Andy McNish – Partner in our Corporate & Commercial department – discusses Brexit and the Impact on Commercial Agreements

As most of us look on at the slow-motion Parliamentary train wreck surrounding Brexit, and the next cliff edge date rushes to meet us, I thought that I’d remind you of things you may need to look at in your commercial agreements if we do leave the EU on 31st October, or shortly afterwards.

Broadly these come under three headings:

  • Costs variations
  • Definitions
  • Disruption

These are likely to be most important to look at in agreements which deal with long term and high total value supply or distribution of goods or services, but it may also be important to cover them off even in a short one-off agreement for key goods or services or to just think about them in respect of your ongoing commercial arrangements generally.

Costs variations

  • What first springs to mind here are additional costs if you (or your supplier) have to pay import or export duties or other tariffs/taxes on the relevant goods or services. Please bear in mind that these may apply to imports from outside the EU, as, upon Brexit, all the EU’s free trade agreements with other countries (such as Japan, South Korea, and Canada) will no longer be available to UK importers.
  • VAT rules will change. In the event of a no deal Brexit there will be EU VAT and customs duties charged on import of goods into the EU. Further details can be found on the HMRC website here.
  • Also the general disruption and increased ongoing compliance and administrative costs of being outside the single market may affect the margins for some or all involved in the supply chain for goods sold to or bought from EU countries (or from countries who have free trade agreements with/single market access into the EU).
  • There may also be significant swings in the values of currency/market shocks to particular sectors.

Definitions

  • It sounds trite, but as the UK will no longer be in the EU or (presumably) EEA, then it will no longer by ‘in Europe’ for the purposes of any definitions in your agreement or relevant law.
  • This will affect things like data protection law (a transfer to the UK would now be to a country outside the EU so additional provisions will need to be put in place before a company or customer in Europe can send you personal data) and competition law.
  • In the case of any commercial agreements that use territories (e.g. sales, agency, distribution and manufacturing agreements) you’ll need to check that the territories as defined still work.

Disruption

  • If performance of a contract is delayed or becomes impossible through Brexit issues, then you need to take a good look at any ‘force majeure’ clause in your contract. Such clauses excuse delayed performance if this is caused by a matter beyond the reasonable control of a party, and usually have a long-stop date upon which the parties can walk away from the contract entirely (without it being seen as a breach). You should read them carefully however, as there is a wide variation in the detail of such clauses (and they may provide for other actions such as the ability of the buyer to step-in or to break exclusivity to source temporary replacement services etc.).
  • Force Majeure is contractual. There is also a common law doctrine available to relieve a party from an impossible contract – frustration. However that does rely upon the frustrating event being beyond the contemplation of the parties when the contract was entered into and is not easy to get from a court. After all, the possible disruption from Brexit is becoming more and more foreseeable every day. It’s much better to rely upon Force Majeure if possible.

What should I do now?

  • Check that your new and existing contracts deal with the above matters in a satisfactory way for you. For example:
    • Is there a clause that allows for the reasonable adjustment of pricing to take into account Brexit related matters?
    • What currency is the contract expressed to be in and is any exchange rate risk acceptable?
    • Is there a provision for a party to withdraw from the contract entirely if it becomes economically unviable for them?
    • Who is responsible for import and export taxes and duties?
    • Is the VAT position clear?
    • Is there a Force Majeure clause – does it mention disruption caused by Brexit specifically? Does it detail what happens if this persists for a long period?
    • Is ‘Europe’ or the ‘EEA’ used anywhere in the contract? Does this need to be amended to be deemed to include the UK?
    • What about data sharing over UK and EU borders? Does this need to be looked at?

Many of us just want to close our eyes and ignore the Brexit saga. However that probably isn’t a wise course if you have any important commercial agreements that may be affected.

If you would like to discuss any aspects of the above, or any other commercial matter, then our Commercial Team of Andy McNish, Lauren Sever and Ameliah McLaren-Parker will be pleased to help.

For more information about Andy and his work, please click HERE.

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