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Brexit: A Legal Lens

With Easter recess over, cross-party negotiations on Brexit have resumed in a further bid to break the deadlock over the Prime Minister’s deal with Brussels, but there’s very little ‘new’ news for business to act upon. Following the latest extension to the Article 50 deadline, the UK is now scheduled to leave the EU by 31 October with or without a deal.

But a lot could happen between now and then with the upcoming European Parliamentary elections, Conservative party leadership bids and even a potential general election. There still remains the possibility that the Prime Minister finds a majority for the Withdrawal Agreement, in some form, and it is brought back to Parliament and voted through – in which case the UK would leave earlier. If you’re marking your calendar on UK time, add in 31 May, 30 June, 31 July, 31 August and 30 September as potential earlier dates – and note that these dates would all include a transition period.

What does this mean for business?

Uncertainty remains, but there is now a longer window of time to prepare for exit. Many businesses are now taking this opportunity to assess options they previously didn’t have time to consider – and these include assessing contractual risk to Brexit. In particular, the viability of commercial contracts is now front of mind for many General Counsels and CFOs following the European Medicines Agency (EMA) case.

The EMA was previously located in Canary Wharf, London. As a result of the UK’s decision to leave the EU, the EMA made the decision to relocate to The Netherlands – but had an expensive long term lease to extract itself from. The EMA argued that it should be able to exit the lease on the basis of “frustration”. The High Court rejected this argument in February 2019, indicating that even where Brexit makes a contract uneconomic and less commercially attractive, it will still be difficult for a party to rely upon the law of frustration to avoid meeting contractual obligations. But, earlier this week, the EMA released its grounds of appeal to this decision and so the question of whether Brexit itself can actually frustrate a contract is now working its way through the UK judicial system, with the appeal scheduled for March 2020.

This is just one example of the contractual questions and risks of Brexit that are now leading businesses to take the time to review their contracts specifically with a Brexit lens.

What should business look for when reviewing their contracts?

I asked Meera Patel, a lawyer in Deloitte’s Global Brexit Insights team, to outline the key contractual risks and what business could do about them:

  1. Termination rights: In relation to specific contractual clauses such as Material Adverse Change or force majeure, businesses should review existing drafting of trigger events to determine if these can in fact be relied upon in the event of Brexit. Further, business should check whether, and for which party, existing termination rights are exercisable should a contract lose commercial viability. Some businesses are actively making decisions on inclusion of a ‘Brexit clause’ to future-proof contracts to provide themselves with a mechanism to alter rights and obligations should Brexit impact.
  2. Supply chain impact and continuity: In relation to the supply of goods, the practical implications of International Commercial Terms (Incoterms) now have newfound importance. If a contract contains Incoterms in relation to the supply of goods, it’s critical to check which party holds the risk in the event of additional cost. In relation to the supply of services, businesses should prioritise assessing services continuity if supply is subject to a regulatory licence.
  3. Definitions and EU terminology clarification: Business should make clear how “the EU” is defined under contracts – does the definition still include the UK after it has become a third country? For example, businesses should determine how and whether the definition could impact upon the defined scope of intellectual property licencing. Clarification and slight adjustments to terminology that can be made now will increase certainty for both parties going forward.
  4. FX shocks: Businesses should also consider possible economic changes, including either a gradual or sudden fall in sterling. Understand where this risk sits and consider the insertion of a currency protection clause or review existing clauses to ensure sufficient protection.
  5. Data flow continuity: The EU has an established mechanism to allow for the free flow of personal data to countries outside the EU, namely an adequacy decision. We know that the fastest adequacy assessment is Argentina, which took 18 months, but other assessments have taken up to five years. Therefore businesses should be preparing for the risk that the UK will be a third country without an adequacy decision and understand which contracts may require the insertion of EU model clauses to ensure data flow continuity.

Contractual risk is gaining more prominence, and it isn’t something to be considered by the lawyers alone - many of the areas described underpin the commercial viability of an arrangement or business operating model, including personal data transfers, financial terms, communications etc. Changing an Incoterm to ensure a supplier bears the risk might seem like a sensible protection for instance, but in fact it means a loss of control and options over managing and mitigating the supply chain and duty payment terms, so a strategy to change a legal term would also need the involvement of the commercial, finance, procurement and tax teams.

Reviewing contractual risk can turn out to be a significant exercise as the reality is that some businesses operate under hundreds, or even thousands, of contracts (and across multiple business units). Businesses should leverage technology to identify and measure their level of risk with control and speed as we prepare for and anticipate the future trading environment.

Click here for further information - Brexit and Commercial Contracts.

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