In the weeks since the historic UK referendum in which the decision was made to leave the EU there has been significant debate about the impact that the decision will have on businesses within Scotland and the UK. It is important to remember that the UK’s exit from the EU is still some time away and for now the UK remains an EU Member State. However, even at this early stage businesses are advised to consider the potential contractual implications of the UK’s decision.
Until negotiations are concluded between the UK and EU delegations on the specific terms of the UK’s exit from the EU, we enter a period of uncertainty as to exactly how commercial contracts will be affected. In the meantime, our commercial team have identified a number of considerations for businesses that may be affected by the outcome of the referendum:
What action can you take?
Businesses should review their existing commercial contracts arrangements with a view to determining how exposed they may be to the potential changes. This review should ideally encompass all contracts whether they contain a significant EU trade focus or are principally UK trade focused.
How could your contracts be affected?
The cost of doing business with EU based businesses is likely to change due to several factors including:
- Exchange rate fluctuations – such changes will affect individual contracts differently on a case by case basis. Whilst contracts that currently include price mechanisms will have since the commencement of the relevant contract been subject to increases or decreases in cost depending on the currency exchange rates between the Pound and the Euro (or any other currencies), in individual circumstances a party to such a contract may find that above average fluctuations in the currency exchange rates may expose the business to unexpected increases or decreases in cost;
- Import and export costs – the potential for future import and export tariffs for the sale of goods from/to the EU could lead to increases in the costs borne by a contractual party and limit further trade with EU based companies.
From a supplier’s perspective: A review of customer contracts as well as its own supplier contracts is important to determine how, if at all possible, businesses can pass on increased costs to their customers through price variations or the re-negotiation of contractual terms.
From a customer’s perspective: Customers should consider attempts by suppliers to negotiate price changes, or changes to other clauses of their contract, and whether or not such negotiations are permitted by the terms of the contract.
Contracts such as supply of goods or services agreements and distribution agreements may have been drafted with an EU wide geographical scope. With the UK coming out of the EU, businesses should consider whether this will result in the UK being removed from the geographical scope of the agreement and, if so, does such a change result in the agreement becoming incapable of being performed fully?
Free Movement of Persons
Many businesses rely on the free movement of persons within the EU in order to supply goods and deliver services. Without the advantages of free movement of persons, such businesses may find that access to the EU wide talent pool of skilled workers becomes restricted.
A great number of UK businesses rely on the free flow of personal data from the UK to the EU and vice-versa. In the event that the UK found itself outside the scope of EU data protection legislation, UK businesses may find that they have to implement expensive administrative and legal steps to ensure that the flow of information from the EU continues to be deemed safe by the EU.
A well drafted commercial contract will contain a choice of law clause whereby the parties agree that a particular legal jurisdiction’s courts shall have authority to hear and determine disputes. Whilst it might be unlikely, it could become more difficult to enforce a Scots law or English law court decision within EU Member States. This may lead to an increased use of arbitration as a means to settle contractual disputes, which could result in greater costs for UK businesses seeking to resolve a contractual dispute.
What are the next steps?
Whilst the status quo will be retained for the immediate future, this may not prevent EU based businesses from seeking to pre-empt changes in the UK/EU relationship and attempt to re-negotiate contract terms in the coming months. Therefore, the most important step UK businesses can take at this stage is to review their suite of commercial contracts and assess if and to what extent they may be exposed to potential changes and consider how best any risk can be mitigated.