The impact of Brexit on commercial contracts Part 2: what contractual protection to consider
Last updated 2pm, 11 January 2021
In The impact of Brexit on commercial contracts Part 1: the potential disruptors we considered the various aspects of Brexit where uncertainty remains in the UK’s business environment following the end of the transition period on 31 December 2020. The most significant impact of Brexit on commercial contracts, at least in the short term, is likely to be the increased costs of doing business without the benefit of the free movement of goods and workers, and the uncertainty as to the extent of those costs and how the business and regulatory environment is likely to change, albeit those costs will be reduced considerably in light of the zero tariffs aspect of the UK-EU Trade and Cooperation Agreement (see Part 1 for details). In this article we look at what businesses might do in order to deal with the effects of that uncertainty.
When negotiating contracts, businesses should keep in mind the following factors:
Responsibility for increased costs
Which party is responsible for the additional costs of, for example:
- importing or exporting goods (for example the costs of using customs agents to deal with border formalities)
- goods spending longer in storage facilities as a result of border delays
- service provision needing to be staffed from the UK
- movement of staff across borders being more expensive or more difficult
- supply of goods being more expensive or more difficult (for example due to changes in law or regulation)
- changes in exchange rates
- changes in rates of inflation
If the contract is silent, it will typically be the supplier who takes these types of risks, as they will be committed to providing the goods or services to a timetable and for a price (although this may differ for services contracts charged on a time and materials basis). Contractual mechanisms such as price review provisions or benchmarking clauses can be used to mitigate the effect of such changes and/or allocate responsibility for the increases between the parties. For example, a price review clause may allow a supplier to take into account an increase in the costs of raw materials caused by inflation or unfavourable exchange rate fluctuations.
Even where a business is obliged to take on these types of risks itself, there may be other mitigating measures that it can put in place, such as insurance or hedging, broadening its own supply chain or even revisiting the period of time for which it is committed to the contract.
Responsibility for delays or difficulty in supply
What happens if:
- goods are delivered late due to increased border formalities
- goods or services cannot be supplied due to changes in law
- key staff cannot be moved to a location necessary to provide services
Again, if the contract is silent, it will typically be the supplier who takes these type of risks, and again suppliers may want to include contractual mechanisms such as service review provisions, or put in place other mitigating measures.
The rules set out in the ICC’s Incoterms set out how risk and cost are handled in the supply of goods, including in particular the allocation of responsibility for import and export formalities and the payment of duties and tariffs. Pre-Brexit, many businesses will have been using Incoterms to set out delivery arrangements (e.g. the use of Ex Works to indicate that the customer will collect from the supplier) without regard to the other aspects of the terms, simply because there were no import/export issues when moving goods within the EU. However, it will become more important post-Brexit for businesses to understand the Incoterms they are using, and how those terms will govern the allocation of responsibility around cross-border movement of goods, although as above the UK-EU trade deal removes the issue of duties and tariffs.
Whether Brexit constituted a force majeure event will depend very much on the wording of the clause in question; however, many force majeure clauses require an event to be unforeseeable, which is unlikely in the case of Brexit, except for contracts that have been in place for many years before the referendum became a clear possibility. The issues relating to Brexit and force majeure are much the same as those relating to the Coronavirus pandemic, and we have covered these in detail in our Coronavirus: Commercial Contracts & Supply Chain FAQs and Future Proofing Your Contracts.
The typical termination rights that appear in commercial contracts may apply in the case of Brexit, from a general right to terminate for convenience (“without cause”), through to triggers such as changes in law. Some contracts may have included Brexit-specific termination clauses: the key issue with these is often to look closely at what the triggers allowing for termination are. If concerns remain about the viability of new contracts in a post-Brexit world, then any Brexit related termination provisions need to be clearly drafted with the parameters in which termination will be permitted set out in clear language.
The law governing contracts made under English law did not change substantively as a result of Brexit, since it primarily comes from English common (i.e. case) law, rather than from legislation. Where EU law does impact on contracts made under English law, such as for consumer contracts, the position in the immediate term mirrors EU law, as explained in “Part 1: the potential disruptors.” There is unlikely to be, therefore, any change to the reasons for using English law (certainty, clarity, parties being held to the contractual bargain that they agreed) post-Brexit compared to pre-Brexit.
The English Courts should continue to respect parties’ express contractual choice of jurisdiction provisions. The question of whether courts in EU Member States will continue to do so is less clear cut, as, while the Recast Brussels Regulation no longer applies to the UK, the UK has acceded, as a party in its own right, to the Hague Convention. The Hague Convention is, however, more limited in scope than the Recast Brussels Regulation and, where it does not apply, courts in individual EU Member States will apply their jurisdiction’s own local rules.
The General Data Protection Regulation (GDPR) was implemented into UK legislation by the Data Protection Act 2018, and so data protection regulation within the UK should not change in the immediate term, and indeed the UK-EU trade deal provides for continue high standards in data protection. However, there are some issues to consider when data is transferred between the UK and EU countries. For further information, see How will Brexit impact Data Protection and what should we be doing?
The practical viewpoint
Although contractual protections are clearly important, one lesson that many businesses have learned in the wake of the Coronavirus pandemic is that risk mitigation is as much a practical exercise as a legal one. For our thoughts on what that exercise might involve, see The impact of Brexit on commercial contracts Part 3: the practical viewpoint.
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The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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