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Checking your supplier contracts before Brexit

27 Feb 2019 | 9 minute read

Whilst the political landscape remains uncertain, there are practical, common-sense steps which businesses can take now to protect themselves and understand the risks they might face.

One of those steps is to review contracts with your own suppliers – even if your own business sits in a domestic market, because you might be supplied by other companies who depend on European goods, labour or services, either directly or indirectly through their own supply chains.

This sort of review would be good practice even in a straightforward economic climate. It becomes even more important in advance of 29 March.

What should you look for when reviewing a contract? To help answer this question, we have produced a straightforward guide to common clauses in commercial contracts, what their impact on your business could be, and how

Because this guide is general and necessarily non-exhaustive, it doesn't constitute legal advice. If you need legal advice on a contract or supplier relationship, contact me now on 0117 915 4933 or [email protected].

To make this guide easier to use, you can jump straight to the clause you're interested in using the links below:

PASSING ON COST INCREASES

The clause: Any general clause permitting a vendor to pass on general third party cost increases.

Its impact on your business: Typically these clauses are not subject to any limitation or indexation, such as a cap or limit on changes occurring only once per year or only in line with a percentage increase in RPI/CPI. It simply gives the supplier the right to pass on costs.

This could become onerous for your business where the supplier's costs are increased significantly as a result of Brexit.

 Our recommendations: You should check whether:

  • This sort of clause is included in your contract with the supplier.
  • There are any controls over any uplift or /variation.
  • You or your business entity has any other ability to limit uplift – in other words, do you have the ability to de-scope and move services elsewhere or terminate the contract? Is the contract of fixed duration with limited ability to terminate?
  • The contract is one under which you pay material amounts.

If the contract doesn’t enable you to limit costs uplift, terminate or de-scope services or goods, is of significant value and is not terminable on short notice then it may be worth considering whether re-negotiation is possible in advance of the UK leaving the EU.

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RENEGOTIATING PRICES

The clause: Frequent ability for vendor to renegotiate on prices

Its impact on your business: Distinct from a supplier's ability to uplift prices based on their own supplier costs, this type of clause gives them an ability to renegotiate or change pricing throughout the contract. This might be applicable where products and services are ordered throughout the term and under specific statements of work/orders where new pricing or tariffs can be applied.

Our recommendations: Consider whether:

  • There is any control over the supplier's ability to apply increases to its rate/tariffs card relating to the services provided – is there a limit? – For example, can the supplier only uplift rates/tariffs once a year?
  • You or your business are obliged contractually or practically to purchase from the provider. This in practical terms may provide leverage for future purchases under statements of work.

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GOVERNING LAW

The clause: Governing Law

Its impact on your business: Some governing law clauses may either currently provide for UK law or EU territory law to prevail. On exit, EU territories' laws are likely to diverge from the UK's. This may make litigation or claims more difficult for non-UK law contracts.

Our recommendations: Where of material value, you could seek to amend or renegotiate (if possible) non UK law contracts. If this is not possible, consider amending alternative dispute resolution clauses to make alternative dispute resolution more definitive.

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JURISDICTION

The clause: Jurisdiction

Its impact on your business: Similarly to governing law provisions, jurisdiction provisions should be considered. If these provide for non-exclusive jurisdiction then potentially claims might be made in EU territories. This could make claims more expensive and it may be more difficult for English law contracts to be determined in the EU.

Our recommendations: Consider making jurisdiction provisions exclusive to the UK. This in itself may not always be sufficient to prevent an entity claiming jurisdiction.

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NOTICE

The clause: Notice periods

Its impact on your business: Current notice periods when dealing with EU-based entities may not be sufficient. Service periods may need to be extended depending on increased administration.

Our recommendations: This is unlikely to be a significant risk but worth noting generally where notices are due to be served a lot under the relationship.

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CURRENCY

The clause: Currency rates

Its impact on your business: This may not be directly relevant to a number of your entity contracts but to the extent that fees/charges are being paid in a different currency then fluctuations in exchange rates may have a significant cost of doing business under that contract.

Our recommendations: Consider whether you or your business entities currently pay/receive monies in Euros or other currencies. Rate fluctuations are likely to be extremely volatile in the period leading up to and after Brexit. Including controls on exchange rate risk or altering payment mechanisms/currency may need to be considered or included certainly where significant charges or payments are involved.

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REFERENCES TO THE EU

The clause: EU contractual references

Its impact on your business: Current terms may reference the EU – these should be considered and amended where they are no longer correct and impact the delivery of the agreement (for example this could affect the scope of IP/software licences; data protection legislation definitions; exclusivity arrangements)

Our recommendations: Check references to EU in the contract to ascertain whether these no longer work post Brexit.

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PASSPORTING

The clause: Passporting rights (for financial services providers)

Its impact on your business: Potentially Brexit could result in a loss of "passporting" rights. This could inhibit you or your business entity's ability to provide financial services directly to customers in the EU.

Our recommendations: Alternative means of achieving current working relationships with EU citizens may need to be considered.

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TAX

The clause: Tax

Its impact on your business: Generally tax provisions provide for future change in rates and taxation. This has typically remained fairly stable (subject to the fairly infrequent change in tax rates – i.e. VAT). This could change post Brexit. This could impact the cost again of doing business although arguably this would more likely have a global effect.

Our recommendations: Consider whether there are any specific tax references to import/export tariffs as opposed to English taxable goods/services.

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HARDSHIP

The clause: Hardship provisions

Its impact on your business: Occasionally contracts will include a provision that allows a party to exit/terminate if the contract becomes overly onerous or burdensome from a financial perspective. These are unusual but are worth keeping an eye out for.

Our recommendations: Check whether there are any clauses that enable suppliers (especially when they are key providers) to terminate/renegotiate or exit a contract where the cost of performing becomes too onerous for the provider. What contingencies might be in place should any such clauses be exercised? Do any of these clauses sit in key contracts?

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CHANGE CONTROL

The clause: Change control

Its impact on your business: Change control processes will enable either party to request/suggest a change to the contractual provisions. This may have a cost element to making the change but it usually enable a degree of flexibility in the terms.

Our recommendations: Check material contracts to assess whether there is a change control clause/Schedule and whether it is sufficiently robust to enable you to require change. Further considerations would include: (i) again whether any rate card applied to carrying out change are fixed/limited in terms of any change (ii) whether emergency changes or fundamental changes can be pushed through quickly.

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CHANGE OF LAW

The clause: Change of law

Its impact on your business: Contracts often include change of law provisions. These allocate risk/cost depending on the type of law change in question. Typically under these sort of clauses a provider will take on the risk where the change in law is of a general impact (i.e. impacts all of its customers) and will look to offset risk where the change of law simply affects one or few customers to those customers. This is not always the case but spotting and assessing the risk will be important to assess whether Brexit could trigger a change of law clause.

Our recommendations: Check to see whether the contract contains a change in law clause. Assess whether the risk is on you or your business entity. If you or your business entity has any sort of risk analysis been carried out as to the level of economic change the change may have. If significant consider what rights your or business entity have to renegotiate or exit.

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DATA

The clause: Data

Its impact on your business: Your contracts with a Supplier should already contain data protection provisions (in particular if the Supplier is processing data on your behalf). Depending on how recently they were drafted, these provisions are likely to assume that the UK is part of the EU and so may not be accurate post-Brexit.

Depending on the outcome of Brexit negotiations, data transfers from the EU to the UK will require additional safeguards as the UK will be a "third country". Similarly, data transfers out from the UK and into other territories (particularly non-EEA territories) may require additional safeguards, depending on existing measures in place.

Depending on the data flows involved, there could be scenarios requiring breach notifications to be made to multiple supervisory authorities, or requiring the fulfillment of individuals' rights across borders and so it is appropriate to consider the contract drafting with this context in mind.

Our recommendations: Data protection provisions may need to be adapted to address the fact that the UK will no longer be part of the EU.

Check to ensure the supplier is not able to transfer personal data outside of the EEA without your prior authorisation for risk of putting you in breach of the data protection legislation.

You may need to enter into a particular form of contract known as Model Clauses when personal data is being transferred from the EU to the UK or from the UK to a non-EEA territory. Some uncertainties remain here, but you should at least be talking to your suppliers about what transfers are taking place and looking for ways to govern them.

If you transfer personal data to a supplier in the US and rely on their Privacy Shield certification to legitimise the transfer, you will need to check that the supplier has updated their public commitments to comply with the Privacy Shield in relation to data transferred from the UK.

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Of course, leaving the EU doesn't just affect supplier relationships, and our lawyers are already advising a number of clients on other Brexit-related issues as a result. If you have concerns about Brexit's impact on your business, contact me on [email protected] or 0117 915 4933. 

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