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Out-Law Analysis 3 min. read

Leaving the EU: the contractual contingencies UK life sciences companies should put in place now

FOCUS: Companies operating in the life sciences sector should start future proofing their contracts now to account for the possibility of the UK leaving the EU or renegotiating the terms of its membership.

Should the UK leave the EU or renegotiate the terms of its membership it could have major implications for commercial contracts, with terms relating to competition, intellectual property rights and data protection, among other areas of law, likely to be affected.

Businesses are being encouraged to participate in the ongoing Balance of Competences Review that the Government is undertaking, and this is one way for the life sciences industry – rightly seen by the Government as a major driver of growth and innovation – to make their case for how the UK should interact with the rest of Europe in a way that offers most benefit to them.

However, although any potential decision on whether the UK should leave the EU remains a long way off, life sciences businesses need to begin assessing their current contractual arrangements to better understand their exposure to risks associated with the UK leaving the EU.

To the extent possible, they should look to introduce future proofing safeguards into contracts that account for any UK withdrawal from the EU.

What a review of contract terms could involve and how future proofing could be achieved

Companies should consider whether an EU exit would or should constitute a 'force majeure' event – essentially an unnatural event occurring outside of contracting parties' control – and trigger either their own, or their contractual partners', ability to avoid contractual obligations or liabilities.

Would there be any contractual implications as a result of uncertainties around currency that could arise should the UK exit the EU? This should also be considered.

The territorial scope of contracts may also need to be redefined. Existing arrangements may well refer to 'the EU' and need to be altered to ensure that the contract is effective within the UK should the country leave the EU.

Intellectual property (IP) licensing arrangements may be tied to a moving definition of 'the EU' within contracts. A UK exit could lead to the licence no longer covering the UK. Businesses should consider therefore incorporating an obligation in those circumstances to execute necessary additional licences to avoid infringement of IP rights.

Inserting a hardship clause into contracts may also be useful. A generally worded clause allowing either party to renegotiate terms if the agreement becomes unprofitable may be useful if an exit from the EU is likely to substantially affect the commercial deal.

Tied to this concept is the idea of contractual termination rights. Businesses should consider whether, by the UK redefining its role in the EU, there would be such a profound effect on any commercial deals it has arranged that one or both parties should be entitled to walk away.

Businesses will also want to consider how contractual disputes would be settled in the event of the UK leaving the EU. At the moment, although each Member State has a different legal and court system with different rules, the European Treaties provide for cooperation between Member States to simplify cross-border judicial processes. If the UK exits the EU, then this framework of EU legislative rules would cease to apply.

In this event, International Conventions, such as the Hague Conventions, national law and bilateral agreements would manage the conflicts between the rules as applied by different countries.

Would existing insurance policies cover non-EU exposure? This is something life sciences companies should investigate. They may have to decide whether any revised insurance arrangements can be put in place through affordable premiums.

Data protection clauses will also need reviewed. Irrespective of the exit route that the UK might negotiate, in dealing with international data transfers, companies would need to review and update their contracts involving cross border data sharing with the UK, such as clinical research arrangements.

A straightforward way for companies to approach the possibility of the UK leaving the EU is to put in place contract terms that specifically allow for renegotiation or termination of those contracts following the result of any referendum on the matter.

Why act now?

Last week Conservative MP James Wharton introduced a new Bill before Parliament which would, if backed by MPs and Peers, require a national referendum to be held on whether the UK should exit the EU by 2017.

The Bill is not certain to be passed, with there appearing to be little appetite to support it from either Labour or Liberal Democrat MPs. However, it chimes with Prime Minister David Cameron's wish to give the UK people a say on the future of the UK within the EU.

Businesses need to be prepared for an event as major as the UK leaving the EU and anticipate that is going to happen and begin contingency planning, regardless of whether they believe it will or not. With a potential vote on the matter just four years away, the time for companies to undertake their contractual audits and future proofing is now.

Stuart Richards and Helen Cline are experts in life sciences at Pinsent Masons, the law firm behind Out-Law.com

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