As the clock runs down to Britain’s scheduled exit from Europe on 29 March 2019, companies should take the chance now to build mitigating measures into contracts and manage this risk.
We’re already working with Fintech companies concerned about Brexit’s potentially destabilising impacts on international contracts, in particular on issues such as the interpretation of definitions, how contracts will be enforced, potential tariffs, and future fluctuations in exchange rates.
Arguably, the largest immediate commercial impact for contracts has resulted from exchange rate changes since the referendum result. With many stung by the pound’s slump, companies are looking to secure their position against future currency-led uncertainties.
In order to avoid contracts becoming unprofitable as a result of changes in exchange rates or the imposition of international tariffs - and to add a layer of certainty around the costs of goods or services - we are suggesting that contracts include a clause with more inventive pricing mechanisms.
These mechanisms should not only account for fluctuations in the RPI, but also expressly allow for adjustments on the occurrence of pre-defined events, and cover the passing on of costs associated with an imposition of trade tariffs. A clause which simply deals with exchange rate fluctuation will not be sufficient.
Even if the inclusion of an inventive pricing mechanism makes a contract profitable, a cumulative effect after the UK’s exit may make obligations under the contract unsustainable - and in that instance it is advisable to include an exit provision.
This should be an express contractual provision. Contracts usually include a force majeure clause which allows parties to terminate due to circumstances beyond their reasonable control. However, this may not be sufficient as force majeure events do not usually include events which one party reasonably foresees.
The impending introduction of the General Data Protection Regulation (GDPR) on 25 May 2018 has also ensured that data and privacy remains a hugely discussed topic amongst Fintechs.
GDPR carries significant weight as it regulates how businesses collect, store, process and share all personal data. All businesses will need to ensure that they are compliant prior to it coming into force.
Although it is unclear precisely what the UK’s data protection legislation will look like post-Brexit, it is clear that for businesses to continue to receive personal data and share personal data between the UK and the EU, the UK will certainly be required to have equivalent data protection legislation as that provided for under GDPR – it cannot be assumed the UK data protection legislation will be materially different to the provisions of GDPR as a result of Brexit.
Definitions and interpretations
A key consideration which cannot be overlooked is how definitions within contracts, in particular references to “the EU”, will be interpreted post Brexit.
The starting point would be to review all contracts and definitions to see if the EU has been concisely defined, i.e. listing all member states, or does it refer to EU member states from time to time?
If the latter, it is likely to be interpreted post Brexit as excluding the UK. This may seem obvious but, where the language is unclear and the term is not defined, the context within which the term is used and the wider commercial background to the agreement will need to be taken into consideration.
It is likely that, because of the strict regulatory and compliance obligations around transfer of personal data, references to transfer of personal data within or outside the EU will be interpreted as excluding the UK.
In order to future-proof against ambiguous interpretation of such clauses, we suggest including a concise definition of “the EU” in any new contracts.
In addition, given the rising uncertainty around the future of other member states, if the definition of EU was to be amended it may be prudent to take that opportunity to include provisions to protect against other member states’ departure from the EU.
These concerns also extend to whether references to “EU law” will include any subsequent legislation that is introduced in the UK post Brexit. For example, VAT is frequently defined by reference to tax levied in accordance with EU regulations. It is unclear whether such a definition would include successor UK legislation. In reality, the purpose of the language, to account for VAT, will likely override the strict reading, but such matters will need to be kept under close review.
The recast Brussels Regulation governs the regulation and enforcement of civil judgments, and provides for a system whereby courts of each EU member state recognise judgments in the jurisdiction of another member state. If the Brussels Regulation ceases to apply to the UK post Brexit, we may see situations where judgments handed down in UK courts may be given less favourable treatment when seeking to enforce in EU member states.
It is therefore prudent for businesses to review any security they hold against companies in the EU and to consider how enforcement of those securities may be affected post-Brexit.
It is advisable to consider obtaining security from companies or assets in the UK, or at best seek advice from local advisors regarding any such enforcement in a particular member state. We also suggest that consideration is placed on whether arbitration may be a more appropriate forum for dispute resolution as arbitral awards given in the UK, should remain enforceable throughout the EU member states and vice versa.
All of this naturally has the caveat that in the wake of the unexpected general election results, we are yet to see where the pendulum will eventually swing. Current signs are indicating that we are heading towards a “softer” Brexit, but regardless of the exact nature of the deal, procedures can be put in place to gain some certainty and reduce any negative impact.