Determine the Applicable Law to the Contract
In the event of disruption caused by Brexit, it is vital to determine which legal framework the dispute will be resolved under. Answering this question will be an important step in determining the parties’ liability for the delays in delivery and the difficulties caused in fulfilling the contract. Unless a choice of law has been specified within the contract, the state’s law in which the seller has its registered office regularly applies to supply contracts.
Due to Brexit, special attention should be paid to the choice of law and jurisdiction agreement. Until now, English law has included EU law. After leaving the EU, this is no longer the case. This involves some dangers, and therefore, for future arrangements, agreements under English law should be refrained from.
Unfortunately, the UN Convention on Contracts for the International Sale of Goods as an otherwise practicable fallback option cannot be agreed either, since the UK is not a contracting party of this convention. It would therefore be advantageous to agree on German law, although this again depends on the skill with which the negotiations are conducted.
Force Majeure and the Termination of Contracts – Is Brexit “Force Majeure” under German Law?
In German law, § 275 BGB states that where a contractual element’s performance has been made “impossible” or requires an effort that is grossly disproportionate to the creditor’s interest in performance, it can create an exclusion of the duty of performance. However, a mere “disruption to the trade” is not sufficient to invoke this clause. Determining whether an event is “force majeure” is a means by which this impossibility to perform the contractual requirements can be assessed.
For force majeure to be proven, the impossibility to perform the contract, or to fulfill elements of the contract, must have arisen due to external events which:
- are not related to the company,
- could not have been foreseen,
- and which cannot be prevented or rendered harmless by economically bearable means,
- even by the utmost care that can reasonably be expected in the circumstances.
Essentially force majeure events could not be predicted and are outside the companies’ control and prevent the contract from being fulfilled.
The key phrase here when it comes to Brexit is “could not have been foreseen“. As the Brexit negotiations have been underway since 2017, and there has been much discussion about the difficulties involved with coming to the eventual agreement, can the consequences now be deemed “unforeseen” or those that could not be predicted? Unfortunately, it is unlikely that the disruption brought by Brexit can be seen as generally applicable force majeure, and cause for terminating the contract unless there were Brexit-specific aspects of the contract itself.
Termination of Contract due to the “Disturbance of the Basis of the Contract”?
German law provides for an exception to the principle of “pacta sunt servanda” (contracts once concluded must be kept) in §§ 313, 314 BGB. However, for a termination according to § 314 BGB, there must be a so-called “good cause“. A general reference to the UK leaving the EU would probably not qualify as “good cause”. Rather, it would depend on the concrete individual case.
A serious change of circumstances within the meaning of § 313 BGB, which have altered the basis of a contract, cannot be seen in Brexit alone. Here, too, it depends on the individual case. In addition, § 313 BGB also requires that these circumstances could not have been apparent at the time of the conclusion of the contract. However, since the announcement of the referendum at the latest, one will have to assume that it was foreseeable to some degree. Irrespective of this, § 313 BGB stipulates that initially only an adjustment of the contract can be demanded.
A release from the (entire) contract, the termination of the contract, on the other hand, is only possible if the further implementation of the contract is no longer reasonable. In practice, however, these conditions are not always met.
Brexit Clauses and Renegotiation of Contracts after Brexit
Ideally, the contracts between partners should have Brexit-related clauses outlining what actions can be taken in certain events. Some contracts may have clauses in place which allow for the termination of contract due to the difficulties brought about by Brexit. If your contracts were updated during the Brexit negotiations and include terms concerning termination of the contract (or other steps) due to disruptions caused by Brexit, consult with our contract lawyers. Our team will advise you of the options available to you. It is vital to assess the contract from all angles and assess if other options are available instead of immediately seeking the contract’s termination.
Even if the “disturbance of the basis of the contract” or the “right of impossibility” does not lead to a universally valid solution, it should not be forgotten that contracts can always be renegotiated with the agreement of both parties. Often, sticking to the old contracts is not a good option for either the British or the German companies.
However, if there are no Brexit-specific clauses currently in your contract, and Brexit is now disrupting the supply of goods, our contract lawyers are expert negotiators. They will assess your existing contracts and determine how best to proceed. Should it be determined that changing the terms is in your best interests, our team will lead the negotiations on your behalf. Brexit disruptions are affecting many companies, and reaching an agreement may be necessary for both sides of the negotiations.
Contract Lawyers in Germany
At Schlun & Elseven Rechtsanwälte our contract lawyers work with clients from around the world. Our services are available in German and English. Our contract lawyers will thoroughly analyse your existing contracts and carefully draft future contracts. Allow us to examine your current contracts and determine whether there is the possibility for termination due to the disruption caused by Brexit.
As a full-service law firm, our lawyers comprehensively advise our clients on contractual matters in various legal fields, including sales law, labour law, corporate law, commercial law, employment law, and banking and capital market law. With Schlun & Elseven Rechtsanwälte, you can be assured that you are receiving the full picture when it comes to the legal advice received.
Contact us today using our details provided. Our offices can be found in Cologne, Düsseldorf and Aachen and our conference room facilities are available across Germany. Our contract law experts are ready when you are.