BREXIT - Potential Impact and Risk to Contractual Relationships

We previously reported on the potential implications of a BREXIT relating to intellectual property in our earlier article "BREXIT - An IP Perspective".  In order to complete a review of the major areas of importance for our readers in this article we cover the steps businesses should take now relating to the potential impact of a BREXIT on business and usual trading relationships and the further steps that could be taken at an early stage following a vote in favour.

Currently there is a lot of uncertainty and confusion surrounding the potential impact on business of an exit from the EU.  There may also be a lot of risks and this article looks at some of those affecting contractual relationships.

Risks

It is safe to say that at present the risks are many and varied, although the Government's action during the exit process may mitigate many of these risks. However, it is good to keep the following risks in mind when considering contractual relations already in existence.

Territorial scope

Contracts which have an EU territorial scope, for example, supplier and distribution agreements with a 'Territory' defined as the European Union (or similar), will no longer include the UK unless the provision refers to the membership of the EU as at the time when the contract is signed, rather than a provision acknowledges changes in EU membership during the contract term.

Cost of Importing

The impact of the imposition of import tariffs between the EU and non-EU states and changes in VAT and tax structures may make the contractual pricing mechanism loss-making or too costly for the party which has to bear the additional costs. In addition, there may be additional administrative costs and burdens of import and export licensing and controls. The Government may attempt to put in place a preferential trade agreement or free trade agreement similar to the Swiss model with the EU to mitigate the impact, but clearly a degree of exposure will remain.

Even if a trade arrangement is between two non-EU entities, the supply chain of the supplier may be impacted by the UK's exit from the EU, triggering additional costs which may be passed up the supply chain to the supplier and, if the supplier is able to do so, to its customer.

Worker Costs - Free Movement of Workers

Unless negotiated otherwise, the free movement of workers would no longer apply.  This would impact on the management of a cross-border skilled and experienced workforce in particular it may affect those in the areas of hospitality and/or those who use seasonal workers where a high proportion of workers are from the EU.

Personal Data Transfers

Data transfers to the UK will no longer automatically be permissible.  Instead the UK legislative framework will need to be considered by the EU as to whether it offers sufficient safeguards. This is likely to have the greatest impact on technology based providers with UK data centres offering services to EU clients.

EU Regulations

EU regulations which have direct effect within the UK will cease to apply unless the UK introduces similar national legislation. The Government may also choose to modify or repeal national legislation.  Legislation that may be affected could include TUPE, the Commercial Agents Regulations and consumer rights legislation which were enacted pursuant to EU Directives, impacting outsourcing, commercial contracting and consumer pricing models. Such legislative changes will impact on the commercial bargain underlying the contractual relationship.

Regulated Industries

Within regulated industries, for example, financial services and pharmaceuticals, any change would cause a shift in the domestic regulatory approach (e.g. 'EU home passport control' within the banking sector permitting banks regulated in their home jurisdiction to operate in other EU member states free from additional regulation in those member states).

If you are likely to be affected by any of the changes set out above or require further information or advice regarding your contractual relationships do not hesitate to contact McDaniel & Co. on 0191 281 4000 or email legal@mcdanielslaw.com