Any UK companies doing business with the rest of the EU, or even just in the UK but relying on customers and suppliers who deal with the rest of the EU, should be keeping an eye out for the ramifications of Brexit. These include the effect on the rights and obligations the business has assumed in its commercial contracts. Furthermore, not only will Brexit need taking into account when new contracts are entered into, but existing contracts may also need revisiting and amending. Most of them, after all, will have been drafted and negotiated when the prospect of the UK leaving the EU was considered remote.
Most commercial contracts such as licences or distribution agreements which confer rights in a defined territory often, if that territory is “Europe”, define it with reference to the Members States of the EU or the EEA. At some point these will no longer include the UK (assuming, as appears to be likely, the UK leaves the EEA when it leaves the EU):
- For existing contracts granting rights in the EU, the parties need to decide whether the UK will continue to be included as part of the contract territory post-Brexit.
- New contracts would do well to provide for whether the “EU” as defined will include or exclude the UK at the outset and, if it is to be included, whether, when the UK leaves the EU, it should remain part of the contract territory or not.
For the sake of convenience and because it will remain a key territory after Brexit, many contracting parties will probably wish to keep the UK within the contract’s definition of Europe whatever happens to its relationship with the rest of the continent. However, in case other Member States ever leave too, it would be advisable for contracts to provide for what happens to any country which quits the EU and not restrict this contingency plan to the UK.
Brexit will mean the following changes:
- Restrictions on the movement of people, meaning key staff may be more difficult to secure or keep.
- The UK diverging (albeit gradually and incrementally) from the EU in legal and regulatory terms, meaning “one size fits all” products and services may no longer be possible in some cases and the UK may go its own way in areas like VAT, data protection and competition law.
- Possibly higher trade barriers between the UK and the EU.
- The pound’s value increasing and decreasing in turn as this story continues to play out.
- Changes in the competition regime governing exhaustion of tights and parallel importation.
All of the above could have a significant effect on the suitability and attainability of existing contractual provisions relating to matters like development and delivery times, pricing, royalty calculation, minimum purchase targets and product liability. For existing contracts, therefore, the parties need to ask the following questions:
- Do any clauses need renegotiating?
- If the other side will not renegotiate or we cannot agree the changes, should I terminate on notice (if I can)?
- Is there any scope to get out of the contract by relying on force majeure or break clauses?
- How much scope will there be to mitigate (and maybe even reverse) any disruption by shifting focus to operations and markets outside the EU? Does the contract allow this?
All of these issues should also be considered when new contracts are entered into. Since the ultimate outcome of Brexit is uncertain, they should ideally be drafted with maximum flexibility built in so that a range of scenarios can be accommodated.
Currently, if a contract between parties in different countries is silent on what law and jurisdiction will apply, the issue is addressed by European conventions and regulations which may no longer apply to Britain post-Brexit. It will therefore be doubly important to include clauses in the agreement providing for which state’s law and jurisdiction it will be subject to.
Furthermore, once the UK has left the EU:
- It may be harder for a successful UK litigant to enforce a judgment in the EU; and
- If it litigates in the courts of an EU Member State it may find itself getting less favourable treatment than before as an outsider, especially if Brexit negotiations end up being fraught and acrimonious.
Consequently, picking partners carefully, managing contractual relationships and only signing up to attainable obligations will be doubly important.
It will be hard to plan for all of the above eventualities since the ultimate destination of the Brexit train is unclear. On the plus side, the train is moving slowly. The reset relationship between the UK and the EU, and how it affects trade and innovation, will evolve over time. That will give those who are prepared for the new climate the opportunity to adapt and make the most of the coming challenges and opportunities.