This article was featured in Manufacturing Today on 1 November 2017.
Organisations with standard terms and conditions or other template commercial agreements that are issued time and time again should consider the impact that Brexit could have on their supply chain. A review of such paperwork may allow drafting amendments to be made which could help to mitigate the risk of unintended consequences.
What should I consider amending in my commercial contracts?
Whether you are buying or selling goods or services, we set out below some key points to consider in order to future-proof your commercial contracts. The following may also apply if existing contracts need to be re-negotiated:
- Barriers to trade: One of the key uncertainties for manufacturers and organisations involved in the supply chain of products between the UK and the EU is whether there will be an increase in tariffs and customs procedures. Contracts should be clear on whether product prices include or exclude any new taxes, duties or levies that may be introduced, or whether the cost should be shared.
- Currency fluctuations: Since the UK voted to leave the EU; the value of the pound has reached record lows against foreign currencies and has continued to fluctuate following various announcements by the UK Government. These fluctuations could substantially affect a commercial deal, and you should consider if this risk has been dealt with (including allocating who bears the currency risk).
- References to the ‘EU’: If your current contracts include a territory that is linked to the EU or contain any other references to the EU, you need to consider whether that definition should include the UK or not post-Brexit (as well as any other country that leaves/joins the EU).
- Term of contract: One way of dealing with the uncertainty surrounding Brexit is to operate contracts with shorter time periods so that they can expire before Brexit occurs, or else contracts which can expire when one party gives a short amount of notice. This must be weighed up against the benefits of securing a contract for a longer period of time.
- Termination rights: In addition to, or instead of, having an easy right to terminate for convenience on notice, we are now seeing specific ‘Brexit’ termination rights being included. These termination rights can be triggered if there is a negative impact from the UK’s departure from the EU. It is worth checking if termination can be triggered in relation to certain insolvency events.
- Assignment rights: If you believe that Brexit could have a significant impact on certain contracts or a particular side of the business, then you should ensure that the business is able easily to assign its rights in a contract to another group company (or other third party) when looking at European operations.
- Change in law and regulation: Contracts may already address changes in law; however Brexit increases the likelihood of such changes. It is worth considering if limitation mechanisms should be inserted (i.e. spelling out what the parties agree, for example on termination of agency agreements) instead of simply referring to and/or relying on the relevant statute. It is also worth agreeing who should be responsible for compliance with any changes in laws and regulations and who picks up the cost. It would be prudent to consider whether the protection of certain rights (such as intellectual property rights) might change following Brexit. Whilst drastic changes to our laws seem unlikely at this stage, over time the UK could start to repeal some of our EU-derived laws. Competition law may be relaxed for example.
Note that the General Data Protection Regulation (GDPR) will apply in the UK from 25 May 2018 and it is anticipated that the UK will adopt a similar position on data protection post Brexit. For further information on the GDPR see here.
With regard to intellectual property rights, the European Commission has recently published a position paper setting out how the EU proposes to treat such rights post-Brexit. This includes providing continued protection in the UK for various rights, including unitary rights (such as trade marks and registered Community designs) and database rights, granted before the date of the UK’s withdrawal. Whether the UK’s position will align with that of the EU remains to be seen, but it is expected that the UK position will not substantially differ. For further information on the EU’s position on intellectual property rights post-Brexit, see here.
- Enforcement: There is a risk that contracts that give English courts jurisdiction could face difficulty in enforcing an English judgment in some other EU Member States (albeit, this may not be likely). Consider if the standard jurisdiction clause should be amended and/or if arbitration is an appropriate option (see here for more information).
Future-proofing for other events?
It is difficult to predict every eventuality, and the points above should be considered in relation to wider changes that could occur. In this time of uncertainty it is prudent to build a flexible contract and/or one where the parties have agreed upfront what will happen if there are unintended consequences from global changes.
Is there anything positive to come from Brexit?
Let’s hope so! It is easy to get caught up in considering the possible negative impacts of Brexit, but there is also scope for change that may have a positive impact on doing business in the UK (for example, potentially more attractive tax treatments and regimes). Or is this wishful thinking…?
If you would like more information on this topic, please contact David Thompson, Partner in Michelmores’ Commercial team.