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 having departed 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.

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 before the end of the transition period these rights will give rise to comparable UK rights (by way of the Withdrawal Agreement). However, note that the right will be a fully independent UK Trade Mark or registered design. As such, it will be separately licensed (as well as challenged, assigned or renewed) from the original EUTM or RCD from 1 January 2021.

  • Therefore, ensure that these new and separate IP rights are included in the scope of the licence from the 1 January 2021 by updating the relevant contractual provisions. However, please note that 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.

  • Proceedings before the EU IPO based on UK rights will be automatically closed (this may well not be relevant but is included for completeness)

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

It is hard to generalise and advice should be taken based on specific circumstances but some points to note are as follows:

  • The UK has passed data protection legislation (the Data Protection Act 2018) which reflects the provisions of the GDPR, including its data transfer provisions, and has retained its ePrivacy legislation. Likewise, the ICO remains empowered to impose GDPR level fines. So it is important that, where a contract’s scope could cover the UK and where personal data will be processed, that the contract continue to include suitable data protection provisions.

  • Factors affecting suitability will include whether you are a processor or a controller. Also whether you export or import personal data pursuant to the contract and where to.

  • The CJEU’s recent decision in the Schrems II case has (to say the least) complicated the question of how organisations can comply with data transfer laws. Parties to a contract will need to review the requirements which UK and EU regulators expect to be addressed in light of the case depending upon where personal data is transferred pursuant to the contract.

For further information on steps to take to ensure continued data protection compliance, please see our recently published article on the topic: Ready, Steady, Brexit: Your Data Protection checklist for 1 January 2021 (twobirds.com)


Employment

General Issues
  • Will the contract involve the potential application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) to the transfer of staff on commencement and/or termination?

  • 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 party engages a contractor to do work on its behalf, retenders such a contract or brings outsourced work in-house, it is likely that such a "service provision change" will constitute a "relevant transfer" for the purposes of TUPE.
     
    • Where there is a relevant transfer, TUPE provides that those employees who are wholly or mainly assigned to the services in question will transfer from their existing employer to the new service provider automatically by operation of law.
       
    • TUPE also regulates other aspects of an employee 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 in due course there will be changes in this area, for example making harmonisation of employee terms easier following a TUPE transfer. Depending on the post-transition arrangements, it is also possible that TUPE could undergo more radical change but it is unlikely that this would happen suddenly.
       
  • 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. As from the end of the transition, EU nationals will be broadly in two categories: (1) those who have obtained new rights derived from pre-1 January 2021 residence by registering under the EU Settlement Scheme; and (2) those who have to be treated in the same way as other non-EU citizens and are subject to the new immigration rules to take effect from 1 January 2021. Many employers have taken steps to ensure those in the first category have carried out the necessary registrations. Future right to work checks will need to include appropriate documentation for EU nationals depending on their status.

Force Majeure

General Issues
  • As Brexit has now happened, can the force majeure clause in the contract be relied on as a ground for non-performance of the contract due to Brexit and the impacts of Brexit, such as interruptions to the supply chain and resultant delays in manufacturing and supply of goods?
Specific Points to consider
  • This will depend on how and when 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 and the impacts of Brexit if the contract is entered into now or was entered into following the referendum result or when the parties would have been aware that a vote to leave the EU was a possibility.

  • 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
  • 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.

  • Agreements should contain a governing law clause which is clear and unambiguous in favour of one jurisdiction.

  • Rome I (in respect of contractual obligations) and Rome II (in respect of non-contractual obligations) are part of UK retained law and so will continue to apply, as amended, from 1 January 2021. In practice this means that this area of law will remain the same post transition.

  • 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.
Specific Points to consider
  • 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 (please also note the comments below in relation to jurisdiction and enforcement).

Jurisdiction and Enforcement

General Issues
  • 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.

  • Claims that were started prior to the end of the transition period, namely 31 December 2020, (and any resulting judgment) and the recognition and enforcement of judgments handed down prior to that date, will be dealt with under the ‘old’ regime as long as they fall within the scope of Articles 66-69 of the withdrawal agreement.

  • From 1 January 2021 a new regime for cross-border disputes will apply to claims ‘instituted’ after that date.

  • From 1 January 2021 exclusive jurisdiction clauses in favour of the English courts are likely to be upheld by the English courts and by courts of EU Member States and the judgments of those courts enforced reciprocally as a result of the UK acceding to the Hague Convention on Choice of Court agreements 2005. Although parties should be aware that the UK and the EU do not currently agree on the date that the Hague Convention will apply from. For more information click here

  • Parties should note that the Hague Convention only applies where parties have concluded a contract that contains an exclusive jurisdiction clause. In the event of a dispute arising after 1 January 2021, contracts without an exclusive jurisdiction clause could be vulnerable to parallel proceedings in another EU Member State.
Specific Points to consider
  • Keep jurisdiction and governing law clauses under review. Consider exclusive jurisdiction clauses in favour of the English courts if that is appropriate for the particular agreement.

  • The Law Society has suggested that parties to agreements which contain exclusive jurisdiction clauses signed prior to 1 January 2021 (which may not be covered by the Hague Convention) produce a side letter re-confirming the jurisdiction position as applying from 1 January 2021. This advice may not be practical for every situation, but it may be worth including a restatement of jurisdiction when any side letters or variations to pre-1 January 2021 agreements are signed.

  • If an exclusive jurisdiction clause is unsuitable consider arbitration as the preferred dispute resolution mechanism, providing that your dispute is appropriate for resolution using this process.

  • The UK has lodged an application to join the Lugano Convention. Membership of the Convention would provide a similar system to the Recast Brussels Regulation but at the time of writing the EU has given no indication as to whether it will agree to the application.