Given the primacy of English law in international finance and loan documentation (English law and New York law being the most commonly selected globally), since the Brexit referendum in the UK, financiers and borrowers have been wondering whether any provisions need to change in their English law loan documentation (both existing loans and future ones). Although there is considerable uncertainty as to how and when Brexit might occur, the potential implications and whether any changes to practice are needed warrant discussion.
Over the last forty or so years, the UK and EU legal systems have become intertwined. How these will now be reconciled is likely to be a long and expensive process. Questions to ask include which European legislation does the UK feel it wants and needs and whether any new UK legislation might also be incompatible with EU legislation.
Parties to loan documentation will also potentially be concerned with the following questions on any contractual arrangements they have:
If a contract provides for EU legislation to be followed is that still binding?
Will any general principles of EU law still have influence or apply in English courts?
Can English courts still enforce a judgment from an EU Member State?
If the choice of law was English law at the time of the contract, how will that be interpreted if EU law was part of English law at the time the contract was made but not by the time the contract is performed?
A. Governing law
English law has always been a popular choice for the governing law of international lending documentation. English law benefits from its history of freedom of contract and emphasising the importance of parties’ commercial bargains. This is unlikely to be affected by Brexit due to the Rome Convention.
B. Jurisdiction and enforcement
English courts are often favoured due to their expertise, commerciality and relative speed in resolving financial disputes. Although this should not change post-Brexit, depending on arrangements between the UK and the EU following Brexit, consideration may need to be given to the enforceability of a judgment from an English court in an EU member state (and vice versa). Currently, under the Brussels I Regulation, English judgments are enforceable in EU member states.
Following Brexit, it may be that the Brussels I Regulation would no longer apply to English judgments, however a fix could be for the English courts to accede to the Hague convention or legislate other arrangements. Worst case, English judgments would be in the same boat as judgments of New York courts for example, whose enforceability in EU member states depends on the local law in each member state.
C. Potential implications for lenders
The regulatory landscape represents one of the most significant uncertainties for lenders following the referendum vote.
At the moment a range of authorised businesses, such as banks, asset management firms and insurance companies, are able to operate across the EU as long as they have a base in the UK, the so-called “passporting” route.
By passporting, a British bank can provide services across the EU from its UK home and also US or Swiss banks, for example, can do the same from an affiliate established in the UK. Unless this is separately negotiated it will not be possible to passport into the EU from the UK. Financial services businesses wanting to continue to provide services across the EU may well now elect to establish subsidiaries in mainland Europe (to the extent that they do not already have them) to give flexibility. Lenders may well be considering provisions in loan agreements allowing them to designate an affiliate that meets any regulatory requirements to make loans locally.
Lenders may also face increased loan costs (due to more regulation) and the ability to pass these on to borrowers may be considered. It is fair to say the market hasn’t got its arms around all the possibilities at this early stage, but it is something the sector is keeping an eye on.
D. Material Adverse Effect
Given the significant turn of events in the UK since the vote, something to consider is whether the event caused (or will cause) a “Material Adverse Effect” – this event of default is a feature in most loans. Practically, the actual terms of the documents and the circumstances or events concerned will dictate how this is navigated, so it is on a case by case basis. It is doubtful that a Material Adverse Effect is likely to have been caused by the vote result itself, but it is possible that the indirect effects of the Brexit / leave vote could impact upon the financial health of a borrower (e.g. because of a downturn in the economy, or by preventing free access to the European market) which may affect the loan so again this needs to be considered case by case.
Although certain provisions of English law loan agreements need to be considered according to the facts of each transaction, the current sense is that significant changes will not be required to the documentation.
The decision to leave the EU does create some uncertainty for the financial services and loan markets where continued access to the single European market has been important. UK institutions rely on the EU to export their financial services to and there will be pressure from them to create an environment where this can continue to thrive.