Commercial Drafting Checklist

Overview

Entering into new commercial agreements during periods of economic or political uncertainty can give rise to unique challenges. As the UK negotiates its exit from the EU, we have highlighted below some Brexit related issues which parties may want to consider when contracting during this period. With contributions from lawyers in our IP, Dispute Resolution and Commercial groups, the tool flags a number of issues that have already been shown to be relevant. However, it isn't an exhaustive checklist and there may well be additional issues to consider depending on the precise nature of the agreement concerned and progress with the Brexit negotiations. As ever, we would advise parties to seek specific legal advice on the particular deal being entered into.

For more information, please contact Victoria Hobbs, Ian Edwards or James Mullock.

Type of clause:

Territory

General Issues
  • If your agreement has a territorial aspect which relates to the EU/EEA, do:

    (i) the relevant definitions; and

    (ii) the operative provisions (e.g. grant of rights),

    take into account the UK (or another Member State) departing the EU/EEA?
Specific Points to consider
  • If your agreement grants one party the right to do something within the EU/EEA, consider whether the parties intend for that right to include or exclude the UK (when the UK ends its membership of the EU/EEA).

  • It may be that the parties' intention on this point cannot be agreed in advance. However, consider whether it would be commercially helpful to agree that the UK ending its membership of the EU/EEA should be treated as a trigger for pre-agreed contractual events. For example, further negotiations between the parties.

IP Provisions

General Issues
  • Have you reviewed the territorial scope of the IP registrations you are licensing?
Specific Points to consider
  • If licensing EU Trade Marks (EUTMs)/Registered Community Designs (RCDs), be aware that post-Brexit these rights are very likely to cease to apply in the UK in their current form. They will likely be replaced by equivalent UK Trade Marks (TMs)/UK registered designs to fill the gap, but the details are not yet known.

  • To address uncertainty about:

    1. how the new rights will arise,
    2. their interaction with existing EUTM/RCD licences,
    3. and UK litigation based on EUTMs/RCDs which is on-going at the date of Brexit,

    consider filing for UKTMs/UK registered designs for your core brands and including them in the licence as well/instead.

  • The statutory rules governing licences of UKTMs and UK registered designs differ from those governing licences of EUTMs/RCDs. Consider tailoring your drafting for this.

Financial Provisions

General Issues
  • Could any charges or fees within the agreement be affected by Brexit?

  • Should currency options other than sterling be considered?
Specific Points to consider
  • Parties should consider whether any contractually agreed charges or fees should be subject to some form of review if the scope or nature of the agreement is affected by Brexit.

    For example, should a fee increase / reduction apply if the territorial scope of rights being granted changes as a result of Brexit?

  • Could Brexit-related factors have an impact on any of the prices or payment provisions?

    For example:

    1. the introduction of tariffs (by the UK or another country) on cross-border trade if the UK leaves the European single market and does not conclude individual trade deals which prohibit tariffs,

    2. the potential application of World Trade Organisation (WTO) arrangements,

    3. fluctuations in the exchange rates between sterling and other currencies.

    Can an agreed method for addressing these risks be included in the contract, or is it necessary to refer to some other form of resolution (e.g. expert determination)?

  • Given potential uncertainties around currency fluctuations between sterling and other currencies, it may be worth considering whether to provide that financial amounts should be payable in a different currency, such as the US dollar (in particular in agreements with an international element).

Data Protection

General Issues
  • Will the data protection provisions of the agreement be affected by Brexit?
Specific Points to consider
  • Are you acting for a processor or a controller? If the former, this may be less of an issue for your client as the majority of the related data protection obligations fall on controllers' shoulders.

  • You may need to think about the General Data Protection Regulation (2016/679) (GDPR) (due to replace the current Data Protection Act 1998): it will apply to organisations as from May 2018. In other words, before the UK actually leaves the EU.

  • Post-Brexit, if your (or your clients') processing activities relate to the offering of goods or services to (even if for free), or monitoring the behaviour of, EU individuals within the EU: your operations (and your clients' operations) are likely to be subject to GDPR requirements.

  • When it comes to accessing data transfer compliance, post-Brexit many UK entities are likely to switch to being importers of personal data from the EU (as opposed to being exporters of personal data from the EU). Assess whether your contracts cater for this change in roles.

Employment

General Issues
  • Will the contract involve the potential application of TUPE to the transfer of staff on entry and/or exit?

  • Does the contract contain any immigration warranties?
Specific Points to consider
  • Although the current indication from the Government is that there will not be any immediate wholesale changes to employment legislation, there is clearly the potential for changes to be made to various principles and we have selected two issues below that should be considered in commercial contracts.
     
  • Where a client engages a contractor to do work on its behalf, reassigns such a contract or brings the work in-house, it is likely that such a "service provision change" will constitute a "relevant transfer" for the purposes of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). 
     
    • Where there is a relevant transfer, TUPE provides that those employees who are wholly or mainly assigned to the in scope services will transfer from their existing employer to the new service provider by operation of law.
       
    • TUPE also regulates other aspects of a relevant transfer, including restricting the changing of employees' terms and conditions, providing protection against dismissal and requiring information and consultation with employee representatives.
       
    • Since TUPE originates from the EU Acquired Rights Directive, it is possible that the automatic transfer of employees will no longer apply post-Brexit. It is, therefore, important for parties to give careful thought to the issue of staff transfers at the outset of the contract and ensure that the drafting addresses what will happen if the intention is that in scope staff transfer will occur even if TUPE no longer applies.
       
  • Contracts will often contain a warranty from the supplier that those of its employees who will be providing the "Services" have the necessary right to work in the UK. Given that one of the government's "key priorities" in the Brexit negotiations will be to control immigration from within the EU, the existing right of freedom of movement for EU nationals is unlikely to apply in its current form and companies will need to consider the impact of such policy developments. So, for example, if a company is servicing a contract(s) with EU nationals, some/all of them may be affected by changes to immigration rights. This may then impact upon a warranty that all employees have appropriate immigration permission and companies may want to give some thought as to how this might be addressed now to avoid a breach.

Force Majeure

General Issues
  • As Brexit is now an expected event, can the force majeure clause in the contract be relied on as a ground for non-performance?
Specific Points to consider
  • This will depend on how the clause is drafted. For example, a typical definition of a force majeure event could be one which is:

    "… not reasonably foreseeable by, and outside the reasonable control of the parties…"

    with the definition then proceeding to set out a non-exhaustive list of events which are considered by the parties to satisfy those criteria. Such a list frequently includes a change in law.

  • If the force majeure clause states that an event not only has to be beyond the reasonable control of the parties, but also one that is not reasonably foreseeable by them, it is likely that such a clause would not apply to an expected event such as Brexit.

  • Case law suggests that a change in a party's economic circumstances does not usually qualify as a force majeure event under English law unless the relevant clause has been drafted to include this possibility. If a change in economic conditions or profitability markers is an important factor in the agreement, it is advisable that this be addressed specifically (and the force majeure clause may not be the most suitable place to do so).

  • In addition, the force majeure clause should not be considered in isolation; consider how it works in tandem with any termination and /or material adverse change clauses.

Termination

General Issues
  • Brexit may result in one party deciding that the agreement is no longer operating in a commercially viable way. Can the parties at the negotiating stage provide for a way to exit or terminate the agreement following Brexit if this is the case?
Specific Points to consider
  • Since Brexit is now a 'known' event, it is unlikely that one party will agree to a termination of the agreement on this basis alone.

  • Even if the parties did agree to terminate 'on the event of Brexit' this is unlikely to be deemed sufficiently certain by the courts. Instead parties should define in the agreement particular consequences of Brexit or milestones in the Brexit process, which the parties may wish to use to trigger a termination or a termination right.

  • As with any termination, usual principles of contracting should apply:

    • The termination should be triggered by a clear event.
    • The parties should decide whether the termination should be automatic immediately on one party giving notice or subject to a notice period.
    • Particular consequences resulting from the termination (such as the return of materials or confidential information) should be specified.

  • Any right to termination should also be considered in relation to any force majeure clause or material adverse change term as these may also link to the possible effects of Brexit on the viability of the commercial arrangement between the parties.

Severance / Regulatory Intervention

General Issues
  • How would your severance or regulatory intervention (or "change in law") clause operate in the event of Brexit?

  • Are there any obligations that are currently prohibited under EU law that you would wish to impose following Brexit?

  • Are there any EU laws that you would wish to retain by virtue of contractual agreement, even if they no longer apply in the UK post-Brexit?
Specific Points to consider
  • Severance or regulatory intervention clauses typically operate so as to strike out a particular clause from a contract which would otherwise be considered to be illegal, invalid or unenforceable as a result of a change in law or adverse finding of a court or other regulatory/administrative body of competent jurisdiction.

  • One would not typically be able to rely on a regulatory intervention clause in order to impose (or re-impose) an obligation that is not permitted under EU law, but may now become permissible following Brexit. For example, restrictions on 'passive' sales between EU Member States are generally prohibited under EU law, but could potentially become permissible in certain circumstances as between the UK and the remaining EU Member States post-Brexit. However, specific wording would be required to impose such a restriction post-Brexit.

  • Are there some EU laws that the parties would wish to retain by virtue of contractual agreement between them, even if they no longer apply in the UK post-Brexit (or there is a risk they may not apply post-Brexit)? If so, this may need to be agreed expressly in the contract. An example of this could be that a supplier's product will continue to comply with European safety laws, even if those laws ceased to apply within the UK.

Governing Law

General Issues
  • Should Brexit have an effect on which governing law is chosen by the parties?
Specific Points to consider
  • An agreement should always stipulate the law by which it is to be governed both in respect of contractual disputes and non-contractual ones.

  • Generally speaking English courts will uphold the choice of law governing a contract if that choice is agreed by the parties and written in the agreement between them.

  • Therefore, agreements should contain a governing law clause which is clear and unambiguous in favour of one jurisdiction. This becomes particularly important post-Brexit as the EU Regulations which currently govern this area - called Rome I (in respect of contractual obligations) and Rome II (in respect of non-contractual obligations) - will no longer apply post-Brexit unless they are formally adopted into UK law. It is expected this will occur as part of the Great Repeal Bill.

  • In any event, Rome I and Rome II will continue to apply to the courts of the remaining EU Member States; therefore, governing law clauses in favour of English law should continue to be upheld by them. As a result, there is no need to change from English governing law to a different EU Member State governing law if you are likely to sue or be sued in the courts of an EU Member State (although please note the comments below in relation to jurisdiction and enforcement).

Jurisdiction and Enforcement

General Issues
  • Should Brexit affect the choice of jurisdiction where a dispute may have a connection with an EU Member State or where the counterparty has assets which are located in another EU Member State?
Specific Points to consider
  • Jurisdiction clauses determine which court/s will have jurisdiction to hear a dispute regarding the terms of the agreement.

  • As with governing law, generally speaking the English courts will uphold the choice of jurisdiction set out in the agreement between the parties.  Parties should therefore ensure that their jurisdiction clause is clear and unambiguous setting out which court/s is to have jurisdiction in the event of a dispute.

  • Following Brexit, exclusive jurisdiction clauses in favour of the English courts are likely to be upheld by the English courts but may not be upheld by courts of EU Member States. This is because the Recast Brussels Regulation, which governs the law in this area, does not contain obligatory principles of reciprocity in favour of non-EU Member States (which the UK will of course be post-Brexit) in contrast to the position in relation to governing law discussed above.

  • Parties should consider where the counterparty's assets are located. If they are in an EU Member State an exclusive jurisdiction clause in favour of the English courts may not be ideal following Brexit, as it may be harder to enforce a judgment of an English court in the court of an EU Member State. Depending on whether you are more likely to sue than be sued you may wish to consider amending your exclusive jurisdiction clause, or consider arbitration as the preferred dispute resolution mechanism, provided that your dispute is suitable for resolution using this process.