Commercial Contracts following Brexit

It is vital that you review the key terms of your business or organisation’s existing contracts and those which it may be planning to enter into in preparation for Brexit.

This article explains some of the key commercial issues which could arise following Brexit and identifies practical considerations for future-proofing a contract. The overarching message is to avoid unpredictability by creating certainty where possible now.

This article is prepared on the assumption that the UK is to leave the EU by way of a “hard Brexit”, meaning the UK ceases to be part of a customs union and is no longer obliged to comply with EU law. Whilst a hard Brexit will cause more change than the other possibilities, it is best to err on the side of caution pre 31 October 2019 (or whatever date the UK ultimately leaves the EU, if it does).

Financial Hardship

Brexit could have significant commercial implications affecting the profitability and performance of contracts and could lead to financial hardship for the parties. For example:

  • there could be changes to exchange rates;

  • tariffs could be imposed or increased;

  • additional costs and delays could be incurred due to customs checks for goods entering and leaving the EU;

  • restrictions on the freedom of movement of people could create labour shortages in the UK, particularly for sectors such as construction, hospitality, franchising and care services which are heavily reliant on workers from the EU; and

  • a contract may no longer be required following Brexit, for example, if a business relocates and no longer requires premises or plants based in the UK.

Such events could cause a contract to become unprofitable or difficult to perform, which is problematic, particularly as it is

unlikely that parties will obtain relief from the consequences in the absence of express provisions.

To future-proof a contract against Brexit, consider including clauses which expressly deal with these possible occurrences. One solution would be to include further termination provisions whereby either the contract can be terminated on Brexit or by short notice, if the necessity occurs.

Data Protection Laws and Transfers of Data to the UK

One of the more immediate issues arising in anticipation of Brexit concerns data protection arrangements and the transfer of personal data from countries in the European Economic Area (EEA) to the UK.

Where your business or organisation relies on the transfer of personal data between the EEA states and the UK to operate, such a transfer could be problematic following Brexit. Whilst it will be possible to send personal information from the UK to the EEA without additional arrangements, the same cannot be said about transfers from EEA member states to the UK.

Following Brexit, data processing in the UK and transfers of personal data from the UK to EEA member states will continue to be governed by European regulation in the form of the General Data Protection Regulation ((EU) 2016/679) (GDPR). This is because the GDPR was automatically incorporated into domestic law on 25 May 2018 when it became applicable in all EEA member states.

After Brexit, the European Commission has stated that a decision about transfers to the UK cannot be made until it has considered whether the UK offers an adequate level of data protection, and therefore can be added to the list of countries for which the Commission has already made a determination of adequacy. It is recommended that standard contract clauses are put into place with a business located in an EEA member state in order to facilitate a transfer of personal data to the UK.

References to the EU and EU-related Legislation

It is unclear whether a contract which refers to “the EU” will be interpreted as including the UK after Brexit. This could clearly have a huge impact on the functionality of a contract. 

If, for example, the EU is defined to mean its “member states from time to time”, this would suggest that it will not include the UK (and potentially, therefore, Iceland, Liechtenstein and Norway). Conversely, if the definition of the EU specifically refers to the UK, it would suggest that the contract continues to relate to the UK. Nevertheless, interpretation will depend on a range of factors, including the purpose and context of the clause in question, the commercial background and commercial common sense.

A solution to future-proof a contract which contains references to the EU or EU-related legislation would be to make it clear how such references are to be interpreted after Brexit.

Governing Law and Jurisdiction

Whilst there is no reason to believe that English law will be less attractive as the choice of law, it is important to consider whether English jurisdiction clauses will continue to be suitable.

Choice of Law

 English contract law will be largely unaffected by Brexit. This is because it is largely derived from common (i.e. case) law and so commercial contracts are subject to limited statutory intervention (and such intervention mainly derives from UK statute in any event). 

A choice of English law should be upheld under common law after Brexit. Although the position in relation to non- contractual matters is largely untested, the English courts would be likely to respect the parties’ choice as well.

Jurisdiction Clause

The English courts will be largely unaffected by Brexit as EU law has little influence over the English judiciary and the civil procedure rules. However, some points to note about jurisdiction include:

  • how such references are to be interpreted after Brexit.

  • it being likely still to be possible for parties in member states to give the English courts jurisdiction over the contract;

  • there being possibly greater complexity and inconsistency in the treatment of an exclusive jurisdiction clause in favour of the English courts; and

  • whether judgements of the English courts will be enforced in member states. This requires some caution and a conservative approach would be to:

  1. assume that national law will apply and to take local advice as to the implications; and/or

  2. use arbitration, since arbitration is unlikely to be affected by Brexit.

Practical Steps to Consider

  1. Consider how Brexit is likely to affect your business generally.

  2. Identify key contracts which are likely to be affected by Brexit and consider whether they provide sufficient protections.

  3. Consider renegotiating and terminating contracts to avoid the uncertainty associated with Brexit.

  4. Always take care when discussing issues with third parties, since unequivocal statements that an action either will or will not take place may lead to subsequent arguments concerning interpretation of the contract, including whether the contract has been varied.