Implications of Brexit for Contracts
The full implications of Brexit were still unclear as we went to press. Here our Head of Corporate and Commercial, Jon Healey, and Head of Commercial Litigation, Philip Edmondson, consider the implications for commercial contracts.
With just a few short months before we are told that we will have left the EU, there are many potentially thorny legal issues to be considered when reviewing existing contracts or future-proofing new agreements in a UK only or cross-border business-to-business context.
Prepare to Succeed
The starting point is to ensure you have a thorough understanding of the commercial implications of Brexit for your particular business. Every business should consider its own particular circumstances based on factors such as its location, regulatory environment, the location of its key customers and suppliers and the make-up of its workforce. This process should help us all to create a plan in relation to each issue which clearly identifies:
- The extent to which a business may have to change as a result of Brexit.
- The key risks and opportunities.
This process is primarily a matter of understanding the commercial implications for your business but there are also likely to be many legal considerations. We recommend that a contractual review should be carried out to support and inform the commercial plan. It may be that your business needs to instruct a solicitor to amend template contracts and ensure relevant issues are considered and covered in future contract negotiations.
Review of Contracts
Few of us will have the time to review every single contract that our business has entered into. Prioritising will be key. That prioritisation process can be determined by the Brexit response plan and be driven by the following thoughts and questions.
- Business changes. Which contracts will necessarily be affected by the business' overall response to Brexit? Could this mean that particular agreements or classes of agreements need to be novated, amended or terminated? For example, if the business intends to relocate some of its operations, will that mean contracts related to the previous location of the business need to be transferred or terminated?
- Brexit changes. Even where the Brexit response plan does not directly affect a contract, Brexit itself may still have an impact. The likely issues to consider are set out below. This should help identify those contracts most likely to be most affected by Brexit.
Existing contracts should be assessed by reference to their term and flexibility:
- Term. Will that contract still be in force on 29 March 2019, the date when, barring some dramatic change of events, the UK will cease to be a member of the EU? If the UK enters into a transitional arrangement, will it still be in force when the transition period ends, currently envisaged as 31 December 2020?
- Flexibility. How flexible is that contract? For example, if the contract can be terminated on short notice, that might provide a useful escape route but raises the risk that the counterparty might also terminate. Similarly, are there any minimum purchase commitments under the contract or is it an "at will" arrangement?
The contractual audit should likely need to address a selection of the following issues:
- Does the agreement contain territorial references to "the EU"? If so, will that include the UK after Brexit? This will depend on how has the EU been defined. It will be important for many commercial agreements.
- In what currency must payments be made? Who bears the risk of change in exchange rates during the term of the contract? Are the prices fixed in a particular currency and is there a mechanism to vary the charges in light of any changes to exchange rates?
- Who pays tariffs? Could the provision of goods or services become subject to additional tariffs, either in relation to exports to and imports from the EU, or to and from countries with which the EU has a trade deal? Who would pick up the costs of those tariffs? Are sales subject to Incoterms and, if so, which Incoterm?
- Who is responsible for customs clearance? Who will pick up the cost and expense of managing this process? Are sales subject to Incoterms and, if so, which Incoterm? What impact might customs control have on agreed service levels and delivery timetables?
- Are there data transfers from the EU to the UK? If so, will Standard Contractual Clauses or other mechanisms be needed to ensure those transfers can continue post-Brexit?
- Will Brexit result in any tax changes? Will Brexit result in changes to the tax treatment of payments under the contract, for example changes to the way VAT is applied?
- Is there a hardship clause? Is there any clause which deals with which party should bear the burden of increases in costs of supply, fluctuations in interest rates or exchange rates, and other changes to factors that the parties took into account when they made the deal? If so, could it be triggered by Brexit?
- What effect will a force majeure clause have? Do you want to provide specifically that Brexit (or any of its consequences) will not be deemed to be a force majeure event?
- Will a material adverse change clause apply? For example, a lender is usually unable to rely on an MAC clause on the basis of circumstances it knows about when it enters into a lending agreement.
- Are the laws applicable to performance of the agreement likely to change? Consider what laws are likely to change and what impact that might have on the agreement. For example, is there a danger that one party may have to bear additional costs in order to comply with post-Brexit legal changes?
In preparing and negotiating future contracts businesses should ensure the following issues are addressed, where relevant:
- Parties. Consider location of the parties to the contract. Is there any advantage in ensuring the parties are both in the UK or EU?
- Definition of EU and UK. Make sure that territorial references to the EU make it clear whether or not the EU includes the UK and whether the UK includes Northern Ireland.
- Predictable events. Are there any specific events for which the parties feel confident about providing specified consequences? If so, include clauses which define the trigger event and the consequence.
- Supply of goods. Consider pricing formulae to vary prices in the event of changes to tariffs. Consider who is responsible for customs clearance and the potential impact delays in customs clearance might have on delivery times.
- Supply of services. Consider if the supplier will be permitted to continue to supply services after Brexit. Consider if loss of freedom of movement will have an impact on personnel who need to travel to provide services. Consider if loss of recognition of professional qualifications for those personnel will be relevant.
- Exchange rates. Draft payment provisions which make it clear which party will bear the risk of exchange rate fluctuations.
- Data protection. Will personal data be transferred from the EU to the UK? If so, Standard Contractual Clauses or other mechanisms will be needed to ensure those transfers can continue lawfully post-Brexit.
- Termination. For greater flexibility consider including a termination for convenience clause, with a short notice period, or a specific Brexit termination clause.
- Disputes. English law and the English courts will be largely unaffected by Brexit. However, enforcing an English judgment in a member state could be more difficult after Brexit and a conservative approach might involve taking local law advice on the ability to enforce a judgment against the counterparty after Brexit or opting for arbitration.
If you have any additional queries on how your contracts might be affected by Brexit, Philip and Jon can be contacted on 01423 560630.