Brexit... the impact on contracts
With the constant upturns and downturns in the press around Brexit it is easy to switch off from it all yet, the 29 March 2019 will be here before we know it, (the date the UK is due to leave the European Union (EU).
At the time of typing, we are still facing great uncertainty around whether it will even happen and what Brexit really looks like.
In this blog we look at what is it businesses can be doing with commercial contracts to get ready for the outcome….deal or no deal.
Brexit. . . what is it?
On 29 March 2017, the UK government served notice under Article 50 of The Treaty on European Union to terminate the UK’s membership with the EU (i.e. the UK are wishing to be independent of the EU). Based on Article 50, the EU Treaties shall cease to apply to the UK and as things stand the UK exit will take effect on 29 March 2019.
Whatever eventuality we might be preparing for it is always good practice review your contracts and check-in to see that the contract still works for all parties as originally planned.
Will Brexit have a significant impact on my business and contracts?
The answer to this is a typical lawyer answer I am afraid of…it depends. It depends not only on the deal that is struck (if any) but also every business and every contract is different. If there is a deal, as part of this deal the government is seeking to build in a transition period of around 21 months just after Brexit, until 31 December 2020 and possibly into 2021. The transition period is a time during which UK businesses can prepare and adjust to the new arrangements as a result of Brexit (it means we are not expected to adjust overnight and buys us time).
The impact on your contracts is a question of interpretation of each contract to assess the extent of any risks and opportunities.
What shall I do?
You may want to carry out an audit or review of your contracts to see which of those will continue beyond March 2019. For those which carry on beyond March 2019 (or which are due to be renewed beyond that date), we suggest you identify the risks and opportunities relating to Brexit.
Having identified risks and opportunities, it is then a question of how these should be allocated between the parties, should these be shared evenly or, is one party to bear all the risks of Brexit? The answer depends very much on the strength of the negotiating position of each party.
What risks/opportunities should I look for?
Look for the following:
Check whether there are any provisions enabling either you or, the other party(ies) to terminate the contract, if so, is this an issue for you?
For example, the other party(ies) could seek to argue that Brexit is a “force majeure” event (i.e. an event outside of the control of the parties).
The contract may have a “material adverse change” termination mechanism (i.e. does the contract say if there is a significant change of circumstances this can trigger exit). Alternatively, party(ies) may rely on the law of frustration (i.e. an unforeseen event that renders the contractual obligations impossible or radically changes the party’s main purpose for entering into the contract).
- Choice of Law
Check the governing law, is this EU law or English law (this clause is usually towards the end of the contract and states which territory’s laws will be used to govern the commercial agreement)?
Note, that if there is “no deal” EU law will no longer be applicable to the UK legal system. The government will have to address this with specific legislation in a “no deal” scenario.
Is there any regulatory EU legislation which may be problematic given the nature of what the parties are trying to achieve, does this need to be removed from the contract? If so, do you have a severance (e.g. cut out) clause which removes unenforceable or conflicting clauses automatically? Commercially, can the legislation be severed and the contract still work?
Consider potential currency fluctuations. For example, if you are a retailer or manufacturer does your stock or key components come from the EU? Are supplies to become more costly/unavailable?
Is there any potential impact which will make the contract unachievable? Consider the possible implications on price, import, delivery challenges (cost of delivery rising or import regulatory obstacles), insurance etc. Consider solutions around this can you stockpile, are there alternative suppliers? Does the contract rely on any financing and if so, is this affected?
- Commercial intentions
Have the commercial intentions of the parties altered? Can the contract still be performed with the key benefits intact for all parties? If not, is there a solution to this or do the parties need to end the contract?
Check whether your contract relies on any licences or requirement of people or the transfer of people from Europe.
Commercially consider your existing relationship with the other parties, how are they likely to respond to the change in risks/benefits, do you need to protect against this?
Look at the review and renewal clauses, do these need to be brought forwards or pushed back so you can review the contract pre-Brexit or a period of time after Brexit, do these review clauses need expanding to include Brexit as a topic of discussion.
Think longer term about upcoming contracts or those you may enter into the future. How will these be affected by Brexit if at all? Do you need to expressly include clauses to cover risks in terms of Brexit.
So. . . what next?
Once you have identified risks and opportunities in existing contracts, you can:
- Do something now
Parties can begin negotiations with other parties now as to how risk will be allocated and then vary the contract to reflect your agreement.
If varying a contract, think more widely about whether the contract is generally working for all parties, is there anything more which needs updating at the same time?
- Do something later
Parties can agree to vary the contract to provide that the parties will sit down and negotiate at a later point as to how the risk will be allocated acting in “good faith” (i.e. acting honestly and fairly without disrupting the benefits either are due to receive under the contract).
Consider what the existing contract says about how you vary a contract (i.e. this will usually state any variation needs to be in writing and signed by all parties).
- Do nothing
The parties may choose to vary the contract at this stage to include a clause which states that you will renegotiate elements of the contract following Brexit.
Where are we at with Brexit?
The government voted “no deal” on 15 January 2019 for a proposed withdrawal agreement. This means that unless we strike a new deal with the EU imminently which is then approved by the UK government, there would be a sudden break without plans and agreements in place which would heighten disruption for many businesses and individuals.
In a no deal situation, the government will seek to put side plans in place for urgent issues and some of these may be agreed after Brexit, we do not know what shape these plans will take. Alternatively, there may still be a no Brexit scenario or, a delay to Brexit.
So, Theresa May is set to take her Plan B to the EU imminently and then back to the MP’s for to vote on the revised deal with the EU on 14 February.
Please note this blog is intended to advise businesses located in the UK only. If you need help with your review of contracts or, have any questions about this blog please reach out to us.