How could Brexit impact commercial contracts between businesses?

27 January 2020

After years of discussions, the UK is set to formally leave the EU on 31 January 2020 (Brexit).  Although the UK will cease to be an EU member from this date, the trading relationship between the UK and the EU member states will remain until 31 December 2020 (Transition Period).  Businesses have been considering the impact of Brexit for some time.  We consider below the likely impact of Brexit on existing commercial contracts.

For insights regarding trade marks, please refer to the following link: https://www.fladgate.com/2020/01/trade-marks-and-brexit/

Review of commercial contracts

We expect many commercial contracts to remain unaffected during and after the Transition Period. There are however certain types of commercial contracts which are likely to be affected, such as:

  • contracts with entities located within the EU (excluding the UK);
  • contracts which may focus on specific EU member states; and/or
  • contracts which are likely to continue beyond the Transition Period.

We recommend carrying out a review of all relevant contracts to ensure any necessary changes are dealt with during the Transition Period. If your contract is unclear or contains conflicting provisions, then the purpose of the contract and the commercial background would be relevant in interpreting the relevant provisions to determine the intention of the parties.  The points set out below should be considered during your review of existing contracts and during negotiations of any new arrangements also.

 Factors to consider

Territory: If your contract refers to the EU (for example, a party is granted exclusivity to operate within the EU), you should consider whether the contract will continue to cover the UK. Whether the UK will automatically be included or excluded from the term will depend on the wording and interpretation of the clause. By way of example, provided there are no conflicting provisions, if the contracts refers to:

  • the member states of the EU at the date of this Agreement”, it would continue to include the UK following Brexit; or
  • the member states of the EU from time to time”, it is likely to exclude the UK following Brexit.

Trade barriers: Trade barriers are likely to be imposed following the Transition Period between the UK and EU member states which could alter the commercial value of a project. Once further details are provided, you should consider the impact of any new barriers and specifically, the allocation of any new taxes, levies and duties. When negotiating new contracts, the parties should agree the allocation of any such costs.

Personnel: The freedom of movement between the UK and EU member states is expected to be impacted following the Transition Period. If your contract involves the movement of personnel between the UK and EU member states, you should consider any new requirements imposed by the UK and the relevant EU member state and the costs associated with complying with any such requirements. When negotiating new contracts, the parties should agree the allocation of any such costs.

Termination: Given the likely implications of Brexit (including possible currency fluctuations and a rise in the cost of raw materials and indexes), a party may seek to terminate a contract by relying on force majeure or material adverse change provisions. However, whether a party would be successful in terminating a contract on these grounds should be considered on a case by case basis, giving regard to the purpose of the contract and the facts of the matter.

Jurisdiction: If your contract involves an entity which is based in, or which has significant assets located in, an EU member state, then enforceability of your contract in the relevant EU member state(s) should be considered. Under the current regime, a choice of jurisdiction by the parties would be upheld by courts and a judgment given by a court of one member state is enforceable in all other member states. It is unclear whether this will continue after the Transition Period. You should therefore consider whether alternative provisions, such as referring disputes to arbitration or granting the English courts non-exclusive jurisdiction to deal with disputes, would be more appropriate.

We can assist with a review of any relevant contracts to identify and help resolve any uncertainties.