Brexit Impacts – Future-Proofing Commercial ContractsTuesday, 20 March 2018
Brexit – Current Status
With less than 14 months to go until expiry of the two year time limit for the UK to leave the EU under Article 50, there is still a great deal of uncertainty regarding the extent of progress at the negotiation table. While it may still be reasonably safe to assume that the UK will leave the EU, as scheduled, on 29 March 2019 (followed by a two year transition period), this is not definite and the exact scope and nature of the exit remain unclear. An alternative proposal centres around the argument that the UK may not be prohibited from re-joining the EU under Article 49 (as was recently mooted by Jean Claude Junker and Donal Tusk), although it is unclear as to whether the UK would view this as a viable option and how the process of re-joining would work in practice.
Impact of Brexit on Commercial Contracts
Due to this uncertainty, the extent of Brexit’s commercial impact is yet to be fully determined and there are opposing views. Most commercial contracts being negotiated over the next couple of years will inevitably span both a pre and post Brexit economic, regulatory and political environment, and most businesses won’t have the luxury of waiting to find out what happens. Instead, businesses should be future-proofing by considering the potential impact of Brexit on their commercial arrangements and building protections/flexibility into their commercial contracts.
Whether the UK stays in the single market for goods/services, becomes part of the European Economic Area (“EEA”) or European Free Trade Association or incorporates all or a proportion of existing EU laws into domestic law, remains to be seen. Such changes are likely to have a significant impact on Irish businesses contracting for the sale/supply of goods and/or or services with UK businesses and now is the time to be considering how best to protect against the potential exposures which may arise for such businesses from a commercial perspective.
Top 10 Ways to Future-Proof Commercial Contracts against Brexit
In the current state of uncertainty, it is next to impossible to completely safeguard against all potential commercial and regulatory Brexit-related risks but, against that backdrop, there are certain measures businesses can take in negotiating/drafting commercial contracts to limit exposure, including the following:
- Definitions of “EU”/“EU Law”: Businesses should expressly clarify the scope of future references to "the EU” and “EU Law” to clarify that such definitions will be deemed to include the UK, only to the extent that this is consistent with the UK’s legal status post Brexit.
- Financial Implications: Careful consideration should be given to the potential impact of Brexit on key financial terms , in light of the expected impact of Brexit on free movement of goods and services and potential for increased costs/re-negotiation of prices/trade barriers in doing business with UK customers. The parties may want to consider the inclusion of currency fluctuation protection clauses (fixing rates and or/dealing with liability) and provisions dealing with responsibility for payment of future import duties/tariffs on goods and/or services and other taxes which may apply post-Brexit.
- Changes in Law: The inclusion of ‘changes in law’ clauses making it clear which party will be responsible for the costs incurred in complying with changes in law brought about by Brexit should be considered as providing certainty to the parties in this area. While not unusual in commercial contracts, these provisions are likely to become even more common as the parties aim to allocate the risks (to the extent that these are foreseeable).
- Governing Law/Jurisdiction: In specifying the governing law and choice of forum/jurisdiction for resolution of disputes, the parties should have regard to the fact that UK law post-Brexit will consist of a different and evolving set of rules and regulations which will no longer be subject to the full rigours of EU law. While exclusive UK jurisdiction clauses are likely to be sought by parties which primarily operate within the UK, it may be in the interests of both parties to consider alternative approaches to forum selection, such as (i) providing that the Irish courts will have exclusive jurisdiction in the event of non-enforceability of the UK courts decision; or (ii) choosing Irish law as the governing law and Ireland as the choice of forum for hearing disputes.
- Termination: Businesses should consider whether it may be in their interest to insert specific Brexit termination clauses in future contracts (for example in the event of the UK's exclusion from the single market), or rights to terminate in circumstances triggered by Brexit and/or whether they wish to prevent the other contracting party from being able to invoke such termination right. If included, the circumstances in which any such termination right could be invoked should be limited to specific trigger events taking place.
- Regulatory Compliance/MAC: Parties should be wary of the effectiveness of material adverse change (“MAC”) clauses referencing Brexit/Brexit related consequences in the context of existing transactions requiring prior regulatory or third party approval. Provisions allowing termination in these circumstances may be more likely to be successfully invoked in the context of private transactions. Responsibility for meeting the costs of any additional regulatory compliance requirements triggered by Brexit should also be considered when drafting any new commercial contracts.
- Force Majeure: Going forward, if businesses wish to rely on a force majeure clause in their contracts (i.e. allowing termination in the event of occurrences beyond the reasonable control of a party), they should make sure it is explicitly drafted to reference Brexit-related consequences. Businesses should note, however, that any standard force majeure clauses within their current contracts will likely not be enforced by the courts in circumstances where the contract may be more difficult to perform due to the impact of Brexit, either financially or otherwise.
- Frustration: Frustration occurs when, through no fault of either party, a contractual obligation becomes incapable of being performed. The doctrine of frustration is usually applied narrowly by the courts, requiring the frustrating event to be unexpected or unforeseen in nature. Recent case law suggests that an economic or property crash, for example will not, of itself, automatically amount to a frustrating event. The doctrine of frustration is therefore unlikely to assist in having contractual obligations set aside, by reason only of Brexit having occurred and where, for example, this results in increased costs or more onerous obligations for the parties in performing the contract. While these clauses can be included, their potentially limited effectiveness should be kept in mind.
- Data Protection/Privacy: UK data protection law is currently governed by the Data Protection Act 1998. Had the UK remained part of the EU, it would (along with all other EU Member States) have been obliged to comply with the General Data Protection Regulation (“GDPR”), which comes into force on 25 May 2018. It is therefore unclear as to what the UK position on data protection will be post-Brexit and whether the UK will choose to follow GDPR in its entirety (for example if the UK joins the EEA) or not. Irrespective of the position adopted by the UK, the GDPR will apply to companies based outside the EU (including the UK) which offer goods or services to individuals located in the EU. Also, companies in any country outside of the EU which handle EU citizens’ personal data will be subject to GDPR. Companies that transfer personal data to other organisations outside of the EU must ensure that there is an adequate level of protection in place in respect of the processing of such personal data; so companies located in Ireland/other EU countries who are involved in data processing with UK counterparties should therefore ensure that their contracts are GDPR ready.
- TUPE: The continuing application of the provisions on protection of employees on transfer of undertakings to UK based employees again remains uncertain. Most commentators agree that the repeal of TUPE provisions in the UK is unlikely, given that these rights are so entrenched in UK (and EU) law. Compliance by the UK with fundamental EU employment law rights would also be an obvious pre-condition to the UK's continued access to the single market. There is however, the possibility that certain aspects of the existing UK regime may be altered post-Brexit which may lead to a divergence of approaches between the UK and EU member states to TUPE and these clauses should be kept under review. When entering into a contract that may have an expiry date post-Brexit, it would be advisable to consider the possibility that TUPE may not be around/may be modified in the UK at that point. This may create a need to re-deploy or make employees of the transferor redundant. Businesses may also wish to review their existing agreements for the provision of services, to assess the impact of TUPE being repealed/amended.
Ultimately, it’s still almost impossible to predict the Brexit-related political and economic events yet to unfold that are likely to impact on commercial contracts. However Irish businesses should be aware when negotiating commercial contracts with UK counterparts that Brexit may well impact on the ease or cost of doing business under that contract and attempt to build in appropriate protections and flexibility to the extent possible. As the Irish and UK courts generally prescribe to a narrow view regarding interpretation of clauses in commercial contracts, any future Brexit-related clause should be drafted with great specificity and care to maximise the probability of its being deemed enforceable in the event of a future commercial dispute.
Irish businesses may also want to carry out a review/risk assessment of their existing UK law governed contracts/contracts with UK counterparties to determine whether any changes are required to those contracts in the context of Brexit.
ByrneWallace has extensive experience in advising both Irish and international businesses in relation to commercial contracts and related issues.
We have also established a dedicated multi-disciplinary team to advise and represent both Irish and international businesses on the possible legal and regulatory implications of Brexit.
For advice in relation to commercial contracts, including Brexit-proofing, contact one of our Commercial Contracts team or your usual ByrneWallace contact. For general advice and support on preparing your business for Brexit, contact a member of our Brexit team.