Brexit - How to approach certain aspects of your commercial contracts

Rather like the protagonists on both sides of the Referendum debate, we can only speculate on the legal impact the Brexit decision will have for businesses.  Despite the inevitable flood of commentary on this critical topic – some of which offers seemingly authoritative advice – nothing is certain at this early stage.  That is likely to remain the case for quite some time.  Equally, while all businesses would be well advised to start reviewing existing contracts and proposed contractual arrangements now, the legal impact of Brexit, i.e. when EU laws will cease to have binding effect on the UK in accordance with our current treaty obligations, is at least two years away.  

This uncertainty extends even to any analysis of the amount of UK legislation which comes from Europe.  During the debate we saw figures bandied about by campaigners which were as low as 7% (Nick Clegg) to as high as 75% (Nigel Farage).  Even the most impartial assessment from the House of Commons Library concluded it was impossible to identify an accurate figure and in early June they concluded “…it is possible to justify any measure between 15% and 55% or thereabouts”.  With no political axe to grind, we think it is reasonable to conclude that at least one third of the UK’s legislation derives from Brussels; by any measure a considerable body of law.

With that in mind, we recommend a number of areas for businesses and their in-house legal teams to consider when they are reviewing existing long-term (i.e. with more than two years to run) contracts and new contractual arrangements which will be concluded over the next year or two.  This article should be read in conjunction with our other article on identifying contracts at risk.

EU dependencies

If performance under the contract is dependent on access to the Single European Market, e.g. free movement of goods and services, you will need to consider whether this might be impacted by the UK’s departure from the EU.  Of course, that will depend on the terms ultimately negotiated, but if this is an important element for any party to the contact then you may need to explore including a right to terminate or to renegotiate terms such as pricing or delivery.  We can see that international supply chain contracts may be particularly exposed to this type of risk as well as contracts which have historically relied on the free movement of labour within the EU.  We’ve explored this further in another article on Brexit risk management.

Force Majeure

Many commercial contracts include a force majeure clause, often something which has been carefully negotiated.  This addresses events or circumstances beyond the reasonable control of the parties.  A complex force majeure provision may deal with specific circumstances which the parties agree at the outset should entitle them to be excused from performance, albeit this is usually limited in time before a termination right arises.

Do your existing force majeure clauses deal with the potential consequences of Brexit?  Would the imposition of trade tariffs, the blocking or restricted movement of goods and services amount to force majeure?  If so, the contract is likely to spell out what happens in that event.  If not, consider whether these situations ought to be addressed now so that all parties are clear on their remedies if they happen.  For new contracts which may span a Brexit, we would certainly advise that the business identifies what it believes are the major risk factors once the UK ceases to be part of the EU and then addresses them specifically in the contract.  That may be by incorporating them in the force majeure provisions or by other methods such as re-pricing or termination rights. 

Contracts with non-EU domiciled businesses

Not such an obvious area to consider perhaps, but any departure of the UK from the EU is certainly going to lead to new relationships with non-EU states.  Currently the UK benefits from EU-negotiated trade agreements with many of these nations, but in the post-Brexit world the UK will need different trading arrangements.  While much of the current commercial focus has been on the UK’s relationship with the EU, if your business trades with other countries with existing EU trade agreements (the list is long, but it includes, for example, Mexico and Israel) then that trade will be subject to whatever arrangements the UK puts in place.  These could be via the “umbrella” of a body such as the WTO or via individually negotiated treaties.  The risk assessment process you go through for EU-related contracts should also be carried out for other international contracts using this perspective. 

Data Protection

Real uncertainties exist around this critical business area following the Brexit vote.  In brief, as an EU Member State, the UK has benefitted from comparatively free flows of data to and from other Member States and countries which have been approved by the EU as having adequate data protection safeguards in place (so-called “White List” countries).  As the EU data protection regime is currently undergoing major reform, the UK’s departure from the EU is likely to coincide with the introduction of a comprehensive new law, the General Data Protection Regulation (GDPR).  Unless the UK can achieve an adequacy decision from the EU – which would probably require UK laws to be consistent with those of the GDPR – then it is difficult to see how British businesses could continue to transfer personal data with other EU Member States without entering into alternative and less flexible solutions such as putting in place EU model contracts.  This will undoubtedly make UK businesses a less attractive counterparty in this sector.  On the plus side, we would be free to negotiate separate deals with countries like the USA where the EU has ceased to recognise the Safe Harbor program which previously applied to data flows between the Member States and the USA.

The UK Information Commissioner has urged businesses to continue to make arrangements to comply with the GDPR and is intending to issue further advice as the situation develops.  This has to be the most commercially sensible approach and we endorse it.

Watch this space!

Once negotiations start with the EU we will maintain an overview of developments as they are likely to affect our clients and will update this brief on a regular basis.  As we said at the start of this article; nothing is certain at the moment.  Nimbleness and flexibility are likely to be required in equal measure in order to mitigate as far as possible the profound consequences of Brexit.

Posted on 07/05/2016 by Ortolan

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