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Brexit – Are you contract ready?9th November 2020 Corporate
With many eyes on the Covid pandemic, continuing uncertainty over the UK’s position following the end of the Brexit transition period has become more prevalent recently with reports of continuing struggles in negotiations between the UK and EU.
Whilst a deal may be done, given this uncertainty, businesses should now be considering the impact that Brexit may have on any contracts they are a party to and ensure they are as well prepared as they can be in order to allow them to plan their resources appropriately.
Obviously Brexit will impact on those businesses with counterparties in the EU, but will also impact any business whose supply chain involved the EU.
We’ve set out below are some of the key points that businesses should be looking out for in their current contracts and supply chains as well as points to consider when renegotiating any contracts prior to the end of the transition period on 31 December 2020.
1) Performance of contracts
- Exchange Rates
One of the obvious things for businesses to note is the potential fluctuation in exchange rates. Businesses need to consider their agreements carefully to see which contracts expose them to this currency fluctuation and whether the agreements give them any protections in relation to significant currency fluctuations. As we have seen over the last few years, Brexit-related events have had a negative impact on the value of the pound and the current uncertainty is unlikely to help this in any way.
Whilst any goods or services provided to and from the EU will be subject to tariff charges, there is also likely to be a change in tariff rates when trading with countries outside of the EU. Businesses should review contracts to see if it is clear which party will bear the cost of any increased tariffs.
- Free movement of goods/persons
Free movement of goods has meant that businesses have been able to trade between different Member States without much friction. However, once free movement ends, custom checks may well be required and this will not only lead to additional costs but also delays. Businesses should give due attention to any deadlines under supply contracts and consider planning around these.
Furthermore, businesses will also need to consider how the restrictions on the free movement of persons will impact the supply of services under any contracts.
Given the difficulties that parties may face in the performance of contracts following the end of free movement of goods and persons, a party may seek to terminate the contract by relying on force majeure clauses. Whether force majeure is applicable will depend on the specific facts of a particular case. However in our opinion economic circumstances are unlikely (in most circumstances) to be held to constitute force majeure. Also, the courts are unlikely to be sympathetic to parties when the circumstances could be seen as foreseeable, (eg if the parties entered into a contract just before the end of the transition period).
- Regulatory barriers
Following the end of the transition period, businesses should be aware of potential changes in regulatory rules, which could apply to any goods being supplied from the UK to the EU. The impact of this is that any UK goods being supplied to the EU will have to accord with EU standards (and possibly be certified as such). Whilst the UK has been a member of the EU, the free movement principles have meant that this has not been an issue, but as the UK becomes a “third country”, goods may well have to be certified (even though initially there should be significant regulatory alignment). Again, businesses should consider how this could impact the performance of any contracts and which party will be responsible for any possible increase in costs.
The above is of course not an exhaustive list of factors and the true impact on commercial contracts is only likely to be felt after the end of the transition period and beyond. However, these are just some key factors which we believe you may want to consider.
2) “Brexit clauses”
There are certain provisions in contracts that may need to change as a result of Brexit happening:
- General Data Protection Regulations (“GDPR”)
GDPR will remain in force even after the transition period as it will be transposed into UK law and relevant clauses will remain unaffected. However, issues may arise where organisations transfer data between the UK and the European Economic Area (“EEA”).
While the UK will recognise the EEA as having adequate data law protection, the position is not guaranteed in relation to transfers to the UK from the EU’s perspective. If the UK does have a no-deal Brexit, it will become a “third country” under the GDPR. If the EEA fails to make a ruling of adequacy in relation to the UK then “appropriate safeguards” will need to be put in place via standard contractual clauses, which may be a safer option for businesses. The ICO have developed a helpful tool on when businesses will need to adopt these clauses as well as helping with selecting the right clauses:
- References to the EU
Something which is likely to cause uncertainty in contracts are clauses with reference to “the EU” and any specific EU law. Contracts should expressly state whether references to “the EU” include the UK after Brexit and whether any subsequent domestic legislation which succeeds a specific EU law will apply to that contract.
Jurisdiction clauses are also likely to be impacted by Brexit. As the recast Brussels Regulation will cease to apply to the UK, enforcement in the EU of decisions made in the UK courts will be subject to national procedural laws and substantive tests. Whilst it’s possible (and in our view probable) that UK court judgments will still be recognised, this is not certain. However, the enforceability of arbitration decisions will remain unaffected and will generally be recognised and upheld by most EU courts. Therefore you may wish to consider inserting an arbitration clause as a way to manage disputes to avoid any such uncertainty.
What to do:
In conclusion, businesses who deal with parties in the UK or have supply chains out of the UK should consider any existing contracts in light of the above points raised and renegotiate contracts if possible. Whether you are entering into a new contract or already have a contract in place, you should be aware of the following:
- Assess the impact on the performance of your contracts – will it be commercially viable to perform the contract? Who will bear any extra costs?
- If there is an option to terminate before the end of the transition period, consider whether a new contract might be a better option.
- Insert the “Brexit clauses” considered above – businesses should ensure these clauses are incorporated to future-proof any contracts.
JMW’s Commercial team have extensive experience in reviewing, drafting and negotiating contracts. If you require assistance, please do not hesitate to contact the team on 0345 241 5305.
This note is for general guidance only and should not be used for any other purpose. It does not constitute, and should not be relied upon as legal advice.
JMW Solicitors is a Limited Liability Partnership. The copyright in this note is owned by JMW. Any reproduction of this article should be credited to JMW. All rights reserved.