It remains difficult to predict exactly how the UK's exit from the EU will be effected. The UK's vote to leave the European Union was the first step in a process that is likely to be unparalleled in scale and complexity. What remains clear is that Brexit will have an impact on the rights and obligations of commercial parties in all sectors. Given that the prime minister has made it very clear that Brexit means Brexit, it seems likely that this remains a question not of "if" but "when."
Now that the UK has given formal notice of its intention to leave the EU, a two year exit negotiation will begin, the outcome of which is unpredictable. The only certainty for the foreseeable future is uncertainty.
In the rest of this article, we review the priority areas on which UK businesses are currently focussed.
Many businesses have set up a Brexit committee to co-ordinate all communications and prepare an overview of the potential impact and their business response. Some businesses also need to consider their public reporting obligations, and what, if anything, they need to say in public statements or in their annual report.
A top level review to assess which EU regulations currently affect the business is essential for all businesses operating in the UK; this is proving to be an enormous exercise. The UK's regulatory framework has become significantly entwined with that of the EU and the unwinding process will be enormously complex. For the time being, it is `business as usual' at present the UK remains a member of the EU and must continue to abide by European laws and regulations.
Going forward, we may see parties who want to escape their contractual obligations, for whatever reason, employing Brexitrelated legal arguments founded in "force majeure" or "frustration". These are not easy arguments to win, but we are advising businesses to review such clauses carefully. Cautious parties should consider express carve-outs for any Brexit related circumstances.
Defined terms should also be checked, such as references to the "EU" and EU regulatory bodies. These may not work as intended post-Brexit.
Other points to consider include:
- future corporate reorganisation by parties to a contract; exchange rate fluctuations and pricing;
- allocating compliance costs between parties; appropriate means of dispute resolution;
- potential breaches of financial covenants, financial ratios or material adverse change clauses; and
- impact on ability to borrow and sources of EU funding;
SUPPLY CHAIN MANAGEMENT
It is key to analyse the extent to which a business involves supplies of goods or services between the UK and (a) other EU Member States and (b) other countries with which the EU has concluded or is currently negotiating trade agreements. The impact of the imposition of tariffs and the increased administrative burden needs to be considered, though realistically it is difficult to assess at this stage.
Some businesses are considering relocation in order to maintain free access to the EU market. Relocation carries with it a number of challenges, including:
- relative merits of alternative locations;
- new authorisations;
- implications for headcount;
- lead times for obtaining floor space and relocating or hiring
- necessary staff; delegation back to the UK; and personnel issues and relationship management.
Free movement is one of the core elements of EU membership. If this is curtailed, some businesses may be affected significantly. Visa requirements, for example, could make it difficult to recruit UK-based employees from the remaining EU Member States. Individuals may also prefer to be located in the EU where their movement would remain unrestricted. UK employees currently working in the EU might also need assistance with visas in due course. Businesses should consider what messaging to give to employees about the potential impact, although this is difficult to assess in a relative vacuum.
The decision to leave the EU raises significant challenges and potential opportunities. While there is much uncertainty regarding the shape of the UK's future relationship with the EU post-Brexit, it is clear that Brexit will affect the rights and obligations of all parties to commercial activity in the UK, the wider EU and beyond. Therefore, consideration should be given now to the strategic action that businesses may wish to take in a number of areas, including contractual relationships, financing and supply chain management, to manage the risks and maximise the opportunities presented by Brexit. Proactive businesses will be best placed to meet the challenges of the coming years.