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  •       Wednesday, 19 December 2018   

    Brexit and your commercial contracts

    Like it or not, Brexit is a thundering reality and businesses trading into or out of the UK need to try to assess its likely impact and, where necessary, alter their strategies, business methods and plans accordingly.

    In this article, we consider the potential legal problems which your business may face in relation to its existing commercial contracts with other businesses as a consequence of the UK's decision to leave the EU. In particular, we focus on the implications of a “hard Brexit”. 

    Key Brexit dates

    For the purposes of this article, the key dates are 29th March 2019 and 31st December 2020. This is because it is likely that there will be a “hard Brexit” if a withdrawal agreement is not concluded between the UK and the EU by 29th March 2019 or no agreement is reached in relation to the long-term future relationship between the UK and the EU by 31st December 2020. If you would like a clearer understanding of the importance of these 2 dates, then you should read the “Brexit timeline summary” below.

    Brexit timeline summary

    The UK formally triggered Article 50 of the Treaty on European Union (“TEU”) on 29th March 2017 by giving notice of the UK's intention to leave the EU. Under the TEU, the EU and the UK have two years from the notification date to conclude a withdrawal agreement. On 29th March 2019, withdrawal takes effect, even if no agreement is reached.

    In March 2018, the UK government and the EU reached political agreement on the terms of a post-Brexit transition period, which will run from 30th March 2019 (11pm UK time on 29 March 2019) until 31st December 2020 (the “Transition Period”). During this Transition Period, most EU law (including as amended or supplemented and all the usual EU supervisory, judiciary and enforcement mechanisms, including the jurisdiction of the ECJ)) will continue to apply to the UK, and most references to member states in EU law will include the UK.

    These transitional arrangements are set out in, and depend on the conclusion of, the withdrawal agreement. If the UK and the EU do hot conclude a withdrawal agreement by 29th March 2019, the UK will leave the EU without an agreement to govern the terms of withdrawal. This is commonly referred to as a "hard Brexit” or “no deal" scenario.

    Even if a withdrawal agreement is concluded, some aspects of a "hard Brexit” would then apply at the end of the transition period if the UK and EU do not conclude an agreement to govern their long-term future relationship by 31st December 2020 (and there is no extension of the transitional period).

    On 14 November 2018, the full text of the draft withdrawal agreement was agreed at negotiators' level between the UK and the EU. On 25th November 2018 it was endorsed by the members of the EU. It is due to be voted on in the UK parliament on 11th December 2018.

    Commercial overview

    Brexit may affect businesses commercially in many ways, for example, through fluctuations in exchange rates, increased trade tariffs, changes to the VAT treatment of payments under contracts, the costs and delays of greater customs checks, the risk of labour shortages (either generally or in specific sectors), the complexity of complying with parallel regulations and the potential need for relocation. These events could lead to businesses wishing to renegotiate or terminate contracts, which become loss-making or insufficiently profitable or because they become too onerous or difficult to perform. The result could be financial hardship for one of the parties.

    Whether there is a “hard Brexit” or a “soft Brexit”, the UK will remain an attractive market for the majority of overseas goods and services. However, businesses need to assess and monitor the legal, financial, operational and administrative implications of Brexit on their contracts and working practices.

    Every business is unique, every business owner is unique, the majority of products and services are unique in one way or another and different markets (and the products to which they relate) may be affected by Brexit in different ways. Accordingly, there is no one-size-fits-all solution to dealing with issues arising from Brexit. All businesses will need to review their own structure, business methods and plans taking into account such factors as the nature of the goods or services they provide, the location of their customers (and, in particular, any key customers), the location of their existing suppliers (and, in particular, any key suppliers), the existence and location of alternative suppliers, the availability of a suitable workforce (and, in particular, any key employees or consultants) and any additional legal and regulatory challenges.

    For similar reasons, the risk management opportunities for individual businesses are likely to be unique. The ability to manage contractual risk is likely to be unique to each contract and will depend on factors such as the duration of the contract, its termination provisions, the existence of minimum purchase or sales targets or requirements, the interpretation of the scope of any territorial provisions, the existence and scope of various “escape clauses” (such as force majeure, frustration and material adverse change clauses) and practical matters (such as, whether the contract is ring-fenced in an SPV). Some contracts contain a significant amount of flexibility, whilst others may contain long term commitments. Flexibility can be good or bad depending on your position but it is an important factor when determining whether the contract should be left as is, amended or terminated.

    Existing contracts ending prior to 29th March 2019

    One-off contracts or contracts which will be completed prior to 29th March 2019 are less likely to give rise to problems because they will have been completed before Brexit takes place. However, depending on the nature of your products or services, there may be some post-completion risks in relation to matters such as guarantees, warranties and indemnities or litigation (or other forms of dispute resolution).

    If you are selling goods or supplying services pursuant to one-off or short-term contracts, you should review your terms and conditions of contract in order to take into account any potential problems Brexit may cause.

    See below in relation to renewing contracts and new contracts.

    Existing contracts ending during the Transition Period

    Contracts that are due to be completed during the Transition Period (that is, after 29th March 2019 but prior to 31st December 2020) are unlikely to give rise to problems where the UK and the EU do conclude a withdrawal agreement by 29th March 2019 because (a) during the Transition Period most EU law (including as amended or supplemented and all the usual EU supervisory, judiciary and enforcement mechanisms, including the jurisdiction of the ECJ) will continue to apply to the UK, and most references to member states in EU law will include the UK, and (b) they will have been completed before the end of the Transition Period.

    Like contracts which will be completed prior to 29th March 2019, depending on the nature of your products or services, there may be some post-completion risks in relation to matters such as guarantees, warranties and indemnities or litigation (or other forms of dispute resolution). Your contracts may also be affected by some of the changes which operate during the Transition Period.

    However, the position is likely to be different where the UK and the EU do not conclude a withdrawal agreement by 29th March 2019 (and there is no extension of that period). Then a “hard Brexit” will take place.

    You should review your terms and conditions of contract in order to take into account any potential problems Brexit may cause. If you consider that the contracts may create legal, financial, practical or other problems, where possible, you should try to renegotiate your contracts now in order to resolve any potential problems and protect your business.

    Existing contracts continuing after 31st December 2020

    Contracts that are due to continue after the Transition Period ends on 31st December 2020 may not give rise to significant problems where the UK and the EU do conclude an agreement to govern their long-term future relationship by 31st December 2020 (or by the end of any extension period). However, unless and until the terms and conditions of any such agreement are concluded, the position will remain uncertain. Lack of certainty and its effect on the ability of businesses to plan and their willingness to risk investments is a fundamental problem.

    However, the position is likely to be different where the UK and the EU do not conclude an agreement to govern their long-term future relationship by 31st December 2020 (or by the end of any extension period). Then a “hard Brexit” will take place.

    You should review your terms and conditions of contract in order to take into account any potential problems Brexit may cause. If you consider that the contracts may create legal, financial, practical or other problems, where possible, you should try to renegotiate your contracts now in order to resolve any potential problems and protect your business.

    Renewal or termination dates

    If you are due to reach a contract renewal date or period (or the date or period where you have the option to terminate a contract) then you should review your contract carefully from a commercial and legal perspective. If there is a good commercial case for continuing with the contract, you may wish to seek to implement or negotiate changes to the contract in order to resolve any potential problems and protect your business from any negative impact of Brexit.

    Naturally, if there is no on-going commercial case for the contract or you are unable to negotiate changes to the contract in order to protect your business from any negative impact of Brexit (and you consider the risks to outweigh the potential benefits) then you may decide not to renew it or to exercise your right to terminate the contract (as the case may be).

    New contracts

    If you are due to enter into a new contract in the UK or with a UK based entity then you should consider the potential impact of Brexit on your contract and, where necessary, include appropriate wording to protect your business.

    If you are selling goods or supplying services pursuant to one-off or short-term contracts, you should review your terms and conditions of contract in order to take into account any potential problems Brexit may cause.

    Conclusion 

    Ultimately, the earlier you create your Brexit strategy and more thoroughly you prepare and carry out your due diligence, the better your chances are of making your Brexit strategy work. In order to maximise any benefits and minimise any risks of Brexit, you need to be in control of the process from start to finish, which requires detailed thought, preparation and planning. Determining your objectives and setting your goals early on, creating a viable plan and reviewing and revising it regularly means that you will maximise your chances of being ready to take advantage of any good opportunity to develop your business or minimise any risks to your business as a consequence of Brexit.

    Need to talk? 

    Whatever stage of the contractual process you have reached, we can help you to understand the different legal and related commercial issues relating to Brexit, to choose the option that is right for you and to help you develop or minimise risks for your business.

    Contact us

    If you would like more information about the contractual effects of Brexit or would like to discuss a potential or existing contract, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com

     

     

     

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