On the whole, businesses have welcomed the concept of a transitional period which would maintain the status quo until 31 December 2020, after which time the future relationship – or the trade deal - with the EU will come into force.
While we await details on the terms of our future trade deal with the EU, and what form the transition period will take, we do know that Brexit is coming. As such, businesses would be wise to plan for all eventualities – including a consideration of its business contracts. Here we examine how Brexit could affect your contracts and what you should do in the lead up to Brexit.
Review all long-term commercial contracts that might still be in existence after 29 March 2019. Assess your contractual links to the EU, identify any issues that could arise and take appropriate action. There is no one-size-fits-all approach, but the following key issues should be considered:
- Timing/lead times: Who is responsible for delay under the contract? Delays at ports and airports are possible, particularly in the event of a no-Brexit deal. Who bears the risk of failure to meet delivery dates and/or services levels and are there any ways the delay could be mitigated?
- Pricing: As we experienced immediately after the EU referendum vote on 23 June 2016, exchange rate changes can seriously impact your costs. The agreed pricing mechanisms may now be too costly, particularly if margins were already tight. Consider whether stated prices are inclusive of duty. Knowing your position - in terms of negotiating new prices, enforcing any Brexit-related clauses or even terminating the agreement entirely - is key.
- Tariffs: Ensure you understand who is responsible for payment of import or export duties. Additional duties may become payable post-Brexit both in relation to imports from and exports to the EU, or to and from countries with which the EU has a trade deal. This may not have been considered at the time the contract was signed, particularly for EU-to-EU supplies.
- Customs clearance and administration: Who is responsible for this process? Post-Brexit, the cost of managing this process may increase.
- Termination: The impact of Brexit may prevent you from performing your obligations under the contract, or the commercial analysis of the deal may change, so can you terminate the contract to avoid these issues? Force majeure provisions may help here if they were drafted very broadly, but perhaps there is a material adverse change provision that would help.
- Regulation: To what extent do EU regulations impact the contract? Do you or your contractual party rely on EU licensing schemes or other approvals? These may cease to apply to UK businesses.
- Data transfer: Is there any data transfer from EU to UK? If so, standard contractual clauses or other mechanisms may be required to allow for data transfers to continue to be made post-Brexit.
- Territory: Many contracts contain specific territorial provisions, and uncertainty may arise where provisions refer to the EU. The UK’s position will need to be considered and agreed ahead of Brexit. Each contract may be constructed differently, and all parties should look to clarify the position quickly.
In light of your analysis of these key issues, consider whether any of your existing contracts could or should be renegotiated or terminated to protect the business.
Brexit risks should be covered in each new contract you enter into. Consider how the contract might be affected by the UK's departure from the EU, and make any necessary provisions. This might include:
- Expressly stating whether leaving the EU would be deemed to be a force majeure event or 'material adverse change';
- Giving the parties termination rights when the UK leaves the EU (depending on the impact that the terms of Brexit has on the contractual parties or deliverables);
- Suppliers should consider providing for, or referring to, an alternative pricing mechanism which will apply once the UK leaves the EU and new tariffs and changes to cross-border taxes are known. Alternatively allow for a renegotiation of pricing and other terms once the details of Brexit are known.
What should you do now?
- Keep informed: Stay up to date with the latest developments, particularly the risk of a no-deal Brexit. In preparation for a ‘post-Brexit post-transition period no trade deal’ or ‘post-Brexit no transition period’ situation, we recommend that businesses gain an understanding of the World Trade Organization (WTO) rules. In the absence of trade deals with a country, any exports or imports from that country will be based on these rules. If we exit the EU without a transitional arrangement, WTO rules will apply as of 11pm on 29 March 2019.
- Communicate: Continue to communicate with suppliers and customers about Brexit, any potential challenges and possible solutions. Keep written records of any discussions and agreements reached.
- Take stock: Revisit your standard form contracts to ensure these are suitable for the post-Brexit landscape. Most importantly, review the price variation, import/export duty, force majeure and termination provisions.
- Renegotiate: Some contracts may be dependent on the ongoing operation of particular EU legislation (e.g. the free movement of goods). Following Brexit, it is possible the contract could be incapable of performance, force majeure provisions could be triggered or the contract may no longer be profitable. Consider whether existing long-term contracts should be amended and whether new contracts should build in protections to preserve the commercial purpose. If this is not possible, consider whether you are able lawfully to suspend performance or terminate the agreement. This may lead to dispute, so take appropriate advice first.
- Risk assessment: How will your customers and suppliers view your existing contracts with them? Which contracts are at risk of suspension or termination? If a contract is no longer profitable or becomes incapable of performance, the counter-party may consider its rights to terminate.
- Customer and supplier solvency: Consider the impact of the ongoing uncertainty on your key customers or suppliers. Ensure you are making contingency plans for key suppliers or customers going out of business. Also review your current contracts – what are the rights to terminate for insolvency? Do you have a parent company guarantee in place?
If you would like to discuss any aspect of this article, please get in touch with Kate Westbrook, Brett Lambe, or your usual Thrings contact.