Blog - 30/06/2016
BREXIT – time to have a close look at your contracts?
Many companies will have entered into trade mark co-existence agreements or other licences or agreements which set out what they or another party may do in the “European Union”. For example:
“[Party A] may only use/may not use the Trade Mark xxx in the EU” or
“[Party A] has the right to use the software in the EU”.
Sometimes the parties will have given some thought to what happens if the members of the EU change. Sometimes they will not have and there will not be a definition of EU. However, until very recently this was all one-way traffic with countries joining and not leaving the EU. Agreements may therefore include a definition of “EU” or “European Union”, which say something like, “EU shall mean the countries of the European Union from time to time”, or “EU shall mean the members of the EU as at the date of this agreement”.
How are these clauses to be interpreted should the UK leave the EU? The short answer is that the parties may actually be in a better position if the agreement gives little thought as to the future makeup of the EU and there is no definition of EU or European Union in the Agreement. This is because the English Courts will generally interpret a contract to give it the meaning that it would convey to a reasonable person. (Investors Compensation Scheme Ltd v West Bromwich Building Society  UKHL 28). In doing so the Court will also consider the commercial purpose of the contract or a particular clause of the contract (Reardon Smith Ltd v Yngvar Hansen – Tangen (The Diana Prosperity)  1 WLR 989).
Consider then a clause which simply gives one party rights in the EU or prevents a party from doing something in the EU. In a world where the UK has left the EU the interpretation of this clause may well be contentious. It could be read as meaning the EU as it stood when the contract was entered into or it could be read as meaning the EU as it stands from time to time. While the exercise of construction must be carried out by looking at the contract as a whole there will clearly be situations where a Court will feel that the only way to give effect to the commercial purpose of the contract is to read the clause as including the UK i.e. construing the reference to the EU by reading it at the time when the contract was signed.
There is also support for this kind of approach in Rainy Sky SA and others v Kookmin Bank  UKSC 50 where the Supreme Court said that where there are two or more possible meanings or constructions for a word or phrase then the Court should favour the interpretation which is most consistent with business common sense. Again this may lead the Court to decide that a definition of EU should be read as at the date of the contract rather than at a future time when the composition of the EU has changed perhaps quite considerably.
The Courts have however always been very keen to make it clear that when interpreting a contract the Courts should not disregard or override the literal wording of the contract in pursuit of commercial common sense (Arnold v Britton  UKSC 36).
Where therefore the parties have included a definition of EU in the agreement, perhaps by defining it as the “EU from time to time” then the Courts are highly unlikely to interfere with that definition. The net result in such cases would be that the parties reward for slightly more careful drafting may well be the possibly perverse result that they are left with an agreement that does not cover the UK and possibly other parts of Europe.
In practical terms therefore now is a good time for parties to review the agreements they have in place, to check whether territorially these agreements are drafted by reference to the European Union and to give some thought as to how that may be construed. If there is any doubt about this then there may well be some scope for amending the agreement at this stage to give it the necessary certainty. This is of course likely to be particularly important when the agreement is long-term or perpetual.
In terms of future agreements it is important to give some considerable thought to the territory of an agreement. Using such terms as the EU or even the United Kingdom are possibly no longer likely to be the best choices and parties entering into agreements should perhaps try to anticipate a number of future permutations of both the European Union and the United Kingdom. This is of course easier said than done.
For further information regarding this topic, please contact Nick Phillips – Partner, or any member of the Edwin Coe Intellectual Property team.
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