Until the exit process is complete legally nothing much will change following the UK’s vote to leave the EU. EU laws continue to apply in the UK and the UK continues to participate in EU affairs.
The consequences of Brexit will ultimately depend on the exit terms agreed, the negotiation of which is likely to take years to complete. Until the exit terms are clear, businesses must cope with the immediate effects of market volatility and uncertainty. This article considers commercial steps that UK businesses can take now, post referendum, to prepare for the uncertain times ahead and to be ready for Brexit when it happens.
What is the commercial impact of the referendum vote and a future Brexit for your business? What steps should businesses take?
Identify contracts with businesses in:
- EU member states
- countries with a free trade agreement with the EU
- international agreements in general.
Consider if the following factors are likely to adversely affect the value of those contracts and, if so, whether there is any scope for renegotiation or termination.
For new contracts consider how currency risks should be allocated. For example, price adjustment provisions or termination rights that are triggered if the sterling exchange rate falls below a specified level.
This is particularly relevant for service providers with large numbers of employees who are either non-UK EU nationals working in the UK or UK nationals working in other EU member states. If the outcome of the exit negotiations on immigration is likely to affect the value of your contracts, consider including termination provisions that are triggered by specified Brexit-related events.
Tariffs and taxes
Cross-border contracts may become more costly to perform due to the introduction of import tariffs between the EU and non-EU states. Consider your exposure to such costs in existing contracts and how this risk should be allocated in future contracts.
Contractual rights that might be triggered by the referendum vote or a future Brexit
Review existing contracts for rights that might be triggered by a Brexit or fall-out from the referendum vote. In particular, the following might be relevant.
Force majeure clause
Whether or not Brexit will trigger contractual force majeure rights will depend on the terms of the clause and the specific facts. It is possible that a Brexit could be caught if a change in law or government action is included as a force majeure event. For future contracts, suppliers and service providers may wish to consider referring specifically to Brexit as a force majeure event. Customers may want to exclude Brexit as a force majeure event.
Material adverse change (MAC), hardship and price adjustment provisions
Clauses that deal with changes in circumstance, such as material adverse change (MAC) clauses, hardship clauses and price review provisions, could be triggered if the consequences of Brexit are a significant increase in trade costs. For example, a MAC clause that includes a change in law or government action as a MAC event might give the seller the option to renegotiate the price where significant fluctuations in the value of sterling affect the contract value.
Review payment terms for price adjustment mechanisms that could be triggered by the consequences of Brexit. For example, supply chain contracts that include price adjustment mechanisms triggered by rises in raw material costs.
If the contract does not contain a force majeure or similar clause allocating risk, a party might be able to argue that the contract has been frustrated. Such an argument is only likely to succeed in very limited circumstances but, if successful, would result in the contract being terminated. The English courts apply the doctrine of frustration narrowly. The fact that recession or a drop in the market might make the contract unprofitable will not be enough on its own to establish frustration. Situations where a major piece of EU law is crucial to the performance of contract may have more chance of success, although this will depend on interpretation of the contract in question.
Are your existing and new contracts Brexit ready?
Consider amendments needed to existing contracts and provisions that should be included in future contracts in light of the referendum vote and a forthcoming Brexit.
Ensure that new contracts clearly address territorial scope. If territory is defined in existing agreements by reference to the EU or EEA, then this needs review (for example, in agency, distribution and franchise agreements, intellectual property licences and non-compete clauses). To avoid the UK being carved out post Brexit, define territorial scope by reference to membership of the EU at the date the agreement was signed or by express reference to the UK.
References to EU legislation
Contracts that refer to EU legislation may also require amendment particularly contracts originally drafted on the basis that EU legislation applied (for example, licences of IP rights and distribution agreements drafted on the basis of compliance with existing block exemption regulations). These will need review once the terms of the UK’s exist from the EU are clearer. For further information on the implications of Brexit for competition law see here.
Consider how costs associated with Brexit should be allocated between the parties. For example, if import tariffs are imposed or customs checks make trade more costly. If raw material costs are an issue, ensure that changes to such costs are dealt with by the pricing mechanism in the contract.
If Brexit is likely to adversely affect the solvency of the business’s counterparties consider whether intercompany guarantees should be sought or payment terms restructured to require advance payments. Check that sale of goods contracts include robust retention of title clauses and ensure that new contracts give the business the right to terminate for insolvency events. Carry out careful solvency due diligence on future counterparties.
Assignment and novation
If there is a chance that the business might relocate or restructure as a result of Brexit, flexibility should be sought in new contracts. Existing contracts may need amendment to allow for future intra-group assignment, sub-contracting and novation.
A clearly drafted clause that specifies English law and the jurisdiction of the English courts is likely to be upheld by the English courts after Brexit. It is less clear how an English judgment will be enforced in an EU that does not include the UK. If this is a concern, consider including an exclusive English jurisdiction clause. This will mean that, assuming the UK accedes to the Hague Convention post Brexit, you will be able to take advantage of the mechanism in the Convention that requires effect to be given both to exclusive jurisdiction clauses and to the judgments of the courts chosen in such clauses.
Since English arbitral awards are enforceable cross-border by virtue of the New York Convention, including arbitration provisions might be worth considering. It seems likely that the service of English proceedings and the enforcement of judgments in the remaining member states of the EU will become more complex post Brexit. If possible, consider accelerating any pending litigation so as to obtain judgment and enforcement in the EU prior to Brexit.
Term and termination
Consider including specific rights to terminate which are triggered either by the exit of the UK from the EU or by events arising as a result of a Brexit. For example, a right to terminate if import tariffs are imposed or changes are made to immigration rules. Given the uncertainty surrounding the outcome of Brexit, consider if it would make sense to agree shorter term contracts to avoid being tied in at a time when the full impact of a Brexit is not known.
Data Protection implications of Brexit
The General Data Protection Regulation (GDPR), once implemented in the EU in May 2018, will continue to be relevant for many UK organisations, most obviously those operating internationally. Transfers of personal data from the EU to the UK after Brexit will only be permitted without further justification if the UK can demonstrate to the EU that it offers adequate protection. This requires the UK to have in place a data protection regime that is very similar to the EU regime.
Without such an adequacy, finding any transfers of personal data from the EU to the UK would require additional legal justification, such as EU model contracts or binding corporate rules. It therefore seems likely that GDPR principles will form part of the UK’s data protection regime post Brexit.
UK businesses should continue to work towards GDPR compliance and keep up to date with guidance and statements from the ICO on the GDPR.
Pennington Manches’ four steps to Brexit readiness
Determine the likely commercial impact of Brexit on your business:
- Is there a threat that counterparties might seek to renegotiate or terminate profitable contracts?
- Is there an opportunity for the business to renegotiate or terminate unprofitable contracts?
Review existing contracts for provisions that might be triggered by a Brexit
- Force majeure clauses
- Price adjustment provisions/ MAC/ hardship clauses
“Brexit–proof” existing and new contracts
- Territorial scope
- References to EU legislation
- Intellectual property provisions
- Payment provisions
- Insolvency provisions
- Assignment and novation
- Dispute resolution
- Term and termination
Data protection implications
- Continue working towards GDPR compliance
- Keep up to date with announcements from the ICO on the GDPR