March 24, 2017

Brexit – assessing the impact on your commercial contracts

What should I consider for my existing and future commercial contracts?

Any immediate substantial changes to existing contacts are unlikely to be required at this stage, because all existing EU laws and regulations are likely to remain in force throughout the Brexit negotiation period. And although most commercial contracts are likely to survive, because English contract law generally consists of principles developed and maintained by English courts and Parliament, it’s important to protect and future-proof your contracts now.

We recommend for businesses to:

  • review as early as possible key existing contracts and trading relationships to assess the effect of Brexit on important rights and obligations, and
  • consider the strategic options available for any affected contracts.

The following could have commercial implications, leading to particular contracts becoming more difficult to perform and affecting profitability:

  • the imposition of tariffs on goods and services
  • restrictions on the freedom of movement of people
  • further changes in exchange rates or supply chain issues (where suppliers are located in other EU countries, or in countries where the loss of free EU trade arrangements may have an impact).

Provisions which require careful scrutiny

Requirements to comply with EU legislation and regulations (either expressly or through applicable law provisions)
Check if there are any obligations that are defined by reference to EU legislation. If so, consider if the provisions should continue post-Brexit or whether the ‘EU’ references should be amended to refer to UK laws, or the laws of specifically defined countries for territorial scope.

Territorial scope of rights or restrictions
Review the wording of the territorial scope of key rights and restrictions. For example, the scope of a licence, agency or distribution arrangement or relevant intellectual property rights.

Force majeure and material adverse change
Examine the definitions and exact wording of operative clauses to assess any possible Brexit-related interpretations. If Brexit is expected to impact on your ability to comply with performance obligations or to have serious financial implications, you might consider negotiating a specific "Brexit clause". Businesses should also consider if it is appropriate to include a price adjustment mechanism or currency change options to take account of any financial impact, such as import/export tariffs, exchange rates fluctuations, and different immigration controls.

Term and termination rights
Assess the termination clauses and, in particular, if there are any termination rights for convenience or if there are other mechanisms to compensate for any financial hardship. With new contracts, businesses are advised to consider negotiating shorter terms, where possible, until the impact of Brexit is better understood or to seek to include a Brexit-related trigger event, with as much flexibility as possible for dealing with any consequences.

Data protection
It is likely that the UK will still be an EU member when the new European General Data Protection Regulation (GDPR) comes into force on 25 May 2018. Businesses should familiarise themselves with the new GDPR requirements. Post-Brexit, the UK will likely cease to belong to the EU 'safe data' zone, and if further steps are not taken to address the data protection impact, it may be more difficult for businesses in the EU and European Economic Area (EEA) member states to send personal data to the UK. This may require the UK to implement laws very similar to the GDPR to meet the EU standards. UK businesses with significant customers in other EU or EEA countries should create a map of the personal data flows with such countries and to analyse the likely impact.

Intellectual property (IP)
Most intellectual property rights are likely to be affected because the law has been harmonised by EU legislation, but different rights will be affected in different ways dependent on their territorial scope. Businesses should assess the impact and protection of their IP rights. Broadly speaking:

  • Registered trade marks and designs
    As EU registered trade marks and designs have territorial scope, it is probable that these EU rights will no longer have force in the UK after Brexit. It is thought that the owners will need to be granted parallel rights via a conversion process in the UK. Rights owners should be aware that any conversion process is unlikely to be free or automatic.
  • Copyright
    Copyright law has been increasingly harmonised by a series of EU directives and regulations. It is unclear if the UK will retain these harmonised laws. It could happen that English and EU copyright law start to diverge in certain areas post-Brexit.
  • Confidentiality
    The new Trade Secrets Directive is due to be implemented by June 2018, before the end of the anticipated two-year Brexit negotiation period. It is not yet clear whether or to what extent the Government will implement it after Brexit. As the Directive largely reflects the UK law position, businesses are best advised to follow its provisions in any event.
  • Patents
    The launch of an EU-wide Unitary Patent and a Unified Patent Court in 2017 would see participation restricted to EU members. Brexit would mean the UK cannot participate unless a special agreement is reached with the EU and participating states. There is a separate system of European patents under the European Patent Convention which is not an EU creation and will not be affected.

Governing law and dispute resolution
Check jurisdiction and governing law provisions  for suitability. There are potentially complex implications for the conflict of law rules and the conduct of disputes for cross-border contracts. It may be harder to enforce an English judgement within some EU countries if the UK ceases to be covered by the Recast Brussels Regulation and replacement arrangements are not negotiated. We suggest businesses include alternative dispute resolution mechanisms, where appropriate, as this is likely to minimise the risks surrounding the enforceability of judgments between the UK and the remaining EU countries.

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