Brexit: Impact on long term commercial contracts

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Following the UK's vote to leave the European Union, we consider the potential implications for contracts running throughout this transitional period and beyond any Brexit.

Managing Brexit risk in long-term contracts: Download the guide >>

Key issues 

  • Change of law risk: In practice, the UK's legal environment may not alter dramatically immediately on Brexit. However the potential for change must be factored into current negotiations, with some contracts higher risk than others. Risk can be borne by one party or shared in a more collaborative way. Established contractual mechanisms can deal with either scenario. 
  • Currency risk and tariffs: Exchange rate risk is topical but not new. The possibility of new tariffs introduces uncertainty into some relationships but is contractually straightforward to anticipate. 
  • Commercial viability: In some circumstances, Brexit could make a particular contract economically unviable for one party. Parties can agree in advance that, should this happen, certain contractual obligations / rights will be triggered. These could range from a mere obligation to meet and discuss, to repricing or even the ability to terminate. 
  • Corporate reorganisation: the contract might need the flexibility to accommodate any future reorganisation of one party to ensure that certain functions stay within the EU. Options include the ability to transfer the contract as a whole (say, to an affiliate) and flexibility around customer geographies and volumes of supply.  
  • Data: Most business are gearing up for the new General Data Protection Regulation (GDPR). Post Brexit, the UK's regulator wishes to see equivalent UK laws in order to provide the legal "adequacy" needed to support the transfer of data to the UK from the EU. Any business which processes data about individuals in the context of selling goods or services to citizens in Member States will need to comply with the GDPR irrespective of the UK's legal position.  
  • Staff transfer: Many outsourcings are based on the understanding that TUPE will apply to transfer staff in the event of a business change. If the UK remains in the EEA the scope for change is limited. Full exit from the EU, no EEA membership and no trade agreements, would technically allow amendment/repeal of TUPE but is considered unlikely. A sensible approach is to assume that staff transfer mechanisms will continue but nevertheless consider the possibility that TUPE may not apply in future years. It may become common to see contractual obligations designed to effect staff transfer and apportion redundancy costs in this eventuality. 
  • Force Majeure and Frustration: The potential for successful legal arguments founded in "force majeure" (contract relief and/or termination because of unforeseen events) or "frustration" (termination because of impossibility of performance) is overstated by some commentators. However going forward, it is sensible to review precisely what constitutes a force majeure event. Cautious parties could expressly carve out any Brexit related circumstances. 
  • Cross border enforcement of judgments: Post-Brexit it may become more difficult to enforce an English court judgment in the EU (and vice versa). However, it is hoped that some form of UK/EU harmonised system will be agreed to cover enforcement, jurisdiction and governing law. Without this, the courts of Member States will apply their own laws when determining questions of enforcement and local law advice will be required. This risk is only of concern for contracts where cross-border enforcement might be needed. Choosing arbitration, rather than court proceedings, negates this risk (though is not appropriate in every case). For more information see Brexit: Impact on Dispute Resolution. 

Actions 

  • For new agreements:  
    • Contracting under English law, and with disputes heard by the English Court, remains a sound choice. Take specialist advice on aspects around dispute resolution if the agreement is likely to remain in force after Brexit with a party based in the EU.  
    • To the extent possible at this early stage, anticipate the possible implications of Brexit on the commercial relationship. Agree and document which party will bear that risk. Some agreements will be higher risk than others. Detailed governance procedures, change control mechanisms and, possibility, the ability to terminate for material Brexit related changes, might be advisable for some agreements.
  • For your existing contract portfolio: 
    • Identify key contracts. Assess them for Brexit related risks. For high risk contracts, consider renegotiation or (where contractually, and commercially, viable) termination during this transitional period.  
    • Remember renewal of existing contracts and any associated agreements such as sub contracts. 
For more detailed analysis of the issues, please contact the authors or your usual DLA Piper contact.