This article first appeared on The Scotsman Business Channel on 13 June 2016.
On 23 June the UK will decide whether to remain in the EU and, regardless of the state of the polls, businesses should be taking steps to look at the possible impact of Brexit on their commercial contracts.
Contracts which have an EU territorial scope would potentially no longer include a post-Brexit UK, unless the contract is structured to accommodate changes in EU membership during its term. This issue could arise, for example, in agency agreements whereby an agent is entitled to represent a principal in a specified territory, in this case the EU.
In the absence of an agreement to the contrary, the transfer of personal data to the UK would no longer automatically be permissible under EU law. Instead, the European Commission would consider whether the UK’s domestic data protection framework offered sufficient safeguards for personal data. This might have the greatest impact on technology providers with UK-based data centres who offer services to EU clients. If the UK were simply to adopt (or mimic) the forthcoming General Data Protection Regulation, then EU approval should not be too difficult to achieve; but the more the UK deviated from the standard EU rules (e.g. in order to avoid the more burdensome regulatory requirements the GDPR would place on UK business and public authorities) the more detailed the Commission’s scrutiny would be.
Depending on how a contract has been drafted, any tariffs that might be imposed on UK-EU trade, as well as possible changes in UK VAT and other tax structures, could have an impact on current contractual pricing mechanisms. There could also be an increased administrative burden (and associated cost) if import / export licensing and other controls were imposed. However, much of these impacts could be mitigated or removed if the UK was able to negotiate a preferential trade agreement with the EU, perhaps similar to the Swiss model.
A less obvious potential impact would be on supply chains. Even if a particular contract was between a UK entity and a business in another non-EU country, the UK’s exit might have an effect on cost if the supply chain passed through the EU, as any additional costs of UK-EU trade could then be passed on through the supply chain.
Subject to any constraints, a post-Brexit UK Government would have greater flexibility to modify or repeal national legislation which was implemented in the UK in order to comply with EU Directives, such as TUPE, the Commercial Agents Regulations and certain consumer rights legislation However, change in those areas would not be inevitable. Indeed, there are areas (for example, many employment law issues) where the UK has gone further than the minimum requirements of EU law, and so there would be no reason to expect dramatic change in the event of an exit from the EU. There could, nevertheless, be a gradual repeal of EU-derived legislation that is perceived to place onerous compliance burdens on business.
But could Brexit ultimately lead to contract termination? Unless a contract expressly contains a termination right in the event of the UK leaving the EU (or voting to do so), it is doubtful that a party could terminate solely on that ground. However, the answer in each case would lie in the particular terms and specific facts of each contract (including any material adverse change or force majeure clauses).
There is no doubt that the prospect of Brexit raises certain issues which businesses need to consider closely. If there is a ‘leave’ vote on the 23rd, most businesses will have to start planning for how Brexit could impact (to a greater or lesser extent) their financial and compliance obligations, and also consider whether there is a need to renegotiate existing contracts. Nobody can say with absolute certainty what impact Brexit might have; but if a party would want to terminate a contract in the event of Brexit, or fears that another party may want to do so, it should take advice now on inserting express provisions into agreements to deal with that scenario.