Contractual Considerations on Brexit
It is never too late to sort things out. First published in 2018, this note, now updated, addresses how you may protect your business through your contracts, where border issues cause delays or prices need to be adjusted, and explains the new UKCA Mark.
Some questions you may ask yourself:
- What happens if the borders are clogged up and I cannot deliver or receive goods
- Who will be liable for tariffs in the event of a hard Brexit
- Should I look at amending existing contracts or terminating contracts with a view to issuing new contracts
- Will you have to register with a UK authority in place of an EU one?
Deliveries and Purchases
If you are unable to deliver on time due for example, issues at the border in relation to raw materials coming in or you selling cross border, which then leaves you in breach of a contractual obligation, your contract may provide a contractual right to claim “force majeure” (an event outside of your control). Given however, that we have known Brexit was looming, the question is should it have been foreseen and addressed?
In order to be able to rely on force majeure, the party seeking to rely on it must show that it had taken all reasonable steps to avoid the event occurring and/or to mitigate its results. There will be exceptions but you should adopt the general view that, whilst we may not have known what would be in place on 1st January 2021, business has been given time to prepare for an uncertain future, and where any risk could reasonably have been identified, then precautions should have been taken in the run up to 31st December to mitigate that risk. If a party is unable to show that they have met this test, then it is unlikely that they will be able to rely on force majeure as a defence, as the Force Majeure event must be the sole source of the delay, and a failure by a party to plan and adapt would introduce a second source of the delay.
All of the above assumes that you have an effective force majeure contract clause. If your contract does not contain a force majeure clause then look at the possibility of introducing such a clause by way of varying the contract, or opening a negotiation. Whether you can vary the contract unilaterally will depend on the contract which is in place. If you are able to vary a contract, look also at amending any delivery obligations in regard to time of delivery being only an estimate and time not being of the essence. This will place you in a better position should goods be delayed at the borders.
If you are unable to vary the contract, then consider terminating the contract and issuing a new contract in its place to deal with the likely consequences to your business. You would need to consider the termination rights. Would you be entitled to terminate without cause? and also question the possibility of losing the contract in doing so. Think ahead, understand your rights and obtain advice before acting, if you are unsure.
Tariffs and who will pay?
In the event of hard Brexit and the introduction of tariffs, whether you are buying or selling, who bears the tariffs will again depend on the terms of the contract. If you have adopted Incoterms 2010 or 2020, a supply on an “ex works” basis will place the burden of tariffs on the customer, or if you are buying on these terms on you. If you are buying then you may wish to opt for “DDP” (Delivery Duty Paid), where the supplier is responsible for the costs of duties and taxes.
As with force majeure, you should consider your options on amending, renegotiating or substituting the contract. If you are selling and would be unable to amend, or to absorb the tariffs then a termination may be appropriate.
Licensing and regulation
The current proposal for existing laws, rules and regulations applied from the European Union is that they will continue to apply under the EU (Withdrawal) Act 2018. This will provide some certainty for business. If however you are subject to specific licensing and you rely on EU permissions to operate (to any extent), consider what actions if any may be required to enable you to continue to operate.
CE marking will for example be affected as this will over time be replaced in Great Britain (GB mainland UK, NI will have different rules) by the UKCA mark. From 1st January 2021 the requirements for UKCA marking must be met, though the conformity assessment processes and standards that can be used to demonstrate conformity under UKCA marking will be the same as for CE marking. Companies and officers may be required to execute a CA Declaration as an importer of the product so will need to be satisfied that the product meets the requirements (and maintain a record to demonstrate the process has bene followed). Failure to do so can lead to fines for both business and officers and imprisonment for officers.
To allow businesses time to adjust to the new requirements, CE marking of most products will be accepted until 1 January 2022. There are some exceptions UKCA marking of goods being sold in GB will need to be applied immediately from 1 January 2021 for any new products placed onto the GB market. Business will also need to satisfy CE marking for sales into EU as the CA mark will not be accepted at the time of writing this note.
Dated: 1st December 2020
Partner and Head of Commercial
t: 0151 224 0551