The principal legal effects of Brexit on commercial contracts in Morocco


Financial analysts remain uncertain about the potential effects on the global economy of the United Kingdom’s anticipated exit from the European Union (Brexit).

Although the effects are unclear, the announcement on Friday 24 June 2016 plunged some financial markets to levels not seen since 9/11. 

Brexit raises many legitimate questions and concerns for the UK’s main economic partners which include the Kingdom of Morocco. 

Morocco is the UK’s 7th-ranked customer and its 15th-ranked supplier. For the time being, Morocco’s politicians and economists appear to be reacting pragmatically. They see in Brexit an opportunity to develop closer, more bespoke direct trading links with Great Britain without the involvement of the European Union. The impact of Brexit on the Moroccan economy would be negligible according to a press release from the Governor of Bank Al Maghrib on 24 June 2016. 

In terms of regulations, the separation from the European Union should not be overly difficult, either as regards its effective implementation (the exit negotiations phase will last two years, which will be difficult to stick to in practice for the negotiation of such a far-reaching exit agreement) or its scope, given how intertwined UK laws are with those of the European Union. 

Several European directives will continue to be applied or will be retranscribed by the UK. Furthermore, the UK will be able to draw inspiration from existing arrangements such as the Norwegian model (part of the European Economic Area, allowing it to benefit from the freedom of movement of persons), the Swiss model (bilateral free-trade agreements) and the Turkish model (a new customs union). 

If a deal of this sort cannot be reached and without an important part of its current legal system, it would be the World Trade Organization’s rules that apply, with the introduction (or reintroduction) of trade and tariff barriers. In these scenarios, the UK would have to renegotiate trade agreements on a case-by-case basis (with each of the separate countries) using global WTO agreements. 

What about the legal impact of Brexit? DLA Piper Casablanca has set out below an outline of the main legal effects of Brexit on commercial contracts in Morocco. 

From the outset, we should like to emphasise that Brexit will only come into effect after a period of negotiations lasting two years, as set out in Article 50 of the Lisbon Treaty. The negotiation period may be extended by the European Council. Certain clauses often found in many commercial contracts and transnational investment partnership agreements (particularly those governed by English law and/or involving UK parties or assets) will have to be looked at again in detail and drafted with care in light of Brexit. From now on, practitioners will undoubtedly define Brexit with precision in contracts to avoid any margin for interpretation, given how significant its effects could be on contracts (exit by a partner, early termination of a contract, renegotiation, suspension, etc.). 

1. Material adverse change or material adverse effect clauses (MAC or MAE clauses) 

These clauses allow one or all parties to exit a contract during the interim period between the date the contract is signed and the date the proposed transaction is fulfilled (subject to satisfaction of a certain number of conditions precedent such as obtaining regulatory authorisations or financing). This exit right is exercisable if a major, adverse political, financial or legal event occurs or is likely to occur, that would compromise fulfilment of the transaction. The recent financial crises have seen a revival of such clauses in M&A transactions and financing deals. They involve bitter negotiations. The effect of the unexpected Brexit on current contracts and its consequences for future contracts (such as changes in interest rates and significant currency fluctuations) could have all the characteristics of an adverse political and financial event for a party to a contract. We believe that MAC clauses should expressly set out those consequences of Brexit that constitute an MAC event for the parties. 

2. Hardship clauses 

These are different from MAC clauses which only cover the period up to the granting of the financing and/or the transfer of the underlying asset. They apply throughout the period during which the contract is performed. Hardship clauses are found in commercial agreements or partnerships which are performed over a long period of time. They allow the signatories to require that new negotiations be entered into if an economic or technological event occurs that upsets the contract’s original economic rationale. However, it should be noted that these clauses have a more limited effect than MAC clauses as they only implement an obligation to renegotiate which, if breached, results in damages, with no exit right for the party that suffers the economic imbalance. We feel that the unpredictable currency fluctuations caused by the fall in sterling mean that Brexit may be covered by such clauses. The same applies with the impact of Brexit on those free-trade agreements that form the basis of the economic rationale for numerous contracts. Of course, agreements that will terminate will inevitably be replaced by direct agreements, as the flow of trade cannot be interrupted. Uncertainty still remains, however, regarding such agreements coming into effect. Could we face a period during which no equivalent agreement is introduced to deal with trade and any significant differences between the new trade agreements and their European predecessors? Using Hardship clauses would be one way of adapting contracts to new regulatory constraints that were, until now, unforeseeable and unavoidable. 

3. Force Majeure clauses  

Our comments above on MAC and Hardship clauses are also valid for all clauses used to manage the effects on the performance of parties’ obligations, of events that are unforeseeable and beyond their control (such as suspension, delay and exemption from liability). Could the unexpected occurrence of Brexit constitute a Force Majeure event for current contracts? Whether or not it was unforeseeable would be seriously debatable given that the outcome of a referendum is only one of two possibilities. For future contracts, parties that take the view that certain consequences of Brexit could constitute economic and political Force Majeure events for them will have to specify this clearly in the contract in order to avoid any dispute regarding the legal impact when they occur. The wording of Force Majeure clauses (including MAC and Hardship clauses which are akin to Force Majeure clauses) will have to specify which party will bear the financial costs relating to their implementation and, if applicable, the financial costs relating to the renegotiation of the contract or the suspension or rescission that they entail. 

4. Change of law clauses  

These clauses are commonly found in documentation for financing, large scale projects, public-private partnerships and, generally, transnational deals. They allow parties to be released from certain obligations under liabilities warranties or payment obligations or even to renegotiate certain clauses of the contract if a change occurs in the legislative framework during the term of the contract which changes the initial scope of their obligations. To mitigate the effects of Brexit, it may be advisable to insert these clauses in order to specify the obligations that will continue to apply between the parties even if a change of law occurs during performance of the contract as a result of Brexit. 

5. Exchange rate risk clauses 

These clauses must also be scrutinised closely. Fluctuations in sterling are predicted and putting an exchange rate risk hedging instrument in place will have to be systematically considered before proceeding further with a deal, payment for which would be directly or indirectly influenced by the price of sterling. 

6. Governing law clauses 

As regards the choice of English law as the governing law for contracts, there is every reason to question whether (i) it might be challenged in the courts on the grounds that the contracting parties had chosen English law for its complete integration with European law, (ii) using it is appropriate at the start of projects, in the face of the potential legal uncertainty that it could cause during this interim period of uncertainty until Brexit comes into force. That said, will economic players actually have any choice, given that English law is almost always used in international projects and financing and is required by the large financial institutions (including some, based in London, who nevertheless risk losing their precious “European passport” if Brexit occurs)? 

7. Arbitration clauses

As regards the applicability in Morocco of arbitration awards made in the UK and vice versa, Brexit will have no major impact as the two kingdoms are parties to the New York Convention of 7 June 1959 which provides that awards are enforceable between signatory countries. However, for the reasons given above, it is not out of the question that parties will seek to challenge English law as the governing law before a court of arbitration in London. The legal uncertainty factor relates to clauses that give jurisdiction to the British courts at first instance. Up until Brexit, the judgments of those courts could be appealed before the European Court of Justice under certain circumstances. Post-Brexit, this will no longer be possible. Clauses that submit disputes to arbitration using the International Chamber of Commerce should see a new lease of life. 

Lastly, all clauses that refer to the European Union as a reference territory in franchise, distribution and non-compete or exclusivity agreements will have to be reviewed to take account of Brexit, in order to include the United Kingdom.