Brexit Implications on Commercial Contracts
On 23 June 2016, the UK voted to leave the EU. On 29 March 2017, the UK government gave formal notice under Article 50 of The Treaty on the European Union to terminate the UK’s membership of the EU. This triggered the start of formal withdrawal negotiations between the UK and the EU.
The implications of Brexit are still largely unknown but now is the time to consider existing and proposed new contracts with customers and suppliers in preparation for Brexit. We have highlighted below some commercial issues which you may want to consider when contracting with other parties in the EU.
Freedom of movement
Any immigration requirements for EU nationals in the UK will depend on the final trade agreements negotiated, which are still to be decided. The freedom of UK nationals to travel within Europe and for those in Europe travelling to the UK seems likely to be impacted. This could affect a party’s ability to meet their obligations under existing contracts and could also cause an increase in the cost of labour. Suppliers may want to pass these increased costs on to customers to mitigate their own losses.
Tariffs may be payable on both imports and export of goods to and from the EU. This may affect the costs incurred by a supplier who, again, may want to pass these additional costs on to their customers. 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.
Currency exchange rates
Uncertainty about the UK economy may result in fluctuations in the rate of exchange between sterling and other currencies. Contracts will need to be able to provide for protection against movements in exchange rates.
Identify if any of your commercial agreements have the European Union as their territorial scope. For example, the scope of a licence, agency or distribution arrangement or relevant intellectual property rights. Make it clear in your agreements whether references to the EU will include the UK after Brexit.
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.
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. It will be hard to terminate an agreement simply on the basis that the contract has become more onerous or less profitable as a result of Brexit related events. For new contracts, if a party wishes to be able to terminate the agreement upon Brexit, it is best to include an express termination right. To avoid any uncertainty, a review of your existing agreements should be undertaken to consider whether there should be an express right to terminate on Brexit.
You need to understand the risk that Brexit poses to your particular commercial agreements and assess now whether there is any ability to renegotiate, vary the terms, limit their risk under the contract, or potentially terminate.
If we can assist you or your business in any way, or if you have any questions in relation to the services that we offer, please contact us. We look forward to working with you.