Commercial Contracts Managing Brexit Risks

The end of the Transition Period on 31 December 2020 will have an impact on business to business contracts between entities within the UK and those between UK businesses and businesses domiciled in the EU, where the governing law of the contract is the laws of England and Wales. In this article, we highlight five key considerations: 

1. References to EU legislation

As of 1 January 2021, EU legislation will cease to apply directly in the United Kingdom. Clauses requiring parties to comply with “all applicable law” will cease to capture EU legislation. If any EU legislation is central to the operation of the contract, for example, the GDPR, then the contract should instead reference the parallel UK legislation (e.g. the Data Protection Act 2018). Initially, this process should not be too problematic since much of EU legislation has been localised under UK law; however, as time passes we can expect to see a gradual divergence between UK law and EU law which will require parties to consider more carefully their choice of law and jurisdiction and what specific legislation should be expressly referenced. 

2. Territorial considerations 

International channel relationship arrangements have often defined the territorial scope of the agent’s or distributor’s appointment as the European Union, which has included the whole of the UK. Post-Brexit, as the United Kingdom will no longer be an EU member state the scope will need careful consideration. Parties appointing an agent, distributor or other channel partner will need to consider whether or not any EU-wide appointment is intended to cover the UK and provide for this in the contract. The full effects of Brexit in the field of competition law will take some time to emerge; however, it is important to be aware that Articles 101 and 102 TFEU will continue to apply post-transition to contracts concluded in the UK which have an effect within the EU.

3. Enforcement and jurisdiction 

The issue of which regime will govern jurisdiction and the enforcements of UK judgments in the EU is currently uncertain. However, it is clear that the straightforward enforcement of UK judgments in the EU (and vice versa) under the Brussels Recast Regulation will no longer be an option. 

Two possible roads to enforcement have emerged: the first is the Lugano Convention - in essence a mirror image of the Brussels Recast Regulation - which the UK has requested to join. However, the UK’s independent accession to the Lugano Convention is unlikely to be finalised before the end of the transition period. The default position, therefore, is that the jurisdiction and enforcement of judgments issued in England and Wales will be determined by the Hague Convention. Contracting states to the Hague Convention (which includes the EU) will give effect to exclusive jurisdiction clauses and recognise the enforceability of judgments in their respective territories. 

However, the Hague Convention only applies to exclusive choice of court agreements and legal advice should be taken before entering into agreements with non-exclusive jurisdiction clauses or which otherwise contemplate enforcing UK law in EU territories. Parties will also need to navigate the local process of enforcement when relying on the Hague Convention which, depending on the jurisdiction, can involve significant procedural steps and costs.  

For the time being and until such time as the enforcement of UK judgments in the EU has been finally resolved, parties are generally advised to include arbitration clauses in their contract and rely on the New York Convention to enforce the outcome of arbitration. 

4. Change Control

In the event of a no-deal Brexit, the legislative landscape in the UK will be uncertain. The UK may, in such circumstance, choose to diverge significantly in regulatory and compliance matters such as data protection and competition. Change control/contractual variation procedures should therefore be carefully drafted in order to incorporate the introduction of any new legislation in the UK. It is also worthwhile for parties to agree in advance who will bear the costs of compliance in order to avoid unforeseen termination or unwittingly entering into an agreement that is not commercially viable. 

5. Pricing 

The existence of EU/UK trade tariffs has not been confirmed, but it now seems very unlikely that there will be an across the board free trade between the UK and the EU. Consequently, the cost of doing business in the EU is likely to increase. Pricing should therefore be clearly expressed as exclusive of any new taxes, tariffs, duties or similar levies that may come into force at the end of the Transition Period. In addition price fluctuation clauses may see a return.