Commercial Contracts

On 31 January 2020, the UK’s formal withdrawal from the EU took effect and the UK ceased to be an EU Member State. Exit day marked the start of the transition/implementation period, during which the UK continues to be subject to EU law, and which comes to an end at the end of 2020.

1 January 2021 is the target start date for future UK-EU relationship agreement.
Even if there is a comprehensive agreement in place on time, there will be significant changes to the way that the UK and EU operate and interact. There are likely to be issues outstanding for resolution between the UK and the EU and talks are likely to continue beyond this date.

Brexit could result in increased costs, inability to perform a contract or a contracting market if your customers are affected. This is an area of risk and uncertainty for directors and in-house counsel, action needs to be taken to review existing commercial contracts.

Throughout the implementation period, and until the outcome of the negotiations for the UK’s future relationship with the EU is known, it is important to consider how your business can future-proof in a climate of uncertainty.

During the implementation period, there remains an opportunity for businesses to implement a risk management strategy (if they have not already done so) which begins with the formation of a Brexit team tasked with conducting a full-risk assessment.

We recommend that you conduct a risk assessment of your existing supply chain, key customers and other commercial contracts. These will be existing contracts that continue in force after the end of 2020, as well as new contracts in the pipeline, and you will need to consider whether your ability to perform, or the costs of performing the contract, may be affected by Brexit. This will include not only a contract audit, but also a consideration of the commercial and economic issues.

Any of these factors may affect your ability to perform the contract or the costs of doing so:

Trade tariffs: these could be imposed on the goods you import, affecting your costs or even rendering the contract loss-making. Tariffs could also be imposed on the goods you supply into the EU and the rest of the world. Consider the risk of new or increased tariffs as well as any potential VAT changes.

Currency exchange rates: there is a risk of Sterling’s decline as a major reserve currency, which may lead to greater volatility than was envisaged when a contract was negotiated. Fluctuations both in your costs and sales price outside an acceptable range could result in a contract no longer being viable.

Changes in the law: although the government has put in place the Withdrawal Agreement, the effect of which is to preserve the status quo of EU regulations, after 2020 there is a risk that new EU law and regulation will not apply in the UK creating a divergence, or existing law ceases to be applicable.

Regulatory approvals, licences and registrations: does your business rely upon EU-wide approval or licensing schemes, or similar schemes throughout the world that are derived via the EU. As with other changes in the law, these schemes may cease to apply to UK businesses, or change in a way that increases the administrative burden.

Dependency on workers: possible mobility restrictions and labour shortages in relation to EU or EFTA nationals working in the UK post-2020 may affect your ability to perform contracts.

 Recommended Actions

  • Review existing contracts: are there any Brexit-specific clauses already, or other hardship type clauses?
  • What existing contract boilerplate would help out? It is unlikely that a force majeure clause will be of assistance unless it has a specific reference to Brexit. Some contracts may have either a “material adverse change” (MAC) clause, or a change control clause (that includes change in the law) either of which may help, depending how they are drafted. But the knock-on effect of how the costs are to be borne under such clauses may not assist you.
  • It is possible to include in new contracts a Brexit impact clause and even to re- negotiate such a clause in existing contracts. The aim is to deal either with specified impacts or triggers, or a more general hardship clause addressing adverse impacts of Brexit. In most cases the impact of Brexit will be unclear, so the clause would have to require the parties to re-negotiate the affected aspects of the contract
  • or, if that fails, then termination of the contract would follow. In some cases, the specific impact can be addressed, such as materials and production costs, and the consequence defined, such as a price adjustment.
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