With the UK set to leave the EU on 31 January 2020, what can businesses do to ensure that their commercial contracts are "Brexit-proof"? Although the transition period (currently due to expire on 31 December 2020) provides a helpful breathing space, many contracts being entered into now will last beyond that. As a result, businesses may wish to take account of potential changes at the end of the transition.
Brexit-proofing your contracts: a checklist
Overview
Definitions
Consider the impact on definitions, particularly references to the EU or EEA and to EU law.
Possible Brexit impacts
- Territory defined by reference to "EU" or "EEA" will not include the UK.
- References to "EU law" or EU Regulations or Directives may not capture all relevant laws.
WHAT CAN/SHOULD YOU BE DOING NOW?
- If you intend to include the UK within a territory defined in the agreement, you will need to say so (because although during the transition period the UK will continue to be treated as if it were an EU Member State, legally, it will no longer be part of the EU or the EEA).
- Definitions of Applicable Laws should be checked to ensure that, for example, references to EU Regulations have been replaced with the relevant UK legislation (assuming that the EU Regulation in question is expected to be brought onto the UK statute book as part of "Retained EU Law" after the end of the transition). See also "Compliance obligations" below.
Pricing / costs
Consider the impact on clauses setting out fees and charges, price adjustments and VAT.
Possible Brexit impacts
- Imposition of quotas and tariffs on goods.
- Currency value and exchange rate fluctuations.
- Inflationary pressures on raw materials.
- Increased customs formalities/border red tape.
- Changes in tax law, particularly VAT.
WHAT CAN/SHOULD YOU BE DOING NOW?
- Use flexible pricing models where possible.
- For fixed pricing, clearly set out:
- assumptions on which the charges are based; and
- the period for which the charges will apply. - Require the parties to renegotiate if pricing assumptions cease to apply.
- Include mandatory change control mechanisms to allow contract pricing to be varied as a result of changes in law (see further below).
- Set out who is responsible for compliance with and costs of increased customs formalities/border red tape – see this briefing.
Compliance obligations
Consider the impact on compliance with laws obligations and any duty to maintain required consents, licences, and authorisations.
Possible Brexit impacts
- Repeal of laws which implement EU legislation and the introduction of new legislation on the same subject matter.
- EU regulations and Treaty provisions ceasing to have direct effect in the UK and the introduction of new legislation on the same subject matter.
WHAT CAN/SHOULD YOU BE DOING NOW?
- Draft "Applicable Laws" definitions carefully – see "Definitions" above.
- Where referring to competent or regulatory authorities (e.g. governmental bodies, regulators, courts etc), consider if this will capture EU bodies which may cease to be relevant and/or will fail to capture bodies likely to take over responsibility for the same matters post-Brexit.
Change control/variation procedures
Consider the impact on change control*/variation procedures, paying particular attention to changes which are mandatory (such as changes resulting from new legislation) and voluntary/consensual changes.
Possible Brexit impacts
- Current contractual obligations ceasing to be lawful/enforceable.
- Increased costs of compliance with contractual obligations as a result of changes in law following Brexit.
*NOTE: the term "change control" refers to a clause which seeks to regulate how and in what circumstances an agreement may be amended/varied. It will typically set out a contractual procedure for one party to a request a change and for the other party to respond. It should not be confused with a "change of control" clause, which may impose a requirement for consent to a change of ownership of one party (and/or set out other actions that one party may be able to take in response to such a change of ownership).
What can/should you be doing now?
Include change procedures to enable:
- mandatory changes to be made to ensure ongoing compliance with laws; and
- pricing adjustments to allow the costs of implementing and complying with any change to be passed through (in full or pro rata with other customers affected).
Relief events
Consider the impact on clauses dealing with force majeure events and/or frustration, and on Material Adverse Change or "MAC" clauses.
Possible Brexit impacts
As a general rule, it is unlikely that:
- "standard" force majeure definitions will capture Brexit unless this is expressly stated; and
- arguments that a contract has been frustrated as a result of Brexit will succeed.
That said, Brexit could be a trigger for:
- MAC clauses and more broadly worded force majeure clauses; and
- frustration on grounds of illegality (e.g. where performance is based on "passporting" rights which may cease on Brexit).
For more discussion of these issues, see this briefing.
What can/should you be doing now?
- Consider whether Brexit (or any of the circumstances around it) needs to be included in the force majeure definition – or should be expressly excluded.
- If inclusion of Brexit wording in force majeure provisions is too contentious, it may be possible to address your concerns through mandatory change provisions (see above) and/or a MAC clause.
- Consider whether arguments based on frustration could succeed and whether the contract should be amended to forestall such claims.
Termination / suspension events
Consider the impact on termination/suspension events and similar provisions which may be exercised in response to problems with performance, such as step-in rights.
Possible Brexit impacts
- Unpredictable market conditions and volatility.
- Tougher economic outlook.
- Increased risk of insolvency for some businesses.
What can/should you be doing now?
- Draft the insolvency termination triggers carefully to allow you to take pre-emptive action if necessary.
- Seek step-in rights if you have concerns about a counterparty's ability to perform.
- Link termination/suspension rights to performance indicators, e.g. service levels/KPIs.
Data Protection
Consider the impact on obligations requiring compliance with data protection laws and imposing a duty not to transfer personal data outside the EEA.
Possible Brexit impacts
- Transfer of personal data from the EEA to the UK is likely to become more difficult, especially if the UK has not been formally recognised by the European Commission as offering "adequate protection" of such data.
- Over time, the UK's data protection regime may diverge from that of the EU.
What can/should you be doing now?
- Further steps may be needed to allow handling of personal data from the EEA to continue after Brexit e.g. putting in place contracts containing EU-approved model clauses. See further this briefing.
- Data protection clauses will need to be kept under review and amended in light of the UK's approach to the GDPR. See further this briefing.
- Change control provisions (see under "Change control/variation procedures" above) are likely to be important in dealing with changes in data protection law.
Governing law and dispute resolution
Consider the impact on governing law clauses and dispute resolution mechanisms such as clauses conferring exclusive jurisdiction on the English courts.
Possible Brexit impacts
English law will remain attractive to govern international commercial transactions and English courts will remain an attractive forum for resolving international disputes. However:
- English court judgments may become less readily enforceable in EU member states than is currently the case (although this will depend on the precise terms of any Brexit deal on the UK's future relationship with the EU).
- It may become more difficult to serve English legal proceedings on EU counterparties.
What can/should you be doing now?
- If the risk of English court judgments becoming less readily enforceable in EU member states is a material concern, consider the viability of options such as giving non-exclusive jurisdiction to the English courts or using arbitration.
- Include agent for service provisions in transactions with EU counterparties.
