At 11 pm on 31 January 2020, the UK is expected to cease to be part of the EU (or the EEA) – although the transition period means that, for most purposes, the UK will continue to be subject to EU law until 31 December 2020. What does this change mean for drafting contracts?
Agreements can continue to refer to EU law in relation to say, compliance obligations, as the UK will still be subject to EU law during the transition period (currently due to expire on 31 December 2020). Where a party will be performing obligations in the EU, then EU law will continue to be relevant in any event. However, care should be taken when defining territory by reference to the "EU" or "EEA"; if the intention is to include the UK in the relevant territory, the agreement will need to say so (because although the UK will still be subject to EU law during the transition, legally, it will no longer be part of the EU). But where does this leave agreements entered into before 31 January 2020?
Agreements entered into before 31 January 2020
In many cases, a court looking at an agreement entered into before 31 January 2020 which defines territory by reference to the "EU" or "EEA" is likely to start from an assumption that the parties intended to include the UK. This is because the courts tend to focus on the parties' intentions at the time of entering into the contract; at that time, the UK would have been an EU member state and therefore part of the EU (and the EEA). However, there may be situations where this assumption will not be decisive. For example, in relation to more recent agreements, the court may consider that, as the risk of the UK leaving the EU was well known, the parties should have addressed it when defining the territory (and since they did not, the assumption should be that they were content for the territory to shrink if the UK left the EU). Another potential example is highlighted in the textbox below.
In the case of an exclusive distribution agreement, the choice of "EEA" as the distributor's territory may reflect the position on exhaustion of trade marks. Normally the consent of the trade mark holder is required before goods can be placed on the market in a given territory. However, when trade-marked goods are placed on the market in any one EEA member state, the trade mark holder's rights are said to be "exhausted" for the whole of the EEA. This means the trade mark holder cannot object to the goods being sold in any other EEA member state on the grounds of lack of specific consent to use of the mark in other EEA countries. If, after Brexit, the UK is no longer part of the Single Market, then the position on exhaustion of trade mark rights is likely to be different (and the trade mark holder would probably be able to object to goods placed on the market in the UK being sold in the EEA). If a court were to find that exhaustion of trade mark rights was the primary commercial rationale for choosing "EEA" as the territory, it might conclude that the parties did not intend the agreement to cover the UK after Brexit. Such an outcome would probably leave the trade mark holder free to appoint a different distributor for the UK at the end of the transition period.