Whether the UK crashes out of the EU without a deal or is able to reach a withdrawal agreement for Brexit to take affect over a defined transition period, Brexit may have a significant impact on your business’s contractual rights and obligations. The precise nature of this impact will depend upon the express terms set out in your commercial contracts.
As you would expect, the most significant impact will be to cross-border contracts. However, Brexit may also affect your rights and obligations under domestic contracts where you or your contracting parties or customers rely on free movement of goods and services across the EU in your supply chains.
The following practical steps may assist in understanding what impact Brexit will have on your commercial contracts, how to mitigate the associated risks and what steps can be taken to thrive in the post-Brexit landscape.
Existing commercial contracts
Consider these practical steps:
- Commercial contract audit. Conduct an internal audit of your existing commercial contracts; consider which contracts are the most important to your business and which contracts are the most susceptible to post-Brexit changes (for example, contracts entered into with entities in other EU member states or reliant on frictionless trade within the supply chain).
- Review the terms. Once the relevant key contracts are identified, conduct a review of their terms with a particular focus on:
- prescribed action – does the contract expressly refer to Brexit? If so, what post-Brexit actions should be taken to comply with the contract terms?
- currency – in what currency are payments to be made and are prices fixed in one currency? Which party bears the risk of Forex fluctuations?
- ‘material adverse change’ and force majeure clauses – these release a defaulting party from liability for any delays or defaults caused by the relevant event. These are unlikely to be triggered by Brexit unless they specifically refer to the UK’s departure from the EU;
- price adjustment – does the contract provide a mechanism for you or the other party to implement a price adjustment? Brexit will likely result in both parties having to contend with new cost and compliance burdens (for example, Forex fluctuations and import tariffs imposed on the movement of goods from the EU). Robust price adjustment provisions may allow you to pass some of your increased costs onto your counterparty. However, depending on how they are drafted, the price adjustment provisions may allow your counterparty to freely increase the price payable by you;
- territory – is the territorial scope of the contract defined by reference to the “EU”? If so, consideration will be required as to whether this would continue to include the UK post-Brexit;
- export/import licences – which party is responsible? Can the costs be shared between the parties?
- legislation – what legislation governs the contract, its inception and enforcement, and will that legislation continue to be applicable following the UK’s departure from the EU?
- Data privacy. Consider what (if any) data flows are taking place under your contracts. Brexit, particularly no-deal Brexit, will have a significant impact on the currently unrestricted flow of personal data from the UK to the EU and vice versa. We have prepared a separate article and guidance note on the impact that no-deal Brexit will have on data protection compliance, which we suggest you consider alongside your contract review. Changes to the current data privacy regime caused by Brexit will impact the technology and IT sector in particular; businesses operating in the tech/IT space should now be implementing strategies to ensure that data flows into and out of their business will be unrestricted by Brexit.
- Analyse the risks and opportunities. Having reviewed the relevant terms in your key contracts, analyse whether Brexit will pose a risk to your contractual position or an opportunity (e.g. to use Brexit as a trigger to terminate a loss-leading contract).
- Engage with the other party. Likewise, if you have concerns that a key contracting party may be adversely effected by Brexit then it is advisable that you discuss the steps they are taking to ensure performance of the contract remains unaffected.
Future commercial contracts
If you are in the process of negotiating new commercial contracts then you should consider whether any contractual terms should be included to ‘Brexit-proof’ your future relationship. In short, you should ensure that any areas of uncertainty highlighted above are carefully considered. Our clients are taking different approaches to the outcome of this exercise – some leaving such matters to be defined at the time, and others looking for specific let-outs and options to re-price or terminate without fault. Negotiation of such matters requires subtlety and care, as one person’s solution can be another person’s risk and balancing such considerations is a fine art.
We are still waiting to see what form Brexit will take (if any) and how the UK economy will react. However, in the meantime businesses are taking steps to consider and at times strengthen their contractual positions, are mitigating their risks and planning to grasp the opportunities that may arise.
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