A No-Deal Brexit: Implications on Commercial Contracts

No-Deal Brexit Implications on Commercial Contracts

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No-Deal Brexit

Implications on Commercial Contracts For obvious reasons, a word that we have not heard much lately is ‘Brexit’.

Having dominated the UK’s daily media coverage for the past four years, Brexit has understandably been replaced with a new objective: to beat the Covid-19 pandemic.

Although the pandemic is clearly the most pressing situation to overcome, it is important to remember Brexit has not gone away as a result. Nor is it at all certain that a deal will be done before the end of the transition period on 31 December 2020. This article explains the implications of a no-deal Brexit on commercial contracts and provides practical steps you, as a business, should take to protect yourself from the risks that the end of the transition period brings.

Johnathan Rees

Katherine Martyn

Partner johnathan.rees@laytons.com +44 (0)20 7842 8009

Trainee katherine.martyn@laytons.com +44 (0)20 7842 8000

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No-Deal Brexit | Implications on Commercial Contracts

Brexit 2020

Potential Implications on Commercial Contracts

On 31 January 2020, in accordance with the “Withdrawal Agreement”, the UK left the EU and is now in a “Transition Period” until 31 December 2020. This means that although we have technically left the EU, we still abide by EU laws until 31 December 2020.

The uncertainty surrounding the potential exit without an agreement in place means that measures must be taken to mitigate any risks It is therefore important to review your existing commercial contracts in light of the following considerations:

Subject to any further agreement, once the Transition Period ends, the UK will no longer be subject to EU law. Those

• Territorial scope

You may wish to amend agreements that have the EU

EU regulations already incorporated into our domestic law

as their territorial scope to reflect the UK’s exit. When

will, however, still apply after the Transition Period, unless

drafting new contracts, it is also important to ensure

amended by the Government. Such laws will not simply fall

that the newly defined territorial scope is included.

away overnight.

With the end of the transition period nearing, there is still

• Freedom of Movement

If your contracts involve movement of personnel

great uncertainty surrounding the UK’s exit once the Transition

between the UK and EU, it is worth assessing them

Period ends. Negotiation talks are still ongoing as to the

to see if you can minimise the impact any introduced

technicalities on which we exit, for example, how trade will

restriction will have on your ability to perform your

occur. Despite the Covid-19 outbreak and a push from both a

obligations under the contract. This is particularly

group of MEPs and the Labour Party, the PM’s spokesperson

important to industries where travel is frequent. When

has insisted there were no plans to change the timetable

drafting new contracts, assess whether you can sub-

and therefore as it stands the end of the Transition Period

contract locally so that if restrictions on freedom of

remains 31 December 2020 without a deal . On 19 May, the

movement are introduced, you can still perform your

UK Government published multiple documents setting out

obligations under the contract without disruption.

its version of the future free trade agreement between the

Mitigating risks such as this will help protect you from

UK and the EU2, drawing on previous EU agreements with

breach of contract claims that may arise if you do not

other countries such as Canada and Japan. Although the

perform your obligations as stated under the contract.

1

Government will hope this will aid a deal, only time will tell if a deal will be agreed before 31 December.

1

https://www.bbc.co.uk/news/uk-politics-52101096 https://www.gov.uk/government/publications/our-approach-to-thefuture-relationship-with-the-eu

2

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No-Deal Brexit | Implications on Commercial Contracts

• Trade

the Prime Minister’s commitment to a no-deal exit over

Change to trading is also likely, with increased barriers

the years have caused the pound to fall each time. As

put in place. In real terms, this means the UK will no

a result of such reports, businesses not only became

longer be able to benefit from the harmonised free

apprehensive to invest in the UK economy but were

trade system that exists across all EU Member States.

even deterred from staying in it. If the UK fails to agree

After the end of the transition period, tariffs are likely

a deal with the EU by 31 December 2020, a further

to be higher for UK exports into EU Member States, making it more expensive to trade. This is particularly significant to businesses given that the EU is the UK’s largest trading partner, with nearly half of all UK exports going to the EU in 2018, worth approx. £291 billion.

"

Protect against volatility in the value of Sterling

Tariff-induced price increases are a possibility that your business must be ready for and adapt to effectively, as

drop could occur. In order to protect your business, it

a buyer and/or seller of goods, by re-negotiating your

is important to assess the impact of these fluctuations.

position under your contract and increasing your costs

For existing contracts, you may wish to consider an

accordingly. If your business is in the Services industry, it

early termination or attempt to re-negotiate terms as if

is especially important to assess and re-negotiate, with

you were drafting a new contract. A new contract could

Services accounting for 41% of the UK’s exports into the

for example include a price-adjustment mechanism or

EU in 2018 . When negotiating prices in new contracts,

even a clause detailing Brexit as a viable cause for early

you should consider how any new taxes and duties that

termination.

3

may be introduced will affect pricing and adjust your existing prices accordingly.

• Legislative Change

although those EU laws already incorporated into our

• Value of the Pound

domestic law will continue to apply once the transition

Since the Brexit vote in 2016, the value of the pound

period ends as discussed above, some amendments are

against other major currencies including the Euro has

likely to occur. In particular, unfavoured regulations such

been volatile. Subject to frequent fluctuations across the

as those regulating competition, data protection and

last four years, alongside the economic dive expected

working time may be relaxed. In order to ensure that

to take place as a result of Covid-19 , the end of the

your commercial contracts are properly drafted, ensure

transition period is likely to affect the pound’s value. As

that clauses are kept up to date with the appropriate

shown by data gathered since the 2016 vote , media

laws and re-negotiate these if necessary.

4

5

reports of the UK’s inability to strike a deal alongside

3

Figures: House of Commons Briefing Paper 7851, 16 December 2019, Statistics on UK-EU Trade, Matthew Ward 4 The Office for Budget Responsibility (OBR) warned the pandemic could see the economy shrink by a record 35% by June. https://www. bbc.co.uk/news/business-52279871 5

Figures: House of Commons Briefing Paper 7851, 16 December 2019, Statistics on UK-EU Trade, Matthew Ward laytons.com | 5

No-Deal Brexit | Implications on Commercial Contracts

• Enforcement

it is important to bear in mind that a contract may only be effective if it provides genuinely enforceable rights

Practical Next Steps 1.

Review all existing contracts in light of the considerations

and remedies. If a deal is struck with the EU then it

above to assess the impact the end of the transition

currently looks like the terms will include an agreement

period may bring if the UK does not agree a deal with

for the continued mutual recognition of judgments

the EU.

between the UK and EU states. However if no deal is reached then the extent to which UK court judgments

2. Obtain legal advice to re-negotiate any contractual

will be enforceable within the EU or vice versa remains

obligations likely to be impacted by the uncertainty, such

distinctly uncertain. You need to think about whether

as movement of persons, costs and pricing.

a clause that provides for arbitration may be a better option than court proceedings. You also could consider

3. When drafting and negotiating new contracts, seek legal

whether greater security is needed to protect against

advice to ensure that clauses are flexible such as a price

the potential increased difficulties and increased cost of

adjustment mechanism and Brexit early termination

bringing legal claims.

clause.

4. Consider how disputes are likely to be resolved after the UK’s exit and take appropriate steps to ensure your position is protected.

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No-Deal Brexit | Implications on Commercial Contracts

Expertise

Corporate & Commercial We provide a complete range of corporate and commercial advice and support for clients who extend from start-ups, individual entrepreneurs and family offices to multinational corporations.

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