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Contractual Considerations on Brexit

chris-mcdonough

As Brexit draws near, the question of how it will affect business and the need to know your contractual rights is ever more important.

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 to Brexit, which then leaves you in breach of a contractual obligation, there may be a contractual right to claim Force Majeure (an event outside of your control). This will depend on the form of your contract (terms of business or specific agreement) and whether your contract contains such rights and the extent of those rights. I have commented in previous notes on the use of terms of business and the potential pitfalls on their enforceability (click here for article). There is a question mark over whether, given the possibility of a hard Brexit being a strict possibility, would Force majeure apply given we have broad notice of it being a possibility, and the likely effects on the borders, and so we should have made allowance for it?

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.

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, 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 regulation which is EU in its origin, and subject to an EU body, or 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.

EASA (European Aviation Safety Agency, is one example. The permissions granted by this authority may, in the event of a hard Brexit, move to the UK’s CAA (Civil Aviation Authority). The CAA is currently in the process of “creating the capability required for the UK to fulfil State of Design responsibilities independently of EASA should that be needed once the UK leaves the EU”. Business which relies on any similar provisions in whatever industry they are working, should be aware of the proposed changes and keep abreast of developments within the UK statutory bodies which will pick up these matters post Brexit, to ensure that they can continue to operate.

Regardless of the form of Brexit, the lights will not go out (I could be proven wrong), but there is likely to be some flickering and it is best to be prepared.

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