EU laws come in different varieties. There are directives that have been implemented into UK law by the UK Parliament, and the implementing legislation will continue to apply unless and until the laws are amended or replaced. There are also regulations that have direct application on the UK as a member state. These laws will not apply to the UK when it is no longer part of the EU, and so the UK will have to decide how to replace such laws, if it decides to at all.
But, that’s what we don’t know – yet. What we do know is that for at least the next two years, existing laws and regulations will continue to apply and companies must operate in accordance with them.
What’s also clear is that, even if the UK doesn’t yet have a Brexit plan, organisations should now be considering the potential impact of Brexit on their IT and outsourcing contracts.
That means auditing existing contracts, revisiting standard templates and assessing carefully any draft contracts that are being negotiated. This will help to ensure that risks are mitigated as much as possible, whichever Brexit model is ultimately adopted.
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Here are some of the key issues to consider:
Given the current uncertainty, consider carefully before entering into any contracts with a long duration. In these circumstances, agreeing a shorter initial term with rights of renewal will provide more flexibility if Brexit impacts on the business case for the deal.
2. Change in law
Many large IT contracts include a “change in law” provision that governs how the parties monitor, react to, and share the risk of changes in law that affect the contract and services. Typically, these clauses don’t have a significant impact during the life of an IT deal because material legal and regulatory changes don’t tend to happen very often – or at least not without a lot of advance warning.
But when Brexit is implemented this could result in a whole series of changes in law that affect the contract. Therefore, particularly in material contracts, it will be important to identify upfront how such changes of law should be treated.
Firstly, the parties should set out who is responsible for monitoring changes in law. Responsibility for monitoring typically falls to the party best placed to identify the change in law, i.e., (i) laws specific to the customer, the customer will monitor, (ii) laws specific to the supplier, the supplier will monitor, and (iii) laws that apply to each party, each party will monitor.
The parties will then need to decide who bears the risk and costs of any changes of law. The customer will generally expect the supplier to bear the costs of implementing changes required as a result of changes in laws that are specific to the supplier.
Customers will also often argue that suppliers should bear the costs required by changes in law which apply to their customer base as a whole. What happens if the UK decides to impose stricter technical or health and safety standards than the remaining EU countries, for example? However, suppliers will typically resist this and require customers to pay for such changes, or will split the costs between all customers affected by the change.
Each party should consider whether to build in specific termination rights to deal with a Brexit option that adversely impacts the business case for the deal, or otherwise makes the deal uneconomic or unnecessary. The parties could decide to rely on a general termination of convenience right to deal with such a scenario, or insert a specific termination right.
In either case, early termination fees will need to be considered. For example, if the customer exercises a break option due to Brexit, should the full early termination fees be payable, or should this be considered a force majeure-type scenario, in which case it may be considered to be more equitable for the fees to be split 50:50?
Or the parties may wish to build in a trigger for the parties to carry out an impact analysis and reassess the deal via governance mechanisms if and when the Brexit option is adopted.
4. Location of services
Evaluate whether you need to build into the contract a right to move the location of the services during the term. It’s not uncommon for outsourcing suppliers to seek rights to move the provision of the services from a UK location to a nearshore or offshore location during the term, in order to make cost and efficiency savings. Building in such a right may be particularly helpful if Brexit adversely impacts the supplier’s cost model for the deal.
Equally, if a customer believes that it is likely to need to move all or any of its operations to a location outside the UK during the term, it should consider upfront whether it needs to reflect this in the contract. Possible options may include building in a specific termination right, relying on a right to terminate for convenience (in whole or in part), or having an explicit right to move the services.
5. Data privacy
The new EU data privacy law, the GDPR, may come into force before the UK formally exits the EU. However, when the UK is no longer part of the EU, the GDPR will no longer apply – because it’s an EU regulation.
In those circumstances, depending on what the UK does, personal data could only be exported by an EU business to the UK if the UK is considered to provide an “adequate level of protection”. This may require businesses to put in place alternative data transfer arrangements (such as standard contractual clauses) until the UK’s adequacy status is confirmed.
Accordingly, where your contract will involve the transfer of data from the EU to the UK it would be prudent to build into the contract a mechanism to introduce such alternative arrangements if and when required.
6. Dispute resolution
EU law defines how jurisdiction and enforcement is handled across the EU. It’s not yet clear how jurisdiction and enforcement would be treated if the UK was not subject to EU law. Therefore, although English law and jurisdiction remains a good choice of law and forum for settling disputes, arbitration may be a better choice.
The EU rules on jurisdiction and enforcement do not apply to arbitration and Brexit is unlikely to have any adverse impact on arbitration. This could make arbitration an attractive option for contracting parties seeking to obtain certainty; at least until the post-Brexit position becomes clearer.
7. References to the EU and EEA
Lastly, don’t forget to look out for any references to the EU or the EEA in your contract, for example, in an exclusivity clause, territorial restriction or reference to applicable law. The safest approach would be to add a reference to the UK to ensure that the UK is covered, whichever Brexit option is ultimately adopted.
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