example, UK/French exclusive jurisdiction. I go to court. I get judgment. I now need to enforce it. The French company has not got any assets in the UK. I need to go to France to enforce it. Under current rules, your EU regulations, that is relatively straight forward, in that you can take your English court judgment and enforce it in France reasonably easy but in a new world, unless something is done, a treaty is done between the UK and the EU, it becomes harder is what I was hearing. Is that correct?
Clark: Yes well it would be like taking, it would be like taking a Russian judgment into France, it would be no different, it would be like taking an Iranian judgment into France. It would be, you know, we are the rest of the world to Europe just like all of those other countries. So you would be effectively apply to register it as a foreign judgment in France in a way that under EU regulations that happens almost as a simple, easy, smooth, fast, quick, cheap process now that is a bit more difficult and a bit more discretion, and a bit more open to challenge. You know and in some territories that could end up being a bit more, a bit more difficult because you end up with the, you know, territorial issues and we just, self-governance issues that we just don't have in Europe, we are one big happy family in Europe and now we are not, we are outsiders bringing judgments in.
David: So therefore if you are drafting a contract today before the end of 2020, you either do what you are currently doing and hope that the UK and EU do some kind of deal to make this easy and carry on, or you use a Court Judgment clause as you currently do and be pessimistic and just cross your fingers and just have to deal with the hassle of enforcement another time and wait, or you go for arbitration. Is that the choice?
Clark: Absolutely. I don't think this by any stretch means that arbitrations are always favourable to Court proceedings because arbitrations have their own benefits and they have their own drawbacks and you have to weigh them up. It's just that, you know, in that see-saw balance of which one do you pick, the problems with enforcement put a weight in favour of arbitration and against the Courts. It has just slightly changed the balance on the see-saw.
David: Yes.
Clark: So you just have to apply more thought to that. And remember, of course, we don't have any reciprocity with any of these European countries at the moment because we don't need reciprocity for reciprocal enforcement of judgments with any of these European countries because we were in the EU and it was all dealt with under the regulations. So when we come out it is not like there is a load of other stuff to fall back on. We are going back fifty years and we will be digging out, you know, was France ever a signatory to this treaty, that treaty, blah, blah, blah and you know we will be doing it very old fashioned ways. Ways we thought we had long left behind.
David: Yes. So my experience at the moment is that when I am talking to clients about contracts which might be straddling the UK/EU border is that most people are loathe to change from what they are currently doing. What they are currently doing is Courts and that probably works and people are hesitating to change wholesale to arbitration. I am seeing people change to arbitration for a high value long-term contract because where they really want that confidence of a system that will be in place whatever. I do wonder, though, that people's attitude to this might well change over the next six months depending on how the negotiations go, as the risks dawn on people and therefore we might see more arbitration clauses I would forecast.
Clark: Absolutely, I mean it is the case that, you know, Court fees are more expensive than they used to be but it is still generally, faster, quicker, cheaper to issue a Court claim than to get an arbitration started. You can't argue about issuing a Court claim in the way that you can argue about issuing an arbitration claim and having an arbitrator appointed. There is more delay in costs in the arbitration route. So on small claims you might just say I'll get the claim, I'll get the judgment and then I'll worry about the enforcement. That might be perfectly sensible still to do. It is just that then enforcing it in Europe, just in Europe, will be a bit more difficult than it used to be and you need to start weighing that in.
David: Great.
Clark: It is also the case, by the way, of course, that the more this becomes costly and the more business MPs back to the Government that this is a problem, the more you then might see the Government going back and saying we really ought to be looking at doing reciprocity agreements or equivalent agreements with the EU on these governing law jurisdiction service enforcement points to replicate what we used to have, because it makes common sense, that would help UK businesses. It would also help European businesses. European businesses who contract with UK companies have got exactly the same problems in reverse. They are going to be no more pleased about it than the UK companies are. Perhaps that will build a political pressure and something will happen. It is just that we would have assumed that that would happen very easily if we were doing a very soft and, you know, adhering to an equivalent regulations, etc., type of Brexit. If we are doing the harder one it will just take more political push and will to get there.
David: Great. So, final topic Clark, is the issue of privilege.
Clark: Oh yes now I put this in just because a few years ago we had the Akzo Nobel decision that in Europe, when the EU Commission was bringing competition investigations, in-house lawyers in the UK, their documents were not privilege in that kind of EU competition enquiry, because the EU views the in-house lawyer and, you know, their issue of total independence from their employer, in a stricter way than we do in the UK. In the UK in-house lawyers always have privilege just like external lawyers and that is different in the EU and different across, by the way, all of the 27 other member states - they all have slightly different rules on how they look at in-house lawyers.
We are coming out of the EU so that Akzo Nobel decision is just going to go away because we won't have, we shouldn't have EU competition enquiries on us any more, so long as you are not doing, you know, business through European business offices in the EU. So it is sort of bye-bye to Akzo Nobel. The issue that that then makes you think is of course well, hang on, what about now when you are a multi-office international company and you have in-house lawyers obviously in your German offices but also including in your UK offices, now generating documents which will be used within the European-based businesses. Do we suddenly need to be worried that because of the harder border between us the European countries will now be applying a lot less privilege to come and get in-house generated documents when we have companies that have offices in the EU and the UK? Now I pose that more as a question because it is I am a thinking about that, how will that happen? How will that happen and I have never liked "so we will have to wait and see" but there no line of "well we will have to wait and see how that works out". But I am conscious that that is an interesting issue that might arise, that we see a harder time for in-house lawyers always maintaining privilege on their documents that they would have been very confident about whilst the UK was within Europe and we were never challenged on this issue.
David: Right, so although superficially it looks like good news. That we are free of Akzo Nobel so good news for in-house lawyers in the UK - no longer do you have to worry about not having privilege on documents. Actually what you are saying is that…
Clark: In a new EU competition enquiry and now actually when you lose that will it actually be you might lose it wider. You might actually lose it wider. Once you get anything that has a European angle on it because they will be looking at it just going look we owe the UK no favours. We owe them no favours, it is our rules.
David: Yes. So it is, yes. I think that is definitely something we need to see how it unrolls to see how it works in the real world don't we.
Clark: Absolutely, yes. It is just something I am conscious of that in-house lawyers might have to think about a bit more, particularly UK in-house lawyers, might need to be thinking about a bit more than before. And, of course, with other cases that are going on on privilege at the moment that we don't need to talk about, but all of which are going to require now for us to be thinking a bit harder about making sure we maintain privilege.
David: So, that brings a conclusion to this review of the contractual impacts of Brexit which will hopefully help you weigh up its impact and what you need to focus on. Certainly immediately after the referendum there was a sense of panic in the air of people desperately can I have a Brexit clause, oh my god the world is going to end feeling to that I guess even if that feeling is still around Covid-19 has probably overtaken it and reminds us what a real panic can be like. But I would say that most people were starting to come to terms with Brexit in early January 2020 and starting to more calmly work through the issues. Because as we have talked them through today, none of these issues come as huge surprises. All of them are issues that can be dealt with, anticipated and worked through, and we do have the time to be able to do that.
Think before you drink or tap before you contract are the suggestion of thinking ahead about what to do. Do think ahead about the border. How are goods actually going to cross that border? What do your contracts actually say now? How should they be amended to make that delivery point clear? Hereditary divergence? That is going to be probably the big story for the next five years on this, is are we going to diverge and what is the impact? So I would say this is going to rise as an issue. This isn't a day one issue. Because on day one there isn't going to be hereditary divergence broadly, so it is not going to be an issue on day one. But in three to five years it probably will be an issue and therefore making sure your contracts manage that issue now will set you up well for the future so that you avoid a future panic.
On claims you have heard about how claims are just going to be harder, more complicated, so you should be thinking about that and anticipating that in your contracts. Weighing up whether you un-balance the see-saw. Clark talked about where we are unbalanced we should be moving towards arbitration. Consider whether you should be including process agents, something that we have got out of the habit of doing over the last 20 years because it has just become less important. Maybe we need to so that. And then be mindful then that if you have got claims, thinking quite hard about how you are going to approach them to find the least painful way through it, because it will be more painful whatever happens going forward.
Well I hope that this has been helpful to you and we have loved your feedback to hear what are the contractual issues you are seeing? What would you like to hear from us about? But for now we really look forward to hearing from you.
Thank you.
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