Brexit - Thinking Ahead About Commercial Contracts
It is finally upon us – the UK left the EU on Friday 31/01/2020 , at 11pm in the evening.
However, for all intents and purposes, little will change for most organisations for the next 11 months. This is because the EU/UK Withdrawal Agreement provides for a transition period which will last until at least 31st December 2020. During this time:
- The UK will be treated, for most purposes, as a Member State of the EU;
- EU law will continue to apply in and to the UK; and
- The UK will remain part of the Single Market and Customs Union.
The transition period will, therefore, act as a cushion, giving organisations time to get themselves ready for the full effects of Brexit. It will also give the UK and EU an opportunity to try and agree a trade deal.
However, for many organisations, the question ‘What should we do to prepare?’ is a difficult one, because there are so many unknowns: Will the UK and EU be able to agree a trade deal? If they do, what form will that deal take? Just how far does the UK Government plan to deviate from EU law once the transition period has come to an end?
That said, when it comes to commercial contracts (both existing and those in the pipeline), there’s no doubt that preparation is important.
In relation to existing contracts, it will come as no surprise that the starting point should be to carry out an audit to determine which of an organisation’s key contracts are likely to be most affected by Brexit. Once this has been done, organisations should move on to consider what action they might be able to take to limit the risks. In some cases, re-negotiation of contracts may be possible. However, even if it isn’t, it is better to be forewarned of potential areas of difficulty.
In relation to contracts that have yet to be entered into, it will be important to think carefully about what impact Brexit might have on the rights and obligations your organisation is committing to. Once you’ve done this, you’ll be better able to negotiate provisions which will provide you with a suitable degree of protection and/or room for manoeuvre.
Our Top Tips
Although the terms of each commercial contract will differ considerably depending on the nature of the transaction, certain issues are likely to be relevant whatever the context. Below, we set out our top tips for organisations seeking to trouble-shoot in relation to existing contracts and/or Brexit-proof new contracts:
- Price: It is common knowledge that, post Brexit, there are likely to be more trade barriers and that this will mean an increase in costs for many organisations. In addition, further currency fluctuations are likely. Existing contracts should be reviewed with these issues in mind. For example, which party will bear the burden of any increases in costs, are there are rights to vary the price and what termination rights exist? Similarly, when negotiating new contracts, organisations need to think about who should bear the cost of new taxes or duties, whether rights to vary the price should be included and what rights there should be to terminate the contract.
- Delivery times: Organisations have already been warned to prepare for possible delays in the delivery of supplies. Existing contracts should, therefore, be reviewed to check whether either party is tied to fixed delivery times or whether any clauses state that ‘time for delivery is of the essence’ (the latter will give the benefitting party an immediate right to terminate the contract if delivery is late). When negotiating new contracts, think about what rights you may need if incoming supplies are delayed. Conversely, if your organisation is the supplier, try to negotiate some leeway when it comes to delivery times and to limit your customer’s rights if delivery is late.
- Territorial scope: Some commercial agreements (typically distribution agreements, agency agreements and intellectual property licences) will include a definition of ‘Territory’. Existing agreements need to be reviewed to check whether ‘Territory’ is defined as the ‘European Union’. If it is, the agreement may need to be amended to make it clear whether, post Brexit, this will or will not include the UK. This point also needs to be borne in mind when negotiating new agreements.
- Governing law and jurisdiction: There has been a lot of confusing legal debate about how Brexit will affect governing law and jurisdiction clauses in international agreements. However, in the majority of cases, the risks for UK organisations can be minimised by agreeing that the contract will be governed by the laws of England and Wales and subject to the exclusive jurisdiction of the courts of England and Wales. Also, it’s worth noting that arbitration regimes will be unaffected by Brexit. Consequently, arbitration will still be a workable alternative to dispute resolution through the courts.
- Changes in law: Immediately after the transition period, UK and EU law will largely mirror one another. However, in the longer term, the UK government will inevitably start introducing changes to the UK legal landscape and even repealing some EU derived legislation. Consequently, when negotiating new contracts, it will be important to include clauses that deal with possible changes to applicable law. These might take the form of provisions which allow you to renegotiate the contract (e.g. to increase the price or make changes to standards or timings) or even rights to terminate the contract if it becomes untenable to perform. In relation to existing contracts, you may have limited scope to renegotiate. However, it is well worth considering whether changes in the legal landscape are likely and if they are, what the impact on your organisation will be.
- Dual regulatory regimes: Similarly, some contracts are likely to be affected by dual regulatory regimes once the transition period comes to an end (e.g. differing product standards). It will be important to factor this into new contracts (i.e. who will be responsible for compliance and any resulting increases in cost). In relation to existing contracts, check whether the terms deal with any such changes and if possible, open up discussions with the other side about how the introduction of differing regimes should be dealt with (which could lead to agreement to amend the contract).
- Personal Data: Many contracts involve the transfer of personal data between the UK and other Member States and vice versa. Such transfers can take a variety of forms, including simply storing personal data outside the UK. As between Member States, EU data protection legislation ensures that such transfers can freely take place. Once the transition period comes to an end, however, the UK will fall outside this regime. The UK government has already taken steps to ensure that UK to EU transfers can continue. However, EU to UK transfers may be restricted unless additional, prescribed safeguards are put in place.Unfortunately, it is very much a case of ‘watch this space’, as it is hoped that, before the transition period ends, a new arrangement will be put in place between the UK and the remaining Member States to facilitate ongoing data transfers (known as an ‘Adequacy Decision’). However, there is no guarantee that this will be the case.
New contracts therefore need to include contingency clauses that deal with the worst-case scenario. In relation to existing contracts, dialogue with EU partners should take place sooner rather than later to agree how the parties will ensure that data transfers can continue if an Adequacy Decision is not in place in time. Ideally, this should be reflected in amendments to the relevant contract.
- Term and termination rights: We have mentioned the importance of termination rights a few times already. When negotiating new contracts, it is vital that the termination rights provide your organisation with the protection it needs (whether that’s giving you the flexibility to terminate a contract if it becomes too costly or difficult to perform or ensuring that the other side’s rights to terminate a contract are suitably restricted). In addition, it will be important to think about the term of the contract carefully – there are many different options, ranging from a fixed term contract (with or without options to extend) to an indefinite term which continues until brought to an end by the giving of notice.
So, our advice is start planning ahead now.