The referendum on whether to leave the EU is fast approaching but uncertainty reigns as to the actual impact on business, should the UK vote to leave.
Businesses should take steps now to look at the potential impact of Brexit on their business and usual trading relationships. They should consider the steps that could be taken in anticipation of a vote to leave the EU and the further steps that could be taken at an early stage following such a vote.
We have previously reported on the potential impact of the referendum.
What are the risks?
The risks are many and varied, although the UK government's action during the two year exit process may mitigate many of these risks. The following risks should be borne in mind:
- Territorial scope
Contracts which have an EU territorial scope will no longer include the UK unless the contractual provision refers to the membership of the EU as at contract signature, rather than a more fluid mechanism which accommodates changes in EU membership during the contract term.
- Importing costs
Regardless as to whether the UK remains within the scope of the contract, the impact of the imposition of import tariffs between the EU and non-EU states and changes in VAT and other tax structures may also make the contractual pricing mechanism loss-making or too costly for the party which has to bear the additional import/export costs. Consideration also has to be given to the additional administrative burden (and associated cost) of import and export licensing and controls. The UK government may wish to put in place a preferential trade agreement or free trade agreement (similar to the Swiss model) with the EU in an attempt to mitigate the impact, but clearly a degree of exposure will remain.
Even if a particular trading arrangement is between two non-EU entities, the supply chain of the supplier may be impacted by the UK's exit from the EU, triggering additional costs which may be passed up the supply chain to the supplier and, if the supplier is able to do so contractually, through to its customer.
- Personal data transfers
Personal data transfers to the UK will no longer automatically be permissible - instead the UK legislative framework will need to be considered by the EU as to whether it offers sufficient safeguards. This may have the greatest impact to technology providers with UK-based data centres who offer services to EU clients.
- Free movement of workers
Unless negotiated otherwise, the EU principle of the free movement of workers would no longer apply, impacting the management of a cross-border skilled and experienced workforce.
- EU regulations
EU regulations which have direct effect within the UK (and so have not required national enabling legislation) will no longer apply unless the UK introduces similar national legislation. The UK government may also choose to modify or repeal national legislation such as TUPE, the Commercial Agents Regulations and consumer rights legislation which were enacted pursuant to EU Directives, impacting outsourcing, commercial contracting and consumer pricing models. These legislative changes will have a bearing on the commercial bargain underlying the contractual relationship.
- Regulated industries
Within regulated industries such as financial services and pharmaceuticals, the change in regulatory environment will cause a shift in domestic regulatory approach (e.g. 'EU home passport control' within the banking sector permitting banks regulated in their home jurisdiction to operate in other EU member states free from additional regulation in those member states).
If the UK decides to leave the EU there is a potential fundamental impact on business' trading relationships and, in particular, a cost impact that, regardless as to how it is allocated between the two contracting parties, will strain the underlying commercial bargain.
That strain is likely to cause either or both parties to wish to renegotiate the pricing mechanism and may be an opportunity for a contracting party to open up a renegotiation of broader commercial terms, potentially burying businesses under a mountain of contractual renegotiation and administration.