Your commercial contracts: time for a review!
Given the ongoing Coronavirus pandemic, it is understandable that the media’s coverage of Brexit has been substantially reduced in recent months. However, UK-EU negotiations are carrying on in the background and the UK recently rejected the option to extend the post-Brexit transition period, meaning it will end on 31 December 2020 as originally forecast.
Accordingly, despite the effects of the ongoing Coronavirus pandemic, now is still a very important time to think about your existing and future commercial contracts in order to effectively minimise your commercial risk and ensure that their terms are as favorable to you as possible during and after the transition period.
In this article we highlight some key things for you to consider now in relation to your commercial contracts.
Does your commercial contract contain a ‘Brexit clause’? This is the generic name given by lawyers to a clause that triggers some change in the parties’ obligations as a result of a defined event occurring. At this stage in the transition period, the ‘trigger’ event could be the end of the transition period, changes in exchange rates or the imposition of tariffs.
If your contract does not contain a Brexit clause, or you are not sure, it would be sensible to review your contract now and vary it to include a Brexit clause if your contract could benefit from its inclusion. For example, if you supply goods and/or services to a customer based in an EU Member State, including an appropriately worded Brexit clause could require the customer to pay a defined amount of increased fees if tariffs are imposed on the customer, so the customer is contractually obliged from the outset to pay the increased fees without you and the customer having to formally vary the contract if the tariffs are imposed.
Change in Law clauses
Does your contract include a ‘change in law’ clause? This is a clause which would enable you and the other party/ies to vary your contractual obligations in the event of a change in EU law (or English law) after the end of the transition period. For example, the clause could permit you and the other party/ies to agree an increase or decrease in fees payable under the contract if such a change in law affected supply of goods and/or services supplied.
If your contract does not include a change in law clause or you are not sure, you should review your contract now and vary it to include a change in law clause if appropriate. Otherwise, you may end up being stuck with contractual obligations which aren’t as favorable to you because of a change in EU or English law arising as a result of Brexit either during or after the transition period. For example, as a supplier a change in law after the transition period may require you to pay tariffs on certain goods and/or services you supply to customers based in EU Member States. A change in law clause would provide a straightforward mechanism for you to increase your fees under the contract without the need for a formal variation that would have to be agreed at the relevant time.
References to ‘European Union’ or ‘EU’
Does your contract contain a definition of ‘European Union’ or ‘EU’? For example, a distribution agreement where the distribution territory is defined as ‘the EU’ or a trade mark license for use of a trade mark in connection with goods and/or services ‘in the European Union’.
If your contract does contain such a definition, then to avoid potential problems of interpretation it would be sensible to review and update this definition to make absolutely clear whether it includes the UK after the end of the transition period. Depending on the nature of your contract and its length, it may also be sensible to deal with any future changes of EU membership, for instance if the EU Member State in which the other party is based also leaves the EU.
Many commercial contracts comprise an ‘Initial Term’ being a fixed period of time, for instance 12 months, followed by a subsequent ‘Renewal Period’ being another fixed period of time e.g. 6 or 12 months. The overall term of the contract is then the ‘Initial Term’ plus each and any subsequent ‘Renewal Period’.
Is your commercial contract due to renew before 31 December 2020? If so, you should now review your contract as a whole to ensure it does not automatically renew on terms which could be less favorable to you.
Payment – exchange rates
What does your contract say about payment in the event of exchange rate fluctuations? It is likely that exchange rates will fluctuate around the end of the transition period so you should review the payment terms in your contract now and vary these if appropriate to ensure the amount of any fees and disbursements payable to you can be increased in line with fluctuations in exchange rates. Otherwise, the amount you are paid under your contract may not reflect the contract’s value to you at the time you entered into it or conversely, the amount you are due to pay under the contract may exceed the market value of the goods and/or services supplied to you under it.
Personal data transfers
Does a party based in the European Economic Area (‘EEA’) transfer personal data to you under your contract? The UK is now a ‘third country’ under the GDPR with respect to personal data transfers. This means that after the transition period transfers of personal data from a party based in the EEA to you under your contract would only be lawful if either the EU Commission has issued an adequacy decision in respect of the UK or ‘appropriate safeguards’ are put in place in respect of the personal data transfer.
It is unclear when the EU Commission will make such an adequacy decision and indeed in a recent letter to the European Parliament Andrea Jelinek, chair of the European Data Protection Board, raised concerns over whether the EU would issue such a decision in respect of the UK. So, if this situation applies to you, you should now review the relevant provisions of your contract governing data protection/processing and, if appropriate, put ‘appropriate safeguards’ in place such as through adoption of Standard Contractual Clauses (SCCs) issued by the EU Commission.
It should be noted that in its judgment of ‘Schrems II’ on 16 July 2020, the CJEU held, amongst other things, that SCCs are valid. However, if you are seeking to rely on them to transfer personal data to a third country then you as a controller and data exporter must:
- assess the law and practice of that third country; and
- if public authorities in that country may have access to the personal data, also assess the factors relevant to the EU Commission in making an adequacy decision under Article 45(2) GDPR
Compliance with local laws
Cross-border commercial contracts typically containing a clause specifying which party/ies will be responsible for compliance with, and will bear the cost of, compliance with local laws.
Whether you are for instance distributing goods in the UK for a supplier based in an EU Member State or you are supplying goods and/or services based in an EU Member State, you should review your contract now and vary it to provide that either you will be, or you and the other party/ies will jointly be, responsible for bearing the costs of compliance with any changes in laws in the UK and/or that EU Member State during or after the transition period which affect performance of contractual obligations (for example distribution, marketing, promotion and advertisement of goods or supply of goods and/or services in an EU Member State).
Most commercial contracts contain quite detailed termination provisions, often enabling one of the parties to terminate for cause (for example if another party repeatedly breaches the contract) or for convenience (because a party wants to) by giving notice to the other party/ies.
You should review the termination provisions of your contract now to ensure they enable you to terminate for convenience at any time (and so during or after the transition period) on expiry of a commercially acceptable notice period or on the occurrence of one or more specified events set out in the contract which would make continuing it commercially unfavorable to you. For example, the value of the pound dropping to a certain level for a defined period of time at the end of the transition period might be a useful provision.
If you are party to a supply contract, then at the same time it would be sensible to ensure the termination provisions also comply with the new rules on termination if a customer becomes insolvent as laid down by the Corporate Insolvency and Governance Act 2020 (see our article ).
Jurisdiction and Arbitration
Commercial contracts made under English law almost always contain a governing law and jurisdiction clause. This clause makes clear that the contract is governed by English law and that the contract is subject to the exclusive or non-exclusive jurisdiction of English courts (as chosen by the parties), even if one or more of the parties are based in an EU Member State (or anywhere else in the world).
During the transition period, the recast Brussels Regulation still applies between the UK and EU Member States. Among other things, the recast Brussels Regulation allows parties to a contract to choose which courts will have jurisdiction (for example, the courts of England and Wales), subject to certain exemptions, and makes provision for the recognition and enforcement of judgments as between the EU Member States. This enables a judgment made about your contract by an English court to be recognized by, and enforced in, an EU Member State. This is obviously useful where the other party is based in an EU Member State, a dispute arises, and you want to enforce judgment obtained in your favor against that party.
However, after the end of the transition period, this arrangement will cease to apply. Accordingly, an important issue is whether a judgement by an English court in respect of your contract would still be enforced in the relevant EU Member State after the transition period. At this stage, a conservative approach to address this issue would be to:
- assume that national law will apply and take local legal advice on the implications of enforcing an English judgment in that EU Member State; or
- insert an appropriate arbitration clause into your contract, specifying the seat of arbitration as London. Arbitration is likely to be unaffected by the UK’s transition out of the EU for various reasons beyond the scope of this article.
The option to choose will need to be carefully considered and will amongst other things depend on the nature of your contract and the circumstances surrounding it.