On 29 March 2017, the UK Government served formal notice under Article 50 of The Treaty on European Union to terminate the UK's membership of the EU (following the June 2016 UK referendum on EU membership). Based on Article 50, the EU Treaties shall cease to apply to the UK and the UK exit will take effect in March 2019 (subject to the unlikely possibility of the withdrawal agreement being concluded sooner and unless all Member States agree to extend the period). Negotiation of a new trade agreement with the EU could take several years beyond 2019 although the Prime Minister has declared the objective of achieving such an agreement within the two-year period.
This briefing note focuses on the immediate considerations of the leave vote and the triggering of Article 50, and anticipates how Brexit may impact on commercial contracting arrangements more widely in the UK.
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 left or remained in the EU. 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 Brexit?
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 effect that Brexit may have 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: 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 Brexit takes effect.
- Movement of persons: The freedom of UK nationals to travel within Europe and indeed for those in Europe 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.
- Monitoring currency fluctuations: Now that the UK has voted to leave the EU, businesses are closely monitoring the value of the pound. 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 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. Depending on the nature of the UK's new relationship with the EU, 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 of changes in law arising out of Brexit may have, bearing in mind the way in which change in law is governed under the relevant agreement.
Further Points for Consideration
From a regulatory perspective, the EU laws that have been incorporated into UK law will not quickly fall away. The UK Government has indicated that it will freeze into UK law the EU legislation in force at the point of the UK's exit to ensure continuity, but may choose to amend such law in due course. 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 now 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 likely timetable of Brexit means that, from 25 May 2018, the UK will still be an EU member state when the new European General Data Protection Regulation (GDPR) starts to apply. If the UK later opts for a relationship with the EU where the GDPR is no longer directly applicable to UK-only businesses, this could remove the increased regulatory burden of GDPR compliance. However, any business with people or customers in the EU would likely still have to comply with the GDPR, which has extra territorial effect where goods and services are offered into the EU or where EU data subjects are monitored by a non-EU business. Importantly, such a future EU and UK relationship would also mean that the UK will no longer automatically be considered to be a safe destination for transfers of EU personal data and would need to seek separate approval from the European Commission by way of an 'adequacy' decision. This may, in practice, require the UK to implement laws very similar to the GDPR in order to meet the EU's standards. For further information see our note on the Data Protection implications of Brexit.
Whilst deregulation is generally seen as a good thing, from an administrative perspective it may make the use of standard agreements for the whole of Europe 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 Europe. Similarly, if the mutual recognition of standards and approvals across Member States is to fall away, UK operators may require separate approvals when selling onto mainland Europe for example.
Do you have grounds to terminate your existing contracts?
Whether Brexit 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 following a Brexit 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 Brexit but again, such an argument will depend on the facts of the particular case.
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?
Pre-Brexit the English courts determined the governing law of an agreement in accordance with the EU Rome I Regulation. The position is unlikely to change following Brexit as the English courts would revert to English common law principles, which are similar to those found in the Rome I Regulation. For instance, an express choice of law clause is still likely to be followed. However, the position is not so clear with regard to the governing law in respect of non-contractual obligations as the Rome II Regulation does not reflect English common law so closely. It could now be the case that agreements as to the governing law of non-contractual obligations are no longer effective following Brexit. There may also be changes for UK businesses involved in litigation within the EU – if Rome I and Rome II no longer apply to the UK, courts in other jurisdictions will not be bound by them and may instead apply local rules to matters concerning governing law. 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.