How will Brexit affect existing contracts or the preparation of new contracts between commercial ent

The following article discusses session three in the IR Global Virtual Series on 'The Business of Brexit: Implications for the commercial contract process'

U.S – TT One way that Brexit will affect existing contracts or the preparation of new contracts between commercial entities is its impact on the value of the commercial relationship.

Brexit will affect commercial contracts in the EU through any or all of the following: increased trade barriers; reduced freedom of travel; currency fluctuations; changes to EU territory; rise of parallel regulatory regimes; and variations in substantive law. Thus, it would be prudent to audit existing contracts that have a connection with the UK or the EU in order to re-evaluate the deal and reassess the parties’ bargaining power. Doing so will help commercial entities determine whether contracts will need to be amended, renegotiated or terminated.

 

For example, the governing law, venue, and jurisdiction provisions in any EU or UK related commercial contract must be clarified and remain suitable to the parties. Any reference to ‘English law’ may need to be updated, to either refer specifically to UK law or EU law, postBrexit. Likewise, any contracts, like distributorship or franchise agreements, with territoriality clauses may need to redefine the scope of any territoriality provisions.

Amendments to existing contracts may be required to account for higher costs associated with cross-border transactions, such as tariffs or varying legal requirements, like customs declarations. Depending on Brexit’s impact on the commercial viability of a contract, parties that cannot renegotiate contracts may find that early termination is best and should prepare accordingly. If the contractual relationship will resume, then parties may choose to renegotiate their contractual rights and obligations by reallocating anticipated costs and risks among them or sharing them equally.

For new contracts, commercial entities should aim to anticipate all possible implications of Brexit on the commercial relationship. As noted above, this will involve re-evaluating the value of the deal and ensuring it remains viable and in the best interest of the parties. Depending on the type of contract, parties should consider adding clauses to protect against: perceived changes in currency value, future imposition of tariffs or duties, customs regulations, other non-tariff barriers to trade, substantive changes in the law, and material changes to contract terms post-Brexit.

Germany – UB As a typical German, I'm not really optimistic because there's a great repeal bill in the UK which will reduce EU law, and I don't know which parts will remain in domestic UK law.

It all depends on the political side. If there's a hard Brexit there will be political pressure in Britain to push even further away from the EU, so the best thing we can hope for on contracts is that Brexit will trigger Force Majeure or Material Adverse Change clauses. I'm not so sure though, because if I look at German or English case law, the courts are really very restricted in how they can use the Force Majeure clause. Is a change of law in a member state really a Force Majeure? I'm not too sure.

In Marks & Spencer Plc v BNP Paribas Securities Service Trust Company (jersey) Ltd [2015] the UK Supreme Court held that a court should only intervene where a term has been considered so obvious that it went without saying.

The territorial scope of contracts is one of the major points for me on this topic. This is especially true for license agreements and the different treatments you put on the territory of the European Union. That is no longer true for England, Wales, Scotland or Northern Ireland. Clients have to make sure that such licensing clauses in contracts are renegotiated for the UK and added into new contracts.

This is the same for copyright laws. My firm AQUAN just applied for protection of its copyright in the UK. We did it like we do in Switzerland, with a separate registration for our copyright.

Another big thing is GDPR. I hope that the UK will stay in the framework of European data protection and everything will be fine. If not, the UK will no longer be a safe harbour, and we will see a lot of problems for M&A transactions.

Tariffs and taxes have always existed, but for a long time there weren't tariffs and taxes between the UK and Germany. It's not yet clear who should bear the tariffs and taxes, and we don't know what will happens and how long it will take. I have recently heard that the British and French governments are hiring a lot of people, because of potential problems with tariffs and business contracts. There is still no solution for the Irish-NorthernIrish border.

The exchange rate is another concern and some US firms are already refusing to sign contracts in Sterling because it's not stable enough anymore.

Insolvency also has problems, because we have European insolvency law which won't apply anymore after Brexit. I am not really hopeful that the Force Majeure or Material Adverse Change clause will apply, so we can might see some frustration there.

My advice is that if a business has the chance to renegotiate, they should do it and put in a special termination clause in case of Brexit.

Malta – WSB At the moment we're seeing a number of insurance companies that are showing interest in Malta because, being based in the UK, they may not be able to trade within the EU.

Regarding changes to tariffs and taxes, there are more than 750 international trade agreements that need to be re-negotiated with the UK, with 295 of them on trade, 202 of them on regulations and more around customs, fisheries, transport and nuclear energy.

All of this re-negotiation will affect our own plans and they are still being negotiated at the moment.

So actually, it's very difficult to know where ultimately we will end up. These arrangements need to be re-negotiated as quickly as possible, before we know when and how to prepare new contracts.

UK – RC The current transitional period is allowing professionals and businesses to gradually get a feeling for what they need to put in place. There are not many that are rushing to change their contractual arrangements because of the uncertainty around the actual eventual deal that is done.

In the UK, we have just completed a huge amount of work putting in place measures to comply with General Data Protection Regulations (GDPR), so we're not seeing the business community acting in a way that's inconsistent with European membership. Certainly not among any of our clients.

Force Majeure has become relevant to all sizes of business because of Brexit. We have asked a lot of our clients to make sure their Force Majeure provisions are updated, because of potential bottlenecks in delivery of goods. It will be important for clients to look carefully at the Force Majeure provisions and make sure they know what happens in the event of delayed delivery.

That's just a small, but very relevant, example, particularly if you're delivering a container full of microchips, which could be worth upwards of GBP2 or 3 million per container.

With regard to territorial scope, if the UK is leaving the EU, then we must look carefully at distribution agreements. Clients have been caught out here before when new countries have joined the EU. It has expanded from 11 member states to 27 and businesses can find that they have granted distribution rights to a far wider territory than they originally thought.

As far as licenses and registrations are concerned, there will be divergence once we move past the transitional period, because there will be different levels of certification for goods and services. I suspect we will see UK businesses continuing to comply with the requirements of the European Union simply because it makes economic and commercial sense to do so.

Finally, we've been putting in huge amounts of work for all of our clients to ensure compliance with GDPR, and, in fact, a lot with U.S. clients, who are equally keen to comply with GDPR because they have so much data flow between different nations.

I believe the legal framework will remain in place and we'll come back to the same issues about how its enforced. I suspect we'll see a sensible practical route through and contracts will not change greatly. I expect to see UK entities agreeing to comply with the GDPR laws.

Italy – PM I am happy that Robert’s vision from the UK is positive, but, just like my colleague in Germany, I'm not so optimistic because I think that there we have more than one problem.

First of all, I'm not so sure that we will have the transition period, because we don’t know if the withdrawal agreement is going to be finalised.

Obviously, we hope that we will have an agreement between the EU and UK and a transitional period, because March 2019 is very close, but, if not, the changes to tariffs and taxes will have a very large effect on the circulation of goods in general, especially foods and suchlike. The problem is not just new taxes and new customs duties, but the operation of border controls, because we know there is nothing in place at present and everything can circulate freely in the Union. People and businesses in the UK and in the EU don’t know how the controls at the border will work and how costly in terms of money and time will be. I really hope there will be an agreement and not a hard Brexit scenario, since that will be a really difficult situation to deal with.

Licensing is also a very big issue, because we know that we have some sectors, for example the financial sector and pharma industry, where a system of licences is crucial. Now, EU regulatory agencies control these licences and grant the access to the 28 EU member states market.

Even if the UK continues unilaterally to follow the European rules, UK companies will need to be allowed to operate in the EU market and the lack of an agreement is going to badly affect the trade of services. There are many services that cannot be provided in the EU by service providers established in UK without a license and authorisation recognised by the European Union.

Spain – SL I agree with Paola and Urs on the first point, since I believe that with the Force Majeure and MAC clauses, there won’t be any guarantee that the provisions that allowed for termination will stand during Brexit. We have the frustration of contract doctrine, as mentioned, and we all know that the interpretation of that doctrine is different in each member state.

in terms of territories of contracts, when there's a provisional distribution agreement for joint ventures or franchises or licenses in the EU, it currently includes the UK within the scope. The best thing from my point of view would be if the parties involved reviewed the contracts and clarified that, but, in my experience, that often brings the problem of one party using that opportunity to renegotiate the whole contract.

It's like a game of Tetris, because everything changes if a small piece is moved.

The biggest issue we have, in relation to IP rights, is EU regulation and the directives that are in place. We need to see how they will actually apply in the UK, and it’s an issue for patents and trademarks and so on. We have to distinguish between patents in Europe and the UK and there is also the problem of the community trademark and the registered community design. This is all unclear from my point of view.

With regard to trade secrets, data protection and data safety, we have the GDPR issue and whether the UK can be considered as a safe harbour. I believe that, from the GDPR point of view, there won't be any major issues and I agree with Robert that UK companies will do the right thing here and comply with GDPR in terms of data protection and data flow.

With competition and state aid, we have to consider that there won't be any changes in the applicable law, but in the enforcement of the law there will be major changes. One key difference will be that the commission will have no power to carry out on-site investigations anymore.

Finland – LR I very much agree with the previous speakers, that the Force Majeure and material adverse change clause cannot easily be resolved in the context of Brexit. We should remember that the United Kingdom is not a part of the Vienna Convention for the International Sale of Goods.

In that convention, we have a definition of Force Majeure, and I think that many other bodies, including the International Chamber of Commerce have this. They have special criteria, that says Force Majeure relates to events beyond the control of the parties – unprecedented events that you cannot overcome by any measure. I think this probably excludes Brexit.

Regarding changes to tariffs and taxation, these matters are divided between the parties by trade terms, most notably that the seller is to pay all the delivery duties if they have changed, and the buyer must pay any increased duties or taxes on importation.

With regard to payment terms, I don’t think this aspect will change very much because Sterling is not the same as the Euro. We have these fluctuations already and companies have learned to cope with them.

I agree that UK companies will take care of their obligations in respect of GDPR, and so the UK should be a safe harbour, but it obviously depends on the national legislation. I would assume that the UK government has no intention of causing data protection issues.

One issue that is not listed here, is the UK government’s plan to comply with European standards on service provision. The UK is heavily dependent on its service industry, and there would no longer be a freedom to provide services in this sense.

Denmark – AH The possibility of new tariffs, country rules of origin certificates, product standard checks and other customs procedures introduce uncertainty into some contracts. This should be dealt with contractually as it is straightforward to anticipate some changes in this area.

When Britain is no longer a member of the EU, article 34 and 35 TFEU (prohibiting quantitative restrictions on imports and exports) will no longer apply and restrictions may be imposed. Goods will need to pass a special authorisation procedure, which may cause delay and increased costs. It could also mean that import/export of certain goods are prohibited.

As an example, if a British manufacturer has agreed to deliver a product to Denmark, restrictions on imports to Denmark could mean part of the British product is banned.

This may mean that the contract is impossible to perform (force majeure). However, if the prohibition only affects a component which may be substituted with a Danish component, it would still be possible for the British manufacturer to perform the contract, even though it may be way more expensive for him to do so.

New contracts should therefore include ‘Brexit-reservations’ and, more specifically, set out the effect of such anticipated hardships.

Regarding corporate reorganisation, a commercial contract might need the flexibility to meet the needs of any future reorganisation by one of the parties, to ensure that certain functions stay within the EU. The contract may therefore include the ability to transfer the contract as a whole to an affiliate.

Switzerland – PR I think I can agree there are some uncertainties and we will see what really happens. I think the British government has to set up some rules regarding all these things to make it easier to enter into new contracts or to settle disputes.

My advice is to think ahead, by ensuring that all new contracts are drafted to best anticipate the changes that Brexit will bring. Doing this will ensure companies are in a stronger position to limit their exposure to uncertainty.

In addition to amending standard contract terms and/or standard boilerplate templates to anticipate Brexit issues, companies need to upskill those employees who are involved in negotiating contracts, by increasing their awareness of potential pitfalls.

The main considerations should be, applicable law where the contract doesn’t expressly state it already, or where it states English law. Jurisdiction and enforcement of contracts are also important, as is sufficient flexibility in the contract to address the various possible scenarios.

Netherlands – JW If a commercial entity in the Netherlands wishes to vary, amend or terminate an agreement without the consent of the other party, the freedom to do so is restricted under Dutch law. If regulations regarding trade with the UK change (like higher tariffs) to the disadvantage of entities located in the Netherlands, there are two legal reasons to allow unilateral amendment of the agreement. The first one is the inclusion of such a provision in the contract itself, the second one is to invoke Dutch legislation.

The last option is under the terms of article 6:258 BW (Dutch Civil Code), if it cannot reasonably be expected that a contracting party should comply with the original terms of the contract due to a change of circumstances after the conclusion of the agreement.

To achieve a successful appeal around unforeseen circumstances in the Netherlands, it is necessary that the circumstances were not possible to foresee at the time of the conclusion of the agreement. Secondly, the changed circumstances must be so significant in their nature, that it would be unreasonable or even unjust to expect the affected party to continue performing the agreement.

Examples of Dutch case law show us that the consequences of government measures, such as a change in the law, or unpredictable market developments, can constitute circumstances on the basis of which it is not reasonably to assume that a party will comply with a trade contract.

Depending on the consequences for the specific trade relationship, it is possible that Brexit would qualify as an unforeseen circumstance preventing the fulfilment of an agreement. Whether this is the case, will have to be decided on a case by-case basis.

When drafting new agreements, we recommend the inclusion of a specific Brexit clause, making it possible to terminate or renegotiate the contract. Brexit clauses are not fundamentally different from other ‘change’ clauses, but are more specific to Brexit-related circumstances. It is of key importance that parties define and agree on which trigger is specific enough, and also predetermine future events (e.g. changes in exchange rates or deterioration in the economic prospects of a business).

A potential trigger for a Brexit clause, could be a specific change in the law, or the imposition by government of specific costs, tariffs or a loss of ‘passporting’ benefits which are currently available under EU rules.

Some specific aspects of Brexit (such as regulatory change or imposition of tariffs), which have the power to stop certain services within the EU, could constitute a Force Majeure.

CONTRIBUTORS

Sönke Lund (SL) Grupo Gispert – Spain www.irglobal.com/advisor/sonke-lund

Anders Hedetoft (AH) Holst, Advokater – Denmark www.irglobal.com/advisor/anders-hedetoft

Lauri Railas (LR) Railas Attorneys Ltd – Finland www.irglobal.com/advisor/lauri-railas

Robert Cain (RC) Blaser Mills Law – England www.irglobal.com/advisor/robert-cain

Paola Mariani (PM) Pesce & Associati – Italy www.irglobal.com/advisor/paola-mariani

Urs Breitsprecher (UB) AQUAN Rechtsanwälte – Germany www.irglobal.com/advisor/urs-breitsprecher-new

William Spiteri Bailey (WSB) RSM Malta – Malta www.irglobal.com/advisor/william-spiteri-bailey

Peter Ruggle (PR) Ruggle Partner – Switzerland www.irglobal.com/advisor/peter-ruggle-switzerland

John Wolfs (JW) Wolfs Advocaten – Netherlands www.irglobal.com/advisor/john-wolfs

Nico Ooyevaar (NO) McMAN Ooijevaar – Netherlands www.irglobal.com/advisor/nico-ooyevaar

Teresa N. Taylor (TT) Akrivis Law Group, PLLC – U.S – Washington, D.C. www.irglobal.com/advisor/nico-ooyevaar

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