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.
Brexit 2020
On 31st 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.
Subject to any further agreement, once the Transition Period ends, the UK will no longer be subject to EU law. Those EU regulations already incorporated into our domestic law will, however, still apply after the Transition Period, unless amended by the Government. Such laws will not simply fall away overnight.
With the end of the transition period nearing, there is still great uncertainty surrounding the UK’s exit once the Transition Period ends. Negotiation talks are still ongoing as to the technicalities on which we exit, for example, how trade will occur. Despite the Covid-19 outbreak and a push from both a group of MEPs and the Labour Party, the PM’s spokesperson has insisted there were no plans to change the timetable and therefore as it stands the end of the Transition Period remains 31 December 2020 without a deal. On 19 May, the UK Government published multiple documents setting out its version of the future free trade agreement between the UK and the EU, drawing on previous EU agreements with other countries such as Canada and Japan. Although the Government will hope this will aid a deal, only time will tell if a deal will be agreed before 31 December.
Potential Implications on Commercial Contracts
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:
Territorial scope
You may wish to amend agreements that have the EU as their territorial scope to reflect the UK’s exit. When drafting new contracts, it is also important to ensure that the newly defined territorial scope is included.
Freedom of Movement
If your contracts involve movement of personnel between the UK and EU, it is worth assessing them to see if you can minimise the impact any introduced restriction will have on your ability to perform your obligations under the contract. This is particularly important to industries where travel is frequent. When drafting new contracts, assess whether you can sub-contract locally so that if restrictions on freedom of movement are introduced, you can still perform your obligations under the contract without disruption. Mitigating risks such as this will help protect you from breach of contract claims that may arise if you do not perform your obligations as stated under the contract.
Trade
Change to trading is also likely, with increased barriers put in place. In real terms, this means the UK will no longer be able to benefit from the harmonised free trade system that exists across all EU Member States. After the end of the transition period, tariffs are likely 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.
Tariff-induced price increases are a possibility that your business must be ready for and adapt to effectively, as a buyer and/or seller of goods, by re-negotiating your position under your contract and increasing your costs accordingly. If your business is in the Services industry, it is especially important to assess and re-negotiate, with Services accounting for 41% of the UK’s exports into the EU in 2018. When negotiating prices in new contracts, you should consider how any new taxes and duties that may be introduced will affect pricing and adjust your existing prices accordingly.
Value of the Pound
Since the Brexit vote in 2016, the value of the pound against other major currencies including the Euro has been volatile. Subject to frequent fluctuations across the last four years, alongside the economic dive expected to take place as a result of Covid-19, the end of the transition period is likely to affect the pound’s value. As shown by data gathered since the 2016 vote, media reports of the UK’s inability to strike a deal alongside the Prime Minister’s commitment to a no-deal exit over the years have caused the pound to fall each time. As a result of such reports, businesses not only became apprehensive to invest in the UK economy but were even deterred from staying in it. If the UK fails to agree a deal with the EU by 31 December 2020, a further drop could occur. In order to protect your business, it is important to assess the impact of these fluctuations. For existing contracts, you may wish to consider an early termination or attempt to re-negotiate terms as if you were drafting a new contract. A new contract could for example include a price-adjustment mechanism or even a clause detailing Brexit as a viable cause for early termination.
Legislative Change
Although those EU laws already incorporated into our domestic law will continue to apply once the transition period ends as discussed above, some amendments are likely to occur. In particular, unfavoured regulations such as those regulating competition, data protection and working time may be relaxed. In order to ensure that your commercial contracts are properly drafted, ensure that clauses are kept up to date with the appropriate laws and re-negotiate these if necessary.
Enforcement
It is important to bear in mind that a contract may only be effective if it provides genuinely enforceable rights and remedies. If a deal is struck with the EU then it currently looks like the terms will include an agreement for the continued mutual recognition of judgments between the UK and EU states. However if no deal is reached then the extent to which UK court judgments will be enforceable within the EU or vice versa remains distinctly uncertain. You need to think about whether a clause that provides for arbitration may be a better option than court proceedings. You also could consider whether greater security is needed to protect against the potential increased difficulties and increased cost of bringing legal claims.
Practical Next Steps
Review all existing contracts in light of the considerations above to assess the impact the end of the transition period may bring if the UK does not agree a deal with the EU.
Obtain legal advice to re-negotiate any contractual obligations likely to be impacted by the uncertainty, such as movement of persons, costs and pricing.
When drafting and negotiating new contracts, seek legal advice to ensure that clauses are flexible such as a price adjustment mechanism and Brexit early termination clause.
Consider how disputes are likely to be resolved after the UK’s exit and take appropriate steps to ensure your position is protected.