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The Legal View: Brexit (Part 1)

Posted: 07/05/2016 - 21:18

Nearly two weeks after the UK’s vote to leave the European Union (the ‘Brexit’), very little has become clear in terms of what this means for the country and the EU itself – and the sourcing and outsourcing space in the region - and even how and when the exit process will take place. Obviously, such a momentous transition should not be rushed through over-hastily; however, uncertainty can have a paralysing economic and commercial impact and pressure is already mounting on the British government to begin the formal exit process. Only then will the true impact of Brexit begin to become apparent.

In the meantime there’s plenty of room for speculation – but while in the final analysis the future remains as yet unwritten, there is a world of difference between speculation of the most informed and illuminating type and simple guesswork. With this in mind Outsource has reached out to members of one sector of its readership in particular, outsourcing lawyers, whose professional perspectives on the potential impact of Brexit can be regarded as being very much more the former than the latter. Over the course of several instalments we’ve compiled thoughts from some of the most prominent figures in outsourcing law, from the UK, the rest of the EU and beyond, to give our readers as full a picture as possible of what Brexit really means for this space – and while in one sense the only certainty is that nothing is certain, the perspectives presented here should go a long way towards clarifying in readers’ minds the biggest issues now arising, and, to some extent, how they’re likely to be resolved…


The more things change...
Kit Burden
DLA Piper

In terms of the concrete drafting of an outsourcing agreement, the likelihood is that not much will actually change; not only do most of the provisions reflect the shape of the deal rather than the governing law in any event, it will also likely be the case that many of the "new" UK rules will end up mirroring those in the EU so as to facilitate trade with European partners (eg the ICO in the UK will likely end up following the changes in EU data protection laws so as to put the UK on the "white list" of countries for data protection purposes).

However, there will clearly be the potential for a wider impact. For example, if organisations switch their operations to mainland Europe, there may be a revised thinking as to where the "core" negotiations of outsourcing agreements for the customer entities should be centered, ie such that where negotiations have previously been hosted in the UK and made subject to English law, we may then see more contracts governed by civil law jurisdictions.


Four immediate questions (and answers)
Louise Freeman and Nick Price
King & Wood Mallesons

For many, the outcome of last month’s referendum on Britain’s membership of the European Union was unexpected. Even those prepared for the outcome of the Brexit vote may not have anticipated the extent (or the immediacy) of its effects. With the possibility of the divorce process beginning soon, a number of questions are being asked about what the legal effects of this 'conscious uncoupling’ may be.

Does the referendum count as an event of ‘Force Majeure’ or ‘Material Adverse Change’?

'Force Majeure’ clauses free parties from contractual obligations when an extraordinary event occurs and 'Material Adverse Change' clauses kick in when the position of one party is so fundamentally changed that the parties should no longer be bound. In the main such clauses are unlikely to be triggered by the referendum outcome alone. However, this will depend upon the wording in a particular contract: some may be triggered on the basis of the referendum result, with others potentially triggered in the event of the UK actually leaving the EU. Businesses should review, with their lawyers, their service agreements and other contracts for opportunities this may bring.

How else could Brexit bring an end to my contract?

It is possible that cross-border arrangements could be legally ‘frustrated’, wholly or in part, should performance become fundamentally different if and when the UK leaves the common market. Also, contracts which provide, for example, for an exclusive right to provide services "in the EU" may be interpreted as only covering full member states and no longer applicable to the UK once it ceases to be part of the EU. Businesses would do well to revisit potentially affected clauses sooner rather than later.

Can I ignore EU regulations now?

No. All existing EU rules and regulations continue to apply in the UK for at least two years after the Article 50 notice is given. Any companies doing business in the EU will need to meet those standards in any event (as EU recipients of goods or services will require this). Further, the UK may decide to implement its own regulations in certain sectors, which could lead to divergence and to companies needing to comply with two different sets of rules!

Which law will govern my contracts?

EU rules and English common law rules on the governing law of contracts are largely similar and broadly an explicit choice of English law is likely to be upheld by both an EU member-state court and an English court after the UK’s exit from the EU. However, the law on choice of jurisdiction clauses is different under the two regimes and litigation should be commenced with caution and legal advice. Also, without the existing framework for enforcing a court award in other EU member states it may become more difficult to recover any damages awarded at trial. Consequently, businesses should consider carefully which courts are to have jurisdiction over their claims from the outset.


Only fools rush in (or out)
Tim Wright
Pillsbury Law

From a UK-based outsourcing lawyer’s perspective, it is very much a case of "wait and see". Until Parliament moves to repeal or amend the European Communities Act 1972, the United Kingdom’s laws, including the application of the EU Treaties, remain unchanged. What is clear is that neither the Leave campaign nor the government has a detailed plan for the legal and regulatory overhaul which will result from uncoupling from the EU. These things remain to be worked out in the coming weeks and implemented by whoever succeeds David Cameron as prime minister. But it will be no simple task. Sir David Edward, former judge at the Court of Justice of the European Union in Luxembourg, could not have put it better when he said that “withdrawal from the Union would involve the unravelling of a highly complex skein of budgetary, legal, political, financial, commercial and personal relationships, liabilities and obligations".

Outside of the public sector arena where the procurement process across the EU is heavily regulated, there really is no discrete outsourcing law; instead outsourcing transactions where governed by English law are subject to a system which mashes together the common law (judge-made law applying legal precedent) with enacted laws and regulations. Some of these laws are of general application such as duties arising under the common law - for example, confidence, or employment and data protection laws - whilst others, such as the requirements set out in the FCA Handbook, are sector-specific. Some are purely domestic laws but many others originate from the EU and have either been transposed into our law (sometimes with added provisions, so called “gold-plating” as was done with the TUPE Regulations) or have direct application and don’t need local implementation such as the General Data Protection Regulation (when it comes into force). On that subject, most commentators expect the UK to ensure that its privacy laws stay largely “in step” with those of the EU, whatever Brexit model is adopted, and for the UK to seek either “safe third country” designation or agreement of a “privacy shield” along the lines currently under discussion between the EU and the US.

In terms of wider impact in the UK, apart from government procurement which will inevitably slow down in the current climate, the UK outsourcing sector is very exposed to the financial services sector which is still reeling from the shock of the Brexit result. Whilst the market has staged something of a recovery, bank shares remain badly hit, and the potential wider impacts, such as the likely removal of passporting rights for financial firms, will weigh heavily. The real prospect of the UK being frozen out of the Digital Single Market is also a concern. For some there will also be opportunities. Foreign companies, for example, may be attracted to enter the UK market enticed by the falling pound. We may also see some relaxation in regulatory requirements in the next few years designed to encourage inbound investment.


To be continued…

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About The Author

Outsource Magazine provides unrivaled content for the opinion-formers and decision-makers at the heart of the global sourcing community. This indispensable resource for news, views, analysis and thought leadership was launched in 2005 and acquired by Sourcing Industry Group (SIG) in 2016. Outsource columnists and contributors are thought leaders in the global sourcing community and provide insight on challenges and opportunities in the industry today.