Planning for Brexit – The risks to commercial contracts and what to do about them

No comments Business, Consumer Law, Employment, Intellectual Property

It’s difficult to write a blog post about the implications for commercial contracts after Brexit because at this stage no one knows what Brexit is going to look like. However, working on the theory that a no-deal is looking increasingly likely, this blog post is going to be the first of a series outlining some of the key issues which will affect SMEs should the UK leave the EU on 29th March with no deal in place.

Research from the Federation of Small Businesses shows that although almost half of small businesses (48%) believe a no-deal Brexit will have a negative effect on their business, this figure rises to 66% for those small businesses that trade with the EU. For SMEs there is very little guidance on how to prepare for a no deal Brexit. I’m going to attempt (and quite possibly fail) to write this post without being overtly political but this does seem to be a bit of an oversight on the government’s part. The aim of this post and the ones that follow it are to shed some light on the potential issues and assist you to start planning for no-deal Brexit. In the event that the vote on Tuesday 15th January results in the acceptance of the deal brokered by Theresa May then I’ll amend this post and tailor the subsequent ones to reflect the deal agreed.

  1. What are the risks?

I’m going to highlight the key ones which we have identified here. There may be others that apply to your business due to sector-specific rules (e.g. if you’re in food and farming there are specific rules which have already been announced), where you trade (e.g. things are likely to be more complex if you’re based in or trade heavily with Northern Ireland) or which we’ve simply not thought of yet.

  • Impossible to perform the contract – some businesses will have contracts which cannot be performed after Brexit. Organic food producers are a good example of this. Because the UK’s organic certification bodies will have to be approved by the EU but cannot apply until the UK leaves, organic exporters could face a nine-month block on sales to the EU. Another example would be road hauliers who may not be able to transport goods within the EU. If your business is within one of these sectors, then you need to check your contracts immediately to see if they include a clause which allows you to terminate (e.g. a force majeure clause) or if there’s any other legal remedy (e.g. the doctrine of frustration) which would allow you to end the contract early. Lawyers are waiting to see if the doctrine of frustration can be used to justify terminating contracts early due to Brexit and there’s a case due to be heard later in January on this issue.
  • Making it difficult for your business to perform – A no-deal Brexit could cause major disruption at ports and airports and chaos of this kind will have a knock-on effect on business. Even if your business doesn’t export, if any of your suppliers are in the EU and are shipping products to you then this could impact on your ability to perform your contract on time with your customer. It’s really important that you review your contracts to identify the risks you have for late delivery and start to think about what steps you can take to mitigate these potential liabilities.
  • Increase in prices – If your business buys from a supplier in the remaining EU states (usually referred to as ‘EU27’) then you’re likely to be looking at increases in import costs as tariffs are imposed and also exchange rate fluctuations as there’s likely to be a further fall in the value of sterling against the Euro. Again, you need to check your contracts to see what the provisions are for delivery and if you’re paying for the goods in Euros or sterling.
  • Fixed price contracts – If your business has agreed to supply goods to customers at a fixed price then the increase in prices mentioned above are going to have a really negative impact on your profit margins on these contracts. You need to identify these contracts and see if there’s any way to renegotiate them or get out of them before 29th March.
  • What does that clause mean once the UK is no longer part of the EU? – Many contractual provisions are drafted to refer to the European Union and from 29th March that will mean only the EU27. For example, if you’re a European distributor that could mean that your right to distribute after a no-deal Brexit is fundamentally changed as the UK ceases to be part of your sales territory. The important thing is to check these things now so that there are fewer unpleasant surprises after 29th March.
  • What laws apply anyway? – The European Union (Withdrawal) Act 2018 transfers all EU law into UK law on 29th March. However, it’s not quite that simple. Firstly, the government is busy making new legislation which amends certain areas of EU law. Secondly, the government has the power to make such regulations as they think fit to amend the EU law that’s copied over into UK law. Unhelpfully at this stage, the government hasn’t made many regulations but it’s important to keep an eye on changes in the law and to be aware that they may come in as regulations which are subject to little or no parliamentary scrutiny.
  • Supply chain risk – All businesses rely on a network of suppliers and although your business doesn’t buy from suppliers in the EU27, that may not be true of your suppliers. In the event there’s a problem further up the supply chain how will that effect your business and what plans are you going to put in place to mitigate those risks? You may want, cash-flow permitting, to buy more of your key raw materials over the next few months in case there are supply problems after 29th March.
  • If it all goes pear-shaped we’ll just litigate, right? – Cross border litigation with the EU27 is going to get a lot more complicated if there’s a no-deal Brexit. Key conventions which make cross-boarder litigation more straightforward will fall away if the UK leaves without a deal. This means that it’s important to think strategically about how future disputes will be settled and options like international arbitration look a lot more attractive than they used to. If you’re entering into a new contract with a business in the EU27 then it’s sensible to consider the benefits of international arbitration through the LCIA or ICC as an alternative to court proceedings.
  1. Are there any potential benefits?

Sticking only to the commercial law implications and not being drawn into anything vaguely political we’ve identified the following as possible pluses to a no-deal Brexit (however no guarantees are made that these will materialise):

  • Fixed price deals – you may have secured a fixed Euro price deal which allows you to continue selling into the EU27 at the same price post Brexit and if you have you’re probably rubbing your hands at the prospect. However, for your customer things are not going to look so rosy so be prepared for them to be trying to find any and every excuse to get out of it.
  • It’s not just hard for you – if your business is finding things difficult then the likelihood is that your UK competitors are too. This could give you a competitive advantage provided you’ve planned better than they have and are managing the complexities of a no-deal Brexit more effectively.
  • There’s a big world out there – It is hoped that by leaving the EU it will be possible for the UK to trade more effectively with other countries. However, this is something which needs time and investment to achieve. It’s also dependent on what trade agreements the government puts in place and how long it takes post-Brexit for these agreements to take shape.
  1. What to do next?

If you’ve read this and have now got your head in your hands fearing the worst, I recommend a good strong cup of tea before you read this next bit. There are things you can do but you need to get on with them straightaway. In many ways all of the uncertainty about whether there’ll be a deal and what it’ll look like is just a distraction and businesses need to plan for the worst case (i.e. no-deal) even if you continue to hope for the best. We recommend that you take the following steps as soon as possible:

  • Review all aspects of your business that could be affected by Brexit. This will help you to identify not just the risks but what you can do to mitigate them. You may also discover that there are potential benefits for your business.
  • Audit your contracts. You need (or you need to get your lawyers to) review all of your contracts to identify the points which we’ve outlined above. Once you’ve done that you’ll have a much clearer idea of where the risks are.
  • Identify changes in regulatory requirements. Go through the regulations being issued by the government and see which (if any) apply to your business. If you’re part of a trade organisation they may be able to advise on this.
  • Speak to your professional advisors. Obviously I’m going to say that means talking to us, but you also need to speak to your accountants and probably your insurance brokers too. It’s important that your advisors (us included) are up to speed on all of this. It is a massive area of law which is changing all the time. It’s therefore important that you get advice from someone who’s taken the time to understand the implications and can advise you pro-actively.

If you’d like to discuss anything in this blog post, please do give us a call. We’re happy to talk things through with you and help you plan a strategy for dealing with Brexit.

Thanks for taking the time to read this.

Alex

alex@mortonlegal.co.uk

01904 428727

With thanks to our associate Richard Jennings from RDY Jennings Law: http://www.jenningslaw.co.uk/