The impact of Brexit on Commercial Contracts

The types of commercial contracts which are most likely to be impacted by Brexit are:

  • Long term supply contracts which will continue after Brexit; and
  • Contracts which have UK-EU cross border ramifications. These ramifications could be obvious from the nature of the relationship (i.e. a contract between a UK based customer / supplier and an EU based supplier / customer) or may depend on the wording of the contract (for example, if the contract contains references to EU legislation which will no longer apply directly in the UK after Brexit).

Unless there is specific wording in the contract, most commercial contracts will continue in force post Brexit. This means that, from a commercial contract perspective, the majority of the Brexit implications will arise as a result of:

  • One or more of the parties to the contract wishing to terminate the contract as a result of Brexit.
  • The contract containing provisions which become unworkable or commercially unfeasible as a result of Brexit.
  • The contract containing provisions which become unclear or uncertain as a result of Brexit.

The impact of Brexit on commercial contracts and the related risks will largely depend on the nature of the contract and the relationship between the contracting parties. Businesses should be looking at their key commercial contracts to assess the likely impact which Brexit will have on those contracts. 

The steps which can be taken to minimise risk will depend on the nature and likelihood of that risk:

References to EU legislation: References to EU legislation could be problematic, particularly in sectors where significant regulatory measures have been imposed at an EU level. Although the UK Government’s current stated aim approach is generally to preserve existing harmonisation with EU legislation (the so-called Level Playing Field), the commitment to this isn’t legally binding, and it may be difficult for businesses to maintain UK and EU wide compliance if the laws in the different areas begin to diverge. The parties should ensure that they are clear which of them will be responsible for regulatory compliance and, if there are diverging laws, which law will need to be adhered to.

References to the EU as a territory: The UK is no longer a part of the EU.  If the contract refers to the EU territory (for example, by granting a distributor exclusivity for the EU market) with the intention that this includes the UK,  the parties should agree a variation or side letter which clarifies that this means the EU and the UK going forward.

Commercial viability: In some circumstances, Brexit could make a particular contract economically unviable for one party. Where this occurs, the parties will need to look to the contract to see how it can be terminated and, if they wish the contract to continue, renegotiate the price or other provisions to ensure that both parties continue to benefit from the relationship.

Practical viability: In addition to financial concerns, Brexit may also give rise to practical concerns. For example, if performance of a contract relies on a significant proportion of EU staff and those staff are no longer available as a result of Brexit, the supplier may find it impossible to continue to fulfil the contract. Whilst the contract may not allow for termination in those circumstances, the customer should consider whether litigation is the best course of action or whether its long-term objectives would be better by achieved reaching a compromise with the supplier.

Exchange rate risk: The risk to businesses as a result of exchange rate changes is not unique to Brexit but businesses should still be mindful of the potential for dramatic fluctuations following Brexit.

Tariffs and procedural risk: Brexit will undoubtedly result in new tariffs and procedural requirements (such as country of origin certificates, product checks and other customs procedures) for UK – EU cross broader trade. These should be identified as early as possible and the parties should ensure that it is clear which of them will be responsible for compliance. Where required, a contract variation or side letter should be put in place to record such arrangements.

In addition to the contractual concerns outlined above, Brexit may also give rise to employment, data protection and IP concerns which will also need to be considered.

If you wish to understand more about the impact of Brexit on commercial contracts, please get in touch with Kathryn Rogers.

Trade organisations and other industry bodies should be able to provide more industry specific guidance on the impact of Brexit and the UK government Brexit website  includes signposts to various sources of additional information.