Brexit - Commercial Contracts
Critical clauses in existing or commercial contracts under negotiation which businesses must consider:
Definitions: Does the contract mention or define the “EU”? Is the term defined to mean the European Union as it stands at the date of the agreement or as it might change from time to time? If the contract contains any Brexit-related trigger event or events, the term “Brexit” should be clearly defined for any change clause in the contract. Avoid language such as “when the UK ceases to be a member of the European Union” as it doesn’t address a scenario where the UK leaves the EU with transitional arrangements, i.e. some or all of the EU legal regime would continue to apply to the UK for a period after withdrawal.
Governing Law and Jurisdiction: Assess whether enforcement of an Irish judgment or an English/Scottish/Northern Irish judgment is expected to be more difficult and how this would impact your contract. Consider a choice of court or jurisdiction clause which designates an EU Member State post-Brexit, and also whether adding an arbitration clause, or other method of alternative dispute resolution, will be less likely to be open to challenge as a result of Brexit.
Assignment: Identify which agreements or classes of agreements need to be novated, amended or terminated. If either party opts to move its business into or out of the UK, or reorganise or restructure as a result of Brexit, will this result in contract transferring or automatic termination? This is especially relevant to regulated sectors.
Change Clauses - Frustration, Force Majeure or Material Adverse Change (MAC): Recent UK case law has shown how high the bar is for a party to invoke successfully Brexit as a means of frustration of a contract. Therefore, consider whether to identify any Brexit-related trigger event or events and define them clearly in any ‘change’ clause in the contract. Examples of trigger events are set out below.
- Trade Tariffs: Is the contractual price fixed? Does it state where liability for VAT changes and any other trading costs, e.g. tariffs, customs and excise charges?
- Currency fluctuation: Are the contract prices € or £? Are there any provisions for material currency fluctuations? Can the currency exchange rates be hedged? In long-term contracts, consider provision for renegotiation or review of pricing.
- Payment Triggers: Are there milestone events that could be impacted by Brexit?
- Delays such as Late delivery cause by border delays
- Changes in Law: Who bears the cost or duty of compliance with changes in law? Must the contract be terminated for illegality?
- Restrictions on four freedoms: Will there be supply-chain issues, labour shortages or impediments to contracts including services should restrictions be introduced on the free movement of goods, capital, services or labour?
- Does the contract rely upon any EU trade deals?
- Threat to commercial viability