Introduction
With weeks to go until the end of the Brexit transition period, we still don’t know what’s going to happen. What we do know however is that the end of the transition period on 31 December 2020 will have an impact on business to business contracts between UK businesses and for other contracts with businesses in the EU where the governing law of the contract is the laws of England and Wales.
This is the first in a series of articles around the likely impact of Brexit and what businesses should typically be thinking about.
Key areas to monitor
Some key contract risk points for businesses is to think about the key factors specific to them are:
- The business, economic and regulatory environment
- Location
- Pricing
- Change Control; and
- Enforcement and jurisdiction
Let’s unpack these:
- The business, economic and regulatory environment
As of 1 January 2021, EU legislation will cease to apply directly in the United Kingdom. Any clauses in material contracts that oblige the parties to have to comply with “all applicable law” will cease to cover EU legislation.
A good example would be references to the GDPR (the EU legislative part), which should instead reference the Data Protection Act 2018 (the parallel UK legislation).
The good news is that to start with, the issue here should not be too bad as much of EU legislation has been localised under UK law.
This risk though will become more material as time passes and we potentially start to see a gradual divergence between UK law and EU law. At that point, the key takeaway must be to consider more carefully the choice of law and jurisdiction and what specific legislation should be expressly referenced.
- Location
Any contracts appointing an agent, distributor or other channel partner will need to consider whether or not any reference to an EU-wide appointment is intended to cover the UK and provide for this in the contract. Any reference to ‘Territory’ in a contract will have be looked at carefully as well as any licence requirements to trade with the EU, which I have dealt with in an earlier update.
- Pricing
It may be that this is still resolved as I type this but it still seems unlikely that there will be an across the board free trade between the UK and the EU.
Clearly then, businesses should be preparing for the cost of doing business in the EU to likely increase.
Any definition of price or pricing needs to be clear and expressed as exclusive of any new taxes, tariffs, duties or similar levies that may come into force at the end of the transition period.
The other key change could be looking at provisions to deal with price fluctuations, including a right for a party to walk away from the contract if the fluctuation is beyond a certain range.
- Change Control
It seems that there may be a deal struck very late in the day, but if not, in a no-deal Brexit, the UK may, in such circumstance, choose to go down different roads in terms of regulatory/compliance matters such as data protection and competition.
It would be sensible to agree now as to who will bear the costs of compliance in order to avoid unforeseen termination or entering/remaining in an agreement that is not commercially viable.
Contracts should have variation procedures to help incorporate the introduction of any new legislation in the UK.
- Enforcement and jurisdiction
The jury still seems to be out on which regime will govern jurisdiction and the enforcements of UK judgments in the EU is currently uncertain.
There seem to be 2 possible routes on this. The UK is seeking to be part of the Lugano Convention which mirrors the current arrangements and has requested to join. However if this is not finalised before the end of the transition period, the default position, therefore, is that the jurisdiction and enforcement of judgments issued in England and Wales will be determined by the Hague Convention, which gives effect to exclusive jurisdiction clauses and recognise the enforceability of judgments in their respective territories. The takeaway here is to recognise that the local process of enforcement when relying on the Hague Convention can (depending on the jurisdiction), involve significant procedural steps and costs.
However, the Hague Convention only applies to exclusive choice of court agreements, so we would advise taking legal advice before entering into agreements with non-exclusive jurisdiction clauses or which otherwise contemplate enforcing UK law in EU territories.
For the time being and until such time as the enforcement of UK judgments in the EU has been finally resolved, parties are generally advised to include arbitration clauses in their contracts and consider carefully what convention to rely on to enforce the outcome of that arbitration.
Conclusion
It is difficult as things stand to be sure of anything – it seems likely though that Brexit’s impact on the performance and profitability of individual contracts could be significant.
There is no one-size-fits-all approach to the analysis you need to do, but thinking about the commercial aspects above can help you decide what legal changes (if any) are necessary now and in the months to come.
Businesses should take a look at their material contracts and make sure they are clear on:
- what would be the impact of Brexit on the ability to perform the contract in full and on time?
- whether there is likely to be a temporary or permanent inability to perform the contract (for example, pending newly-required permits, the imposition of a temporary embargo or it otherwise becomes permanently unlawful to perform the contract)?
- whether any anticipated disruption or delay would lead to liquidated damages or credits?
- what is the likely effect on either or both of any service level agreements and/or key performance indictors?
- are there likely to be any increases in the costs of performance?
- who should bear additional responsibilities and costs?
- who should be responsible for compliance with, and costs of, changes in law?
Please drop us an e mail or call if you need any further details or assistance with any contract review and stay safe and well.
Roger
