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Brexit and commercial contracts

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16 May 2017

How to approach contracting during the uncertain transitional period that the Brexit negotiations will cause and what does it mean for IP?


David Lowe: So Michael you lead our Brexit taskforce, you're the Partner here who leads that. Brexit - huge uncertainty - is there anything businesses can do within their contracts.

Michael Luckman: Of course the really good thing about in-house Counsel is that their job really, if you think about it, is to manage uncertainty and risk. So they are really quite pivotal for how businesses can approach the problems caused by Brexit. So there's a sort of menu of issues you usually think about going through on a contract to manage uncertain risk. You'd think about its term, do you shorten the term so that it can be refreshed relatively easily. You'd think about exit, can you get out if certain bad things happen, particularly if the impact of Brexit is particularly bad. You'd think about pricing mechanisms because there's going to be currency volatility so you maybe want to review the way in which you manage those kind of things. And it's not just contractual things as well of course we get onto the point of currency of course and you've got the whole question of hedging. Hedging's an obvious answer to currency risk but of course hedging comes at a price doesn't it. So once you've made that decision you have to work out who bears the cost and the risk of that hedging. So there's a few things you know that in-house Counsel can do to help.

David: What about Brexit clauses, can't you just shove a Brexit clause into your contracts?

Michael: Well they were all the rage, within about one day of Brexit coming out, commercial lawyers all over the country were drafting Brexit clauses to get out if Brexit happens. I think the trick is to think it about it in this way - Brexit really is just a massive uncertain event and so in a funny kind of way you should look at issues of uncertainty in every contract in the same way. I think Brexit clauses probably are worth it. If you have to negotiate then parties say well why don't we just wait anyway, why don't we just make it a two year contract and revisit the terms anyway. Why do we need a specific trigger for negotiation around Brexit? The better way to look at it if you are having to look at a contract that is going to go over this transitional period, I think is to focus on what's the impact of Brexit going to be on your contract. So for example if you really are concerned that the introduction of tariffs will change the pricing model or whatever your Brexit clause should effectively say that. You know we will revisit the terms if tariffs are introduced or if my production costs have to go up because of increased regulatory compliance.

David: And are you seeing many Brexit clauses?

Michael: I think I've heard one, I've heard of one but no not really. The approach that seems to be operating in the market is exactly that. Either people are in short term contracts or strategic delay until the situation or scenario is much more clear or they are focussing on what's the impact, can I work out my way on that matter?

David: What about force majeure - is Brexit a force majeure?

Michael: It will pop into the mind of most commercial lawyers I wonder if it is, but I think there's a few things working against that as a way to get out of contracts or delay enforcements of contracts as a force majeure event. First actually Brexit's been knocking around for some time. I think the first time it got mentioned as an option for the referendum was 2012. So arguably many lawyers would be saying well you should have been thinking about the possibility since then. And secondly it doesn't feel like force majeure to me, if you think about the origins of that as a remedy for not having to comply with your contractual obligations. It starts with what you might call geological events, you know earthquakes, floods, fires, but we're not one of those natural disasters or acts of God. English law since then has developed the concept that if you want to rely on force majeure you need to specify the kind of things that you are wishing to rely on to create some kind of principle if these are the things we are looking at. Now you're right you could probably say some of those things are Governmental and makes Brexit a Governmental act. But these clauses are usually narrowly construed and the events which usually trigger force majeure like embargo or sanction, Brexit doesn't feel like one of these.

David: Change of law clauses, you often see those in longer term agreements, they must have a relevance I would imagine?

Michael: Yeah but you've got the same issues you've got with negotiating a Brexit clause which is how material a change, what changes have changed, why don't we just wait and see. Again in the market I am not getting requests for change of law clauses.

David: IP, intellectual property - how is that going to work in Brexit going forward?

Michael: Well I think we have to sort of look at it in two ways. So I will just talk about, if I may, intellectual property protection which at one level is not contractual but it is worth mentioning anyway. The European patent system is not actually EU derived, it's a completely parallel system so in itself those involved in the patent world, life sciences, tech companies, their protection system is not particularly affected by Brexit. We have got some very interesting European issues coming down in relation to the Unified Patents Court which may turn out to be an illegally constituted court if it is finally ratified by the UK, but that apart, you can put patents to one side. The issue in relation to patent rich businesses is not Brexit as it relates to IP law it's more to access to funding and it's more about access to scientists who tend to operate on a European wide basis rather than a national basis.

In relation to trademarks the situation is different though because we have the community trademark and we have community designs. We are discussing there how they are going to be grandfathered. But given that the cost of trademark filing is actually so low what is happening in the market is that European and global businesses are filing for UK marks separate from community marks in any event.

David: So often in licence and distribution agreements you have territory definitions, if its defined as the EU what's that going to mean?

Michael: Yes I think this is where a lot of the issues are going to be. They are going to be small tiny things aren't they that are going to trip you up. But contractually I think there's two things to focus on in relation to IP. The first is territory and of course that's particularly important when it comes to exclusivity, most people will want to maintain exclusivity in territories. So in your case if a licence has been granted for the EU when the UK leaves the EU what does that mean and do I have exclusivity, if I am the licensee do I have exclusivity in the UK anymore? Normal contractual rules of construction would say contracts are construed as at the date on which they are signed. So of course if the UK was in, business efficacy would suggest well it's operating in relation to the UK so you give effect to it. I think that's probably the right answer, so in your case your licence would cover the UK but I can see someone putting up an argument saying no this whole thing has been framed on the concept of operating within a single market. You would have seen the IP licences before, they are very much framed on European principles around the single market and people might say that business efficacy meant it required a single market for this agreement to operate within. So there may be reasons for undoing that.

The more interesting issue is you have probably seen from time to time clauses which talk about the European Union as constituted from time to time, good drafting, I'm sure that's what you used to do David and that probably is consistent, so as the European Union shrinks so will the territory shrink, because it will be logically consistent within the whole agreement. What I can see happening though inevitably is that someone somewhere is going to have a schedule of intellectual property rights and one of them will have a UK patent or trademark in there in relation to one of those licences, now what does that mean? Because the UK right is in the schedule then the territory shrinks with the EU, are the UK rights licensed or not? I don't know but it will be fun finding out.

David: What about the regulatory side, I mean we've got the Great Repeal Bill that is going to sort of freeze all EU law at the time of exit. So we will have all that raft of European regulation that will continue to apply. But presumably then there is a divergence after that point?

Michael: Yes I think there's a couple of things. I think there might be a divergence in detail. I think we forget often that a lot of European regulation with which we comply, and you would have seen the drafting of many clauses, you know, thou shalt comply with EU regulations. A lot of that actually is internationally based in any event. So in the global trading world in which we live many of the principles are just what you might call broad international trade compliance principles anyway. We can't forget about European regulation, (a) it's going to grandfathered - you're quite right, so we are going to have to comply with it in any event; (b) actually, hopefully Europe is going to remain one of our biggest export markets. Well I'm afraid you can't export unless you comply with the relevant regulations to the country in which you export. So de facto if you want to export there we are going to have to comply with it. What I think though will happen is that because we've got parliamentary control here now, one of the big themes obviously of Brexit is that the UK gets its right to determine its own laws, is that yes there is a risk of what you might call continental drift. Small changes over time which will expand in difference. Whereby we will have differential regulatory frameworks in Europe and the UK. But going back to the main point if we want to trade with the EU we are going to have to comply with their regulatory framework.

David: What are you seeing in-house lawyers and businesses doing today about their contracts in light of all of that?

Michael: Yes okay, we have to distinguish I think between existing contracts and new contracts. What we're seeing in relation to existing contracts is we are being asked to do audits and impact assessments. Obviously not wholesale, many businesses are stuffed full of contracts and there's what you might call some risk management of the ones which are really key to the business. But we are being asked to have a look at and assess the potential impact of what Brexit might have on those contracts. So you'd be looking at things like you know how quickly can you exit the contract? How does pricing work particularly in a currency volatile type environment. You'd be looking at whether you've got alternatives can you second source. What are the ways in which you can manage your risk in different ways?

David: So parallel imports, I haven't heard much about that as an issue.

Michael: Actually in relation to IP a lot of the discussions have been around the Unified Patents Court and the excitement that's coming out of that and the whole kind of life sciences sector issues. But I think one of the as yet undiscovered issues is the whole issue of grey markets. Europe has got now well established principles that allow grey imports, you know products sold in France can be imported around the European Union with no barriers, so intellectual property rights owners can't use their intellectual property rights to stop imports and the reason for that is obvious, Europe doesn't want differential pricing in different markets. So, the freedom of movement of good is really important in the context. Of course if the UK leaves Europe and Europe leaves the UK marketing in either of those territories won't constitute a first law for marketing for the purpose of parallel imports and grey markets. So you will find a situation where IP rights owners will be capable of using their intellectual property rights to prevent imports. Now it's not quite that straightforward, it's quite a complicated area because there are certain rules around the supply of spare parts for example and many laws that allow spare parts to be manufactured onsite without infringing so it's not quite straightforward but it's as yet an unexplored area.

The only thing I would add is that actually the UK of course existed before Europe and we do have our own rules on international exhaustion of rights, as this is issue is called. So we may have to dust off our old text books and go back to what old common law English principles used to say about parallel imports and international exhaustion.

David: If we get a free trade agreement with Europe that might have something to say on this issue as well?

Michael: Absolutely and for me it is one of the things you would absolutely want to address first up front in relation to a free trade agreement.

David: Great thank you Michael.

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