The people have voted by a slim margin to leave the EU. The leaving process is likely to take at least two years before Brexit is finalised. Even if there is a second referendum that halts the exit process, there will be short term uncertainty with fluctuating exchange rates and stock market swings. How should you prepare your business contract relationships for Brexit?
No change. Contract law is largely unharmonised in the EU and therefore Brexit won’t see fundamental changes in English contract law.
Choice of law
No change. International treaties and conventions allow you to choose which law governs your contract. The Brexit deal will likely preserve that ability. If your existing contract stipulates English or Scottish law, that will likely continue unaffected. EU member states would recognise your choice of law for your contract. Equally, the UK courts would recognise contracts governed by the laws of France or Germany or the other remaining EU states.
No change. Much of consumer protection law is driven from the EU. Many consumer laws will override conflicting provisions in a contract and while the position is unlikely to change immediately at Brexit, over time it is likely that UK consumer law will differ. Liabilities in B2B contracts will probably continue unaffected subject to bringing successful court actions for which see below.
Much change. One of the main areas likely to be affected is price. The exchange rate has already been affected with Sterling weakening against foreign currencies. If the contract specifies Sterling as the currency, nothing will change as it is now cheaper for businesses outside the UK. If the currency is anything else, this will obviously adversely affect the UK business as it becomes more expensive to buy supplies and revenue from sales in Euros will dip when converting into Sterling. If the currency swing is too much for your business relationship to continue, you might be able to rely upon this as a “force majeure” event allowing you to end the contract early. Certainly new contracts should contain a currency fluctuation clause.
Change? The big question is whether we remain part of the Single Market. If we do, then there should be no new tariffs. If the UK does not remain part of the Single Market, this might lead to the imposition of new tariffs. There is much talk of the imbalance between the amount the UK exports to the EU compared to the amount it imports – the UK is a net importer – and this is thought to be the means by which the UK will avoid tariffs. However, if the 27 member states want to to make further exits unattractive, this might result in the tit-for-tat imposition of tariffs by the EU and the UK.
No change. Under existing contracts the choice of law will continue. Usually the choice of law and the jurisdiction for court actions is that of the customer or the supplier. Now and again the customer and supplier cannot agree on one or the other so specify the law and jurisdiction of a third country. On rare occasions the parties will agree that the law governing the contract is that of the customer but court action has to be taken in the jurisdiction of the supplier (or vice versa). This won’t change although your EU customer or supplier might fight harder in the future to keep the law and court actions local to them. Or they might seek to disregard the choice in the contract and take action locally. One note of caution: a UK judge might take a different interpretation to established EU case law on the basis of UK cultural differences now that Brexit is on the cards. This could lead to uncertainty. The alternative is to opt for arbitration.
No change. If you have a judgment in the UK against an EU partner without assets in the UK, you would have to enforce it inside the relevant EU member state. Again, assuming the UK negotiates favourable terms, enforcing judgments outside the UK probably won’t be much more complicated than it is now. In the absence of terms, this might mean courts of EU states are less disposed to enforcement action. While a judgment for a debt is relatively straightforward, it might be more complicated where the judgment is for an injunction or a declaration.
No change. The main question I get asked is whether Brexit will affect data protection laws. The new General Data Protection Regulation will be in force by May 2018, probably before the Brexit deal is finalised. This means GDPR will apply in the UK, certainly in the short term. After that will depend upon what deal the UK agrees. With a Norway-style agreement, the UK would still be part of the EEA and would therefore have to comply with many EU laws, including GDPR. In that case any law that potentially conflicts with GDPR – such as a snooping right under the UK Investigatory Powers Act – will be scrutinised directly by the EU Court of Justice and the UK will have to suspend non-compliant laws. With any other deal the UK may be able to choose to abolish data protection laws but it would still have to comply in respect of business involving EU citizens’ data, maybe by way of a separate UK Privacy Shield. Either this will lead to a two tier system for EU and non-EU business or the UK will simply preserve data protection law to the same standards as GDPR.
Other EU laws
Much change? EU laws will continue to apply until Brexit is complete. For the UK to ignore EU laws before then would be a breach of its international agreements and that would not go down well. The UK government will likely follow the model adopted by British colonies as they gained their independence by preserving most existing laws until they are specifically replaced. Of course, there will be many EU-driven laws that the UK government will want to abolish or will want to introduce new controls over. It is unclear what this so-called cutting of red tape might look like but it will likely involve immigration restrictions and changes to worker protections.
No change. The Scottish National Party is pushing for another referendum for Scottish independence as the majority of Scots voted to remain in the EU. Even if they get another referendum and even if Scotland votes to become independent, the process of disengaging with the UK will likely take several years. It is unlikely there will be a negotiation between the UK government and the EU member states for the UK to leave on the one hand, while at same time the Scottish government negotiates with the UK government to leave the UK and negotiates with the other EU member states for Scotland to rejoin the EU. So no change in the medium term.
A version of this article first appeared on The Register.
I dissagree with your statement that contracts aren’t impacted by it. We work in SaaS and PaaS and as a result of the Brexit we are likely to have to move Data centre. All of our contracts refer to the the EU Model terms for Data processing and stipulate that data may not be held outside the EEA. With the UK leaving this would mean data is held outside the EEA so clearly contracts have to be renegotiated – costs will increase as a result.
Thanks for your comment. I think we’re essentially agreeing but from different viewpoints. I said Brexit won’t involve fundamental changes to English contract law.
But let’s look at changes to the contracts themselves in relation to Model Clauses. For the period we are still in the EU we will have to comply with GDPR. If we leave EU but stay in EEA we will still have to comply with GDPR. If we leave EEA and abandon data protection laws for non-EU business, we would have to adopt Privacy Shield approach for business involving EU/EEA data. If we abandon data protection laws altogether, the Model Clauses will be necessary.
However, customers will often make decisions without understanding the law. If they demand local datacentres and Model Clauses you either educate them as what the law says or give them what they want. Customer is always right, after all…
[…] rewrite large chunks of the statute book it will likely preserve most laws as they are at Brexit. I blogged about this before – it wasn’t crystal ball gazing as it’s the most logical process. We need the […]