As the end of the Brexit transition period approaches (31 December 2020, in case anyone needs reminding!), businesses are completing their Brexit planning and putting those plans into action. We focus in this Insight on some of the key aspects of commercial agreements which are likely to be affected by the changes which the end of the transition period will bring.
Although the full impact of Brexit on commercial contracts may not be certain until the future trading relationship between the EU and UK becomes clear, there are steps that can be taken now to protect your contractual position. The checklist below sets out a non-exhaustive list of some of the key issues and questions that should be considered now when reviewing existing contracts and negotiating new agreements:
References to the EU or the EEA
Check all references to the EU or the EEA carefully.
The UK is no longer a member of the EU or the EEA. It is therefore likely that any reference to the EU or the EEA will need to be extended to expressly include or exclude the UK. This should be reviewed on an agreement-by-agreement basis.
References to EU legislation and EU regulators
Watch out for any references to EU legislation.
Most EU legislation up to 31 December 2020 will form a part of "retained EU law" and will therefore apply in the UK after the end of the transition period. Unless the parties are required to comply with the original EU law, it will be best practice to amend any references to EU legislation to refer to the EU law as preserved in or converted into UK domestic law.
Review all references to EU institutions and EU regulators. Ensure they are amended to refer to the domestic succeeding institution or regulator, unless reference to the EU equivalents remains relevant.
Consents and permissions
New permissions, consents, certificates, permits or licences may be required in order to provide the services or supply the goods under the agreement. For example, a licence to drive within the EU may be required after the end of the transition period to fulfil the requirements of a logistics agreement. Make sure the agreement is clear on which party will be required to obtain and pay for any such additional permissions.
Customs and other documentation requirements
It is likely to be necessary to complete and file additional customs and related clearance documentation after the end of the transition period in respect of any goods that are crossing the EU/UK border. Check that the agreement spells out which party is responsible for obtaining and filing any additional import and export documentation.
Tariffs and customs duties
Will any tariffs or additional customs duties be payable in relation to the import and export of the goods under the relevant agreement? If so, ensure the agreement sets out clearly which party is responsible for paying these additional Brexit-related costs.
Consider whether the parties are trading on Incoterms. If so, check which term is being used and whether it is still appropriate to govern the relationship between the parties after the end of the transition period. Check whether the parties are using the 2010 or the 2020 version of the Incoterms.
Will any quotas affect the import and export of goods under the agreement? If the UK applies quotas to goods entering from the EU, what impact will this have on the supplier's ability to perform or the customer's ability to receive the goods it requires?
Charges payable under the agreement
Review how the charges are calculated. Is there flexibility in the pricing? If there is an increase in the cost of raw materials, for example, are you able to increase the charges as the supplier, or resist a price increase as a customer? As a supplier, it may be useful to include defined assumptions in the agreement in respect of what the charges are based on. As a customer, you may look for an express clause excluding any increase in the prices due to any factor or element which might otherwise increase the cost of the performance of the agreement.
Exchange rate risk
Check the currency of the agreement. Where relevant, payment provisions should make it clear which party will bear the risk of exchange rate fluctuations. Make sure you have considered whether prices are fixed in a particular currency and whether there a mechanism to vary the charges in light of any changes to exchange rates.
Delivery dates and timetables
Delays at the borders (GB/EU and GB/Northern Ireland) should be expected as a result of additional customs formalities. Review the agreement in relation to agreed delivery times. Are delivery times stated to be estimates only, or are there agreed delivery dates? If dates are agreed, what are the consequences if they are not achieved? Consider amending the agreement where necessary to allow for greater flexibility.
Consider the impact on compliance with laws obligations. The requirements under English law may diverge from the requirements under EU law during the lifetime of the agreement. Consider which party is responsible for any changing compliance obligations and which party is required to pick up the cost of complying with changes in law.
Will personal data be transferred from the EU to the UK, or from the EU to the UK, under the agreement? If so, review our Insight on cross-border transfers of personal data and ensure any transfers are compliant.
The end of the transition period may create such uncertainty that one party may seek additional termination rights to provide it with a right to end the relationship in its entirety. These termination rights may be part of a Brexit clause (see below); an additional right to terminate for convenience; or a right to terminate in the event that an agreed trigger event occurs.
Remember that as a result of the Corporate Insolvency and Governance Act 2020 (as we discuss here), a supplier is now less likely to be able to rely on rights to terminate for insolvency once its customer has entered a "relevant insolvency event". Consider whether other levers should be built into the agreement to protect the position of the supplier.
Consider whether the loss of freedom of movement will create labour shortages at the end of the transition period or cause labour costs to increase, which may impact on the agreement.
Consider whether Brexit will result in changes to the tax treatment of payments made under the agreement, for example, changes to the way that VAT is applied.
It is unlikely that a standard force majeure clause will be triggered as a result of the consequences of Brexit. However, the parties will want to review the drafting of any force majeure clause and put the issue beyond doubt by using express wording.
Consider whether a "Brexit clause" would be appropriate. Brexit clauses are designed to deal with the consequences of Brexit on the particular agreement and trigger a change in the parties' rights and obligations.
If you intend to include such a clause, are there any specific trigger events which are foreseeable and for which the parties may be able to agree a specific consequence? If not, it may still be valuable to include an agreed trigger event, such as the supplier's costs increasing by more than an agreed percentage, as a result of agreed Brexit-related consequences. The consequences of the trigger event having occurred may include notification and negotiation obligations on the parties, and potentially even a termination right if any resulting dispute cannot be resolved.
Change control process
Review any "change control" clauses in the agreement. Could the change control process be used to implement any changes needed as a result of the end of the transition period and, if so, what do the provisions say about how the costs of any changes will be met?
Service on process agent
Service out of the jurisdiction is likely to be more difficult and take longer after the end of the transition period. If your counterparty is incorporated outside of England and Wales, consider including a service on process agent clause.
Dispute resolution and enforceability
Consider the law and jurisdiction of the agreement in relation to both whether or not that choice of the parties is likely to be respected and the enforceability of judgments granted under the agreement. The parties' choice of law won't be affected. But is the agreement stated to be subject to the exclusive jurisdiction of the courts of England and Wales?
The courts of the EU Member States should continue to respect exclusive jurisdiction clauses in favour of English courts, and judgments granted by English courts named in exclusive jurisdiction clauses. This is provided for by the Hague Convention on Choice of Court Agreements 2005, but that basis does have limitations. First, the Convention does not apply to non-exclusive jurisdiction clauses and, second, the EU's position is that the Convention will only apply to agreements entered into on or after 1 January 2021, when the UK becomes a party to the Convention in its own right. If an EU Member State does not accept that the Convention applies to an exclusive jurisdiction clause in favour of the English courts entered into before the UK accedes to the Convention in its own right, then the issue of whether an exclusive English jurisdiction clause will be respected, and whether a judgment obtained under such a clause will be recognised/enforced, will be a matter for the domestic law of each EU Member State.
If you are looking for an alternative method of dispute resolution to litigation in England, you may want to consider using arbitration. Please see our Insight here for further information.