Brexit: Commercial contract implications

This briefing note anticipates how the UK's exit from the EU and the end of the transition period may impact on commercial contracting arrangements more widely in the UK.

• What will Brexit mean for your commercial contracts? 
• Points to consider when auditing current or negotiating new contracts
• Further Points for Consideration
• Do you have grounds to terminate your existing contracts?
• How would Brexit affect the enforcement of your contracts?

What will Brexit mean for your commercial contracts?

On the face of it, many commercial contracts would seem to be neutral as to whether the UK is an EU Member State. They are generally less heavily regulated than many other areas of law, and, as the name suggests, tend to be based on the commercial bargain between the parties. But what if that commercial bargain is in itself significantly affected by the UK's membership of the EU or the extent to which EU law applies in the UK (whether directly or by virtue of the 2018 Act)?

Points to consider when auditing current or negotiating new contracts

If you have a large number of commercial contracts, particularly with entities within the EU, it would be prudent to perform an audit of these contracts and begin assessing the potential effect of the UK's exit from the EU or the end of the transition period on your rights and obligations under these agreements. You should assess very similar points when you negotiate new commercial contracts, including the following:

• Increased trade barriers (including regulatory divergence): Trade barriers between the EU and the UK seem likely to increase, meaning that costs when trading in Europe would increase. It is important to assess the commercial impact this will have on your agreements and if, in light of this increased cost, your position under any agreements needs to be revisited. When negotiating future contracts, you may wish to consider the extent to which prices should include or exclude any new taxes, duties or other similar levies that the UK's or remaining EU member states' governments may introduce after the end of the transition period.
• Movement of persons: The freedom of UK nationals to travel within the EU and indeed for those in the EU travelling to the UK seems likely to be impacted by Brexit. This should be of particular importance to businesses operating in the services industry; the impact of the restriction of movement of persons should now be assessed, particularly in the light of the UK Government's announcement (in the Queen's speech on 19 December 2019) of a new bill to repeal the current EU-derived free movement provisions immediately after the end of the transition period. 
• Monitoring currency fluctuations: Ever since the UK voted to leave the EU in 2016, businesses have closely monitored the value of the pound. Further currency fluctuations could have a significant effect on your existing commercial agreements. When negotiating new agreements, you may wish to consider how to allocate the risk of further future changes in the pound's value.
• Territorial scope of your agreements: Identify if any of your commercial agreements have the European Union as their territorial scope. The question of whether the UK is carved in or out of types of agreement may now need to be carefully considered and then specifically catered in the drafting.
• Parallel regulatory regimes: If your existing or planned commercial agreements govern the introduction of new goods or services onto both the UK and EU markets, you should note that parallel regulatory regimes - under both UK and EU law - may emerge. The risk of this happening is largely dependent on the nature of the UK's future relationship with the EU but, if parallel regimes do emerge, contracting businesses will likely need to agree who should be responsible for achieving compliance and who should bear the consequences of non-compliance (see below). 
• Change in law: Suppliers and customers who are contemplating entering into or are already subject to long-term commercial agreements (particularly service agreements) will need to be mindful of the contractual impact that changes in law following the end of the transition period may have, bearing in mind the way in which change in law is governed under the relevant agreement. 

Further Points for Consideration

De-regulation

From a regulatory perspective, the EU laws that have been incorporated into UK law will not quickly fall away. The effect of the Withdrawal Agreement and the 2018 Act is that EU law will effectively continue in force but under domestic law through the 2018 Act until the end of the transition period, after which the UK Government may choose to amend such law. There could be a gradual repeal of EU-derived laws that are currently implemented in the UK that are seen to be burdensome. For example:

• Competition law: there may be some relaxation of competition law rules to allow the inclusion of more territorial restrictions than are currently permitted by the EU competition rules; and
• Data Protection: the Withdrawal Agreement requires the UK to continue applying the EU's General Data Protection Regulation (EU GDPR) to some EU-originating data, after the end of the transition period; and in any event, most technology businesses have people or customers in the EU, so will likely still have to comply with the EU GDPR. At the end of the transition period, the UK will no longer be treated as an EU Member State: in addition to requiring updates to the wording of contracts and privacy notices, and the appointment of a GDPR "Representative" in the EU, the UK, or both, it also seems likely that data transfer agreements will need to be put in place between UK and EU-based companies (even intragroup). Finally, multinationals that were using the UK as their EU GDPR regulatory "one stop shop", will likely look to move certain data-related operations or decision-making authority to other EU countries, in order to retain the benefit of that "one stop shop" system. For further information see our note on the Data Protection and Cybersecurity implications of Brexit.

Whilst deregulation is generally seen as a good thing, from an administrative perspective it may make the use of standard agreements covering the UK and the remaining EU Member States more difficult. A gradual move into two different consumer protection regimes could have a significant effect over time on the shape of supply contracts in the UK versus those in the EU. Similarly, if the mutual recognition of standards and approvals between the UK and EU Member States is to fall away, UK operators may require separate approvals when selling in the EU.

Do you have grounds to terminate your existing contracts?

Whether the UK's exit from the EU or the end of the transition period provides grounds for termination of a contract will depend very much on the particular terms and specific facts. The question will be particularly relevant in those contracts that have the EU as the territorial scope, as mentioned above.

Parties could seek to rely on material adverse change or force majeure clauses as grounds for termination but their success will come down to the interpretation of the particular clause and the particular facts of the case. We should also flag that changes in a party's economic circumstances have generally not been held to qualify as force majeure events under English law. It is also possible that parties could seek to argue that a contract has become frustrated as a result of the UK's exit from the EU or the end of the transition period but again, such an argument will depend on the facts of the particular case. For more detail on the possible application of the doctrine of frustration in the context of Brexit see our notes on the Canary Wharf v European Medicines Agency.

Parties entering into new agreements will need to bear these points in mind, particularly if they are seeking to agree Brexit-specific material adverse change or force majeure clauses that are linked to termination rights and which are designed to anticipate the possible effects of Brexit on the commercial viability of their commercial arrangement.

How would Brexit affect the enforcement of your contracts?

Before Brexit occurred the English courts determined the governing law of an agreement in accordance with the EU Rome I Regulation and the governing law in respect of non-contractual obligations (such as negligence) in accordance with the EU Rome II Regulation. The position will not change following the end of the transition period as the UK has confirmed that it will incorporate both Rome I and Rome II into UK law. This means that an express choice of law clause in favour of English governing law will still be followed by the UK courts and those of the remaining EU member states and parties entering new agreements can continue to choose English law to govern their contracts.

The position is less clear in relation to the rules which determine the choice of court to hear a dispute and the enforcement of any resulting judgment. The current rules which provide the relevant framework in this area in the UK, the EU Recast Brussels Regulation, will fall away at the end of the transition period. The UK has confirmed that it will sign up to the Hague Convention on Choice of Court Agreements 2005. This will mean that clauses which choose the exclusive jurisdiction of the English courts should be recognised by the courts of the remaining EU member states if they are entered into after the transition period. However, non-exclusive jurisdiction clauses and asymmetric jurisdiction clauses will not receive the same reciprocal protection. Parties entering into new agreements will need to bear this in mind and if they are concerned about the validity and effect of their current jurisdiction clauses then they should seek legal advice.

It is important to note that the EU rules referred to above do not extend to arbitration, and therefore, Brexit will have little immediate impact on this area of dispute resolution. Parties may therefore decide to choose arbitration as their dispute resolution mechanism rather than litigating any dispute through the courts.

For further information see our note on the Cross-border dispute resolution implications of Brexit.

We intend to update our guidance in this area as the implications of Brexit on commercial contracts become clearer.

This article is part of our Brexit series.