Skip to content

Brexit: Implications for Commercial Contracts

On 31 December 2020, the transition period that immediately followed the UK’s exit from the European Union (EU) ended.

For many months, there had been uncertainty as to whether agreement would be reached between the UK and EU, with the prospect of a “no-deal Brexit” seeming a real possibility. However, businesses will have been relieved that the Trade and Co-operation Agreement (“TCA”) was eventually agreed, despite a level of uncertainty that still remains.

With the TCA now in effect, this article considers factors that businesses should consider in relation to the implications of Brexit on their commercial contracts. There are relevant concerns for contracts already in place as well as for upcoming contracts – what are the provisions a contracting party should be looking for, and how can they best safeguard their position? For more detail on trade arrangements under the TCA see Understanding Rules of Origin under the Brexit Agreement.

The first section below looks at the most serious concerns where the impact is expected to be most significant. The next section looks at concerns that are noteworthy but not necessarily as pressing and the final section suggests some lower risk issues.

Significant Impact post Brexit

Generally, when looking at major commercial contracts to gauge how Brexit may affect them, the top priority should be the contracts already in place which fall within both of these two categories (the “Key Categories”):

  1. the contractual term continues beyond the date of the end of the transition period (i.e. 31st December 2020), and
  2. the nature of the contract means that it crosses the UK-EU border in some way.

The second Key Category is very broad and can come in many forms. For instance, there may be a supplier situated in Germany and a buyer situated in England, or an English company offering its products to English customers but doing so in reliance on EU regimes and laws. It is worth remembering that for some contracts which superficially appear not to cross the UK-EU border, perhaps on account of all elements of the contract falling within the UK, or no elements falling within the UK, there may still be underlying ramifications which will be relevant.

The broad possibilities of the second Key Category are further explored under the following subheadings.

References to the EU as a territory and EU legislation

If a contract refers to the EU (for example, by establishing the EU as an area of exclusivity), the UK’s exit could lead to unintended treatment of the UK under that contract – that area of exclusivity may be cut down so that it no longer covers the UK. It is possible that contractual references to the EU, meant references to the EU as at the date of the agreement. Alternatively, it may mean the EU as constituted from time to time. There may be some uncertainty in relation to contracts existing at the time of exit. New contracts should obviously be very clear about references that are meant to include the UK.

References to legislation could also be problematic, and not necessarily addressed by a simple check for mentions of EU Directives or Regulations. The European Union (Withdrawal) Act 2018 (EUWA) provided that a significant amount of – but not all - existing EU legislation was transposed into domestic law, and the UK's intention is to preserve and maintain most (but not all) UK legislation originally introduced to harmonise with EU legislation. However, where existing EU laws have been transposed into domestic law, they may be repealed or amended in the future and future EU legislation will no longer be directly applicable in the UK. The effect could be particularly pronounced for sectors where significant regulatory measures have been imposed at the EU level, and more generally for parties which have warranted that they will comply with EU rules.

This approach indicates a gradual process of detachment as we move into a post-Brexit era. There is little indication at present of which converted laws are being targeted for amendment to a significant degree (or indeed repeal) in the near future. For these reasons, if a contract is drafted on the assumption that obligations and restrictions currently imposed by EU-derived legislation will continue to be in effect in much the same way for years to come, this could prove to be problematic.

Suggested actions are as follows:

  • For contractual provisions dealing with the EU as a territory, confirm whether the relevant definition covers the member states from time to time, or specifically names each country. The “from time to time” wording will not include the UK, but if there is a full list of countries and the UK is named, then the UK should still be covered by the contract. If there is no express wording to indicate which interpretation prevails, various contextual factors will determine whether the UK is now excluded, so the outcome could vary from one case to the next.
  • If there is any legislation key to the operation of the contract which may be affected, check for a clause which says that references are to provisions as modified or re‑enacted. In the absence of express wording to say otherwise, the default position (as established by the Interpretation Act 1978) is that references to repealed laws are construed as referring to the new law where that new law repeats and re-enacts the older law being cited in the document unless the contrary intention appears. The combination of the Interpretation Act with the EUWA could deliver an outcome of minimal effect on references to legislation, with a contract’s citation of an EU law being effectively rewritten as a citation of a newly-converted UK law. Having said that, it would be risky to place significant reliance on the conversion producing a straightforward result and for new contracts it would certainly be advisable to deal with references to EU laws and statutory provisions to make sure that there is clarity going forward, for example, when incorporated laws are further amended. One other thing to bear in mind is that the Government has repealed EU legislation that permits free movement of persons. This is of particular importance to businesses providing cross-border services which require the movement of individuals between EU countries: this is no longer straightforward and commitments given in contracts may need to be reconsidered.

Force majeure, frustration and material adverse change

It may be that the UK’s withdrawal will have a particularly serious effect on the operation of the contract, and the parties may feel that being tied to commitments based on a different framework will lead to undesirable outcomes. On that basis, it is advisable to check whether these events could fit into the ambit of any force majeure clause, or whether there are any other ways to establish them as grounds for ending or renegotiating the contract.

Suggested actions are as follows:

  • Review the definition of force majeure and consider whether Brexit could fit within this definition. If it is feasible that it could, consider the impact on the other contracting party’s duty to perform its obligations, and the potential for it to rely on this to avoid liability for non-performance.
  • Look for a “material adverse change” clause, or any wording which may permit renegotiation of terms should the contract become unprofitable or subject to a change in the law.
  • Consider whether it will be possible for either party to argue that frustration will apply. This would only apply to a contract which creates obligations that have become impossible to observe, with neither party being responsible for the change. Further, a contract cannot be frustrated if the alleged frustrating event should have been foreseen by the parties. Mere inconvenience or the incurring of additional costs would be unlikely to qualify. Conceivably, there may be a stronger case for frustration where a contract heavily depends on EU regimes such as passporting.

New burdens when operating the contract

Any cost-benefit analysis of a contract may be completely altered in the new commercial and legislative landscape that now exists. .New burdens of cost, risk and compliance will most likely appear and they will have to be borne by one or both of the parties. If responsibility for them is not addressed explicitly, these burdens could sour the relationship, and could even lead to fines or other penalties if neither party addresses what is needed under the new rules.

Suggested actions are as follows:

  • Review mechanisms for pricing, given the potential for increased costs of trading. If the currency of the contract is sterling, look for any wording addressing serious fluctuations in its value. There may also be provisions for both parties conducting reviews and renegotiation of prices, especially in contracts with a particularly lengthy term.
  • Look for arrangements which depend on regimes that may cease to apply, such as free movement of goods / services / people or EU trade deals. If new compliance procedures are introduced, is there any indication of which party will have to discharge that duty?
Potential Significant Impact post Brexit

There may be less risk for contracts which are not yet executed than for current contracts, because the parties can plan around the effect of the UK’s exit and redraft accordingly. Nevertheless, once the review of current contracts is complete, businesses should take care when drawing up new contracts..

This section revisits topics covered in the previous section, but here the focus is on how to draft new contracts so as to anticipate and accommodate the impact. There are also new topics to consider for both current and future contracts – jurisdiction and enforcement and data protection.

References the EU as a territory and to EU legislation

Suggested actions are as follows:

  • Consider the circumstances and decide whether the contract should cover the EU at the date of the agreement or from time to time (there may be further changes to members of the EU). If the UK is to be included in addition to the EU member states, this now needs to be expressly stated.
  • As an additional precaution to address the possibility of a future change in membership of the UK (e.g. Scotland proceeding with independence), when the UK is mentioned as a territory in a long-term contract, it may be sensible to plan ahead and draft appropriately. Should the territory be the UK as it stands now, or the UK as it changes from time to time? Make the preferred position clear.
  • Decide whether it will be best to incorporate legislation as it evolves or to have references remain fixed at the time of signing the contract. As a precaution where legislation is incorporated ‘as amended’, consider whether the contract should state that changes that have a materially adverse effect on the standing of either party under the agreement are disregarded where possible. Also, deal with the effect of subsequent amendments to statutes and/or the enactment of subordinate legislation.

Force majeure, frustration and material adverse change

Suggested actions are as follows:

  • If the UK’s departure from the EU is likely to seriously interfere with the contract, include an express right to suspend, terminate or renegotiate terms which will arise upon the particular change that is anticipated.
  • The definition of force majeure could also encompass certain Brexit-related events relevant to the subject matter of the contract.
  • If looking to ensure that the contract continues and the other party will not try to claim Brexit as grounds for any change in position, include an express statement to confirm that the force and effect of the contract (or select clauses of the contract) shall not be prejudiced or diminished by the UK’s departure from the EU.
  • Consider including termination on notice clauses.

New burdens when operating the contract

Suggested actions are as follows:

  • Add express wording to address pricing mechanisms, pricing reviews, fluctuations in value of currency and how newly arising compliance duties will be fulfilled by the parties.
  • If one party is weighing up the option of either moving their business out of the UK or undertaking some other reorganisation, consider whether assignment to a group company should be permitted, and whether there should be automatic termination following such restructuring.

Governing law, jurisdiction and dispute resolution

Prior to Brexit, the position within the EU in respect of which country’s courts have jurisdiction over a dispute was governed by the Brussels 1 Recast Regulation. The Lugano Convention governed the position where the counter party is based in Iceland, Norway or Switzerland.

Under the Withdrawal Agreement, the Brussels 1 Recast Regulation (which was in place prior to 1 January 2021) will continue to apply in the UK in relation to jurisdiction as between EU member states which commenced prior to 31 December 2020 (the position is a little less clear regarding Lugano).

For proceedings relating to jurisdiction that commence from 1 January 2021 onwards, the position is certainly less clear at the moment. Please see Beyond Brexit: What is the position for cross-border disputes now?

On a more positive note, a choice of governing law should continue to be respected by both the UK and EU member states.

Suggested actions are as follows:

  • For any upcoming contract, which crosses the UK-EU border in some way, ensure that the contract is explicit on its governing law and jurisdiction (exclusive or non-exclusive) which has been chosen.
  • If existing contracts have an exclusive jurisdiction clause consider reaffirming this now that the UK has joined Hague (there is significant doubt about the effect of clauses that were entered into prior to the UK joining in its own right).
  • A further option is to consider including a binding arbitration clause or other alternative dispute resolution mechanism.
  • If you have a contract where jurisdiction and enforcement in a particular EU country might be an issue, consider getting local law advice on respect for choice of jurisdiction clauses and enforcement under national law.

Data Protection

It is important to keep an eye on data flows from the EU to the UK. Whilst the TCA included a bridging mechanism, if an adequacy decision is not forthcoming, additional mechanisms such as Standard Contractual Clauses may be required. See Brexit changes to The Data Protection Regime

Lower Impact post Brexit

Beyond this, the “lower risk” label applies to any minor contracts and contracts that are not within the Key Categories. If a contract continues beyond 31 December 2020 but does not appear to fall into the second Key Category, insofar as none of the topics listed in the previous sections are applicable, the safest approach will still be to exercise caution, and to be on the lookout for new Brexit-related issues coming to light.

TOP