Brexit - should we care?

Tuesday 21 June 2016

Author: David Craig

​At the end of this week, the UK​ electorate will be asked to vote on the following question:

“Should the United Kingdom remain a member of the 
​European Union or leave the European Union?”​​​

The p​olitical and economic consequences of both ‘Remain’ and ‘Leave’ have been exhaustively canvassed by academics, politicians and the media. Depending on which side of the ideological divide you sit, this is either a once-in-a-lifetime chance for the UK to rid itself of the shackles of a moribund EU that is lurching from one crisis to the next, or it is a chance to reaffirm the undoubted benefits that have come from integration with a single market of half a billion people. Recent polling, and the volatility of global financial markets, suggest this will be a close call.

Adding to the tension is the uncertainty of what ‘model’ would govern the UK’s relationship with the EU post-Brexit: the ‘Norwegian model’ (European Economic Area and European Free Trade Association (EFTA) membership), the ‘Swiss model’ (EFTA membership plus bilateral agreements), the Turkish model​ (customs union), or something else.

The political and economic issues that we hear debated daily, and that have polarised the UK, are clearly very real. The effects of this vote will have implications not just for the UK and the rest of the EU, but for the rest of the world. New Zealand would not be immune.

But, politics and economics aside, should we care from a legal perspective? Coul​​d this vote have legal implications for businesses in New Zealand?

Potentially yes, but in relatively limited circumstances. Let’s consider some examples. 

Choice of governing law and submission to jurisdiction

We are a self-effacing bunch in New Zealand. We know our place in the world. So, while a loan agreement between a New Zealand borrower and a local bank would invariably be New Zealand law-governed, relative bargaining strength may force that same borrower to accept English governing law in an ISDA master agreement entered into with a global bank. In that case, the borrower would also invariably have to submit to the jurisdiction of the English courts.

The borrower should have few qualms about that concession though. English law has a reputation for its certainty, its stability, and its broad similarity with New Zealand law in many key areas. Moreover, the English courts are highly-regarded for their impartiality, their commercial acumen, and their general reluctance to interfere with the commercial agreement reached between sophisticated parties.

So, could any of that change under a ‘Leave’ scenario?

For the most part, no. The attributes of both English law and the English courts referred to above do not arise out of the UK’s membership of the EU. They existed pre-EU, and would likely continue post-Brexit.

There are cautions nonetheless. For example, parties that rely on English law as incorporating certain EU laws relevant to their contract would need to reassess their position if those EU laws ceased to be part of English law. Also, if the inevitable erosion of London’s dominance as the region’s financial centre was accompanied by a corresponding erosion of the expertise of the English courts, parties may reconsider the acceptability of English law and the English courts. Do not expect that to happen overnight though.

Frustration of contract

For those with long memories, you may recall that, 20 years ago, we were grappling with the legal implications of the introduction of the euro. In particular, there was a concern that, without a legislative fix, the replacement by the European Monetary Union (EMU) states of their local currency with the euro (what was termed ‘redenomination’) could affect the continuity of contracts denominated in that local currency. More recently, the same issue arose with the threat of Grexit.  

Redenomination, of course, is not an issue for the UK. The UK is not an EMU state. The British Pound remained the currency of the UK post-EMU in 1999. And it would remain so post-Brexit.

That is not to say, however, that other features of Brexit could not frustrate an existing contract to which a New Zealand entity is party. But the party claiming frustration would face a high legal threshold. It would need to show that performance of the contract had become illegal or impossible (not just more difficult) or that the fundamental purpose of the contract could no longer be fulfilled. Also, Brexit must have been unforeseen at the time the parties originally contracted. It is unlikely that a contract entered into by a New Zealand party would have those features.

Force majeure/material adverse change

Separate from the issue of contract frustration is the issue of contract termination due to a force majeure or other similar clause, such as one dealing with material adverse change (MAC).

As you would expect, this issue would be resolved primarily by looking at the words used by the parties. On the face of those words, giving them their ordinary meaning, did the parties intend for their contract to be terminable upon Brexit? It is unlikely they did so specifically. The debate would, therefore, be around the scope of the more general words used. While that is a case-by-case exercise, as a general observation, it is unlikely that Brexit would trigger termination under:

  • an illegality/change in circumstances clause, or a MAC event of default, in a loan agreement,
  • an event of default or force majeure clause in bond documentation,
  • a MAC condition precedent in an underwriting agreement, or
  • a Force Majeure Event under an ISDA Master Agreement.

In considering this issue, it is important to bear in mind the chronology of a Brexit. While the vote to remain or leave will be held on 23 June 2016, actual Brexit itself (under Article 50 of the Lisbon Treaty) would likely not occur for at least two years. And the financial consequences of Brexit for, say, an English counterparty might not materialise for many years after that. All of which is to say that, even if Brexit could trigger the operation of one of these clauses, it might not do so immediately.

Reduction in value of UK collateral

While there may be a delay (and, potentially, a long delay) before a contractual termination right arises, other contractual obligations could be triggered much more quickly. In particular, a ‘Leave’ vote would no doubt see a drop in the value of both the British Pound and Sterling-denominated collateral. That could result in top-up margin calls being made by secured parties.

Substituted compliance

In some instances, New Zealand statutory law recognises the equivalence of the laws of another jurisdiction, and confers deemed compliance on organisations that adhere to those foreign laws. This is particularly common in securities, financial markets, and financial reporting laws.

For example, an English entity may have the benefit of substituted compliance in New Zealand by virtue of its status under EU law. That EU law may be incorporated into UK law directly via primary legislation or via the European Communities Act 1972 (the ECA), which allows EU regulations and treaties automatically to take effect in the UK without the need for further enactment through an Act of Parliament. Under the most likely Brexit scenario, the ECA would be repealed. That may mean our English entity could find itself exposed to obligations in New Zealand for which it is not prepared.

Offshore employees

A New Zealand employer with EU employees in the UK, or UK employees in the EU, could face a period of uncertainty as it waits for the final post-Brexit model to emerge. Best case scenario would be that the UK and the EU negotiate a treaty that preserves the status quo. Worst case scenario is that no special treatment is given by the UK or the EU to nationals of the other, potentially requiring the repatriation of employees and leaving a skill shortage in their wake.

Conclusion – New Zealand not immune

Brexit is unlikely to have direct legal implications for most businesses in New Zealand. However, given that this would be unchartered territory for all parties involved, surprises would be inevitable. In a world that becomes increasingly inter-connected every day - in law as well as commerce - it would be foolish to consider Brexit as simply “their problem”.


This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • David Craig

    Partner Wellington
Related areas of expertise
  • Banking and finance