- English contract law is principally derived from the common law, and that will continue to be the case should the U.K. leave the European Union. The certainty of dealings and consistency of decision making by judges in the English courts on matters of contractual interpretation should not be adversely affected. The potential issues are more likely to arise from how contracts attempt to provide for market risks arising from the economic uncertainty caused by the Brexit vote. The principles of interpretation of contracts governed by English law are common-law principles, so the words used in financial contracts are of fundamental importance.
- For financial arrangements where a subscription agreement or other contractually binding commitment to fund subject to satisfying conditions precedent already exists, but debt has not yet been issued or incurred, check the conditions precedent and the force majeure provisions. Is the funder contractually permitted to withdraw its commitment?
- For financial arrangements not yet documented, consider whether conditions precedent and force majeure provisions relating to Brexit risks are desirable. Industry associations are unlikely to propose a “Brexit” force majeure or repricing/flex provision that caters to all eventualities.
- For existing financing documents that contain financial covenants, consider the impact on the covenants as drafted of volatile exchange rates. When are the covenants tested, and by reference to which exchange rates (i.e., time of determination; whether an average exchange rate is used). Should amendments be requested to deal with a period of expected, prolonged volatility?
- For borrowers, if there is volatility in certain debt markets, consider what other options are available and whether this means a different market offering the same tenor of debt, shorter-term debt or borrowing in other currencies, subject to f/x risk, etc.
- Check the MAC (material adverse change) clause. Can it be applied to your facts? Historically, this clause has been used sparingly and typically cannot be used in relation to facts known at the time of concluding the financing agreement.
- Consider which aspects of EU law, if any, you might want to retain in an English law document (e.g., bail-in language deriving from the Bank Resolution and Recovery Directive).
- Choice-of-law and choice-of-forum provisions are unlikely to be impacted. We expect English law to remain a popular choice of law for cross-border transactions, and the English courts a popular forum.
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