In view of the next European summit set for the 15th-16th of October to discuss the EU budget 2021-2027, the spotlight has returned on the EU-UK trade agreement which has not yet been reached. The outstanding problems concern competition, the fishing market, and the exports, and even if – according to forecasts by the London School of Economics – a "no-deal" would have an impact on the British economy at least twice as much as that caused so-far by the Covid-19 pandemic, currently this possibility remains open. Companies must prepare for Brexit in advance, by identifying and addressing its risks and challenges.
Regardless of any trade agreement between the UK and the EU, next year will bring additional costs for the suppliers of goods directed from and to the UK. The commercial contracts clauses that will remain in effect beyond the Brexit transition period need to be reviewed. In addition, certain long-term contracts may no longer be adequate and will need to be amended or terminated. Especially with reference to the O.E.M. Long-Term Supply Agreement, one of the problems could concern the need for the supplier to adjust the sale price of the goods sold to an English buyer according to the higher costs that he will have to bear as a result of Brexit. For an Italian supplier, on the other hand, this cost increase could derive (i) from the need to adapt the goods to new technical standards required and (ii) from any import duties introduced following the exit of the United Kingdom from the European market. For contracts to be entered into after 31st December 2020, the allocation of costs and risks should be considered during the negotiations and subsequent drafting of the contract.
Review your contract! For existing contracts that maintain their effects even after the transition period, the exit of the United Kingdom involves changes in tariffs, additional customs procedures, the product labelling and licenses. These amendments could materially affect the commercial agreement between the parties. For example, if your UK-based company sells goods in Europe, at the end of the transition period, it will have to undergo a new labelling process. At the end of the transition period, in the absence of a different agreement, UK companies will also have to apply customs procedures and VAT at the same rates for goods traded outside the EU. Finally, as regards licensing, after the end of the transition period, the shipment of some goods between EU Member States and the UK will require new import-export licenses.
If the company is not based in the UK, but in a State of the Union, and has contractual relationships with British companies, it is advisable to review the contractual clauses before the end of the year. It is likely that the contract includes a "force majeure" clause that allows a party to not fulfil the obligations agreed following the occurrence of certain events outside its control.
Within the British legal system (unlike the Italian or French civil-law legal systems), there is no specific reference regarding force majeure, or so-called material adverse changes, that can make up for situations not provided for in the contract, therefore the identification and determination of these legal concepts is left exclusively to any negotiated arrangements contained in the contracts between the parties.
In this context, the Brexit event could be hypothesised as a force majeure event, to the extent that it is possible that its occurrence could negatively affect the ability of a party to fulfil its contractual obligations. However, it should be noted that, unless such clause did explicitly foresee the Brexit event, it is unlikely that the English courts would admit Brexit as a cause capable of impacting existing contracts.
Assess the risks. In relation to the negotiation of new contracts, parties should consider how their agreement could be affected by Brexit and to provide a contractual remedy to the fullest extent possible. For example, you could use the "Brexit clauses", i.e. contractual provisions that provide a mechanism or procedure to deal with risks and to help the parties achieve the agreed outcome, resulting in a change in the rights and obligations of the parties following the predetermined event.
Some clauses could leave room for the subsequent negotiation and renegotiation of the contractual terms between the parties in order to solve problems that could arise following Brexit. Other clauses could consider the new duties on imports and exports and additional requirements relating to the procedures for submitting documents and obtaining licenses, providing for a renegotiation of costs.
Brexit is also likely to lead to retards in the receipt and delivery of goods between the EU and the UK, affecting the ability to comply with contractual commitments. For this reason, it is necessary to consider during the stipulation of the clauses at possible remedies for delays or defaults.
Applicable law. There is no reason to believe that, after the transition period, the choice of English law as the law applicable to the contract becomes less attractive.
English contract law derives mainly from common law and the only relevant intervention of EU law on commercial contracts was introduced by the Late Payment Directive (2011/7/EU), which replicated the existing laws in the UK. This means that English contract law will not be largely affected by the UK exit. On the contrary, the advantages of choosing English law remain and are characterised by the predictability and legal force of the judicial precedents.
Furthermore, even after the end of the transition period, the courts of the EU Member States would be required to respect the choice of contractual law pursuant to the Rome I Regulation (593/2008/EC) in relation to contractual obligations, and the Rome II Regulation (864/2007/EC) in relation to non-contractual obligations.
On the other hand, within the EU, the Brussels I Regulation allows contractual parties to choose which court will have jurisdiction, and provides for the recognition and enforcement of judgments between EU Member States. During the transition period, the Brussels I Regulation will continue to apply, but after the end of that period, the Regulation may cease to apply. In this likely scenario, although the parties remain in a position to obtain the English courts jurisdiction over the contract dispute, the enforcement of the English judgments in other EU Member States may be subject to national procedural and validation laws which could offer a treatment less favourable to the English judgements.
Businesses need to prepare for Brexit by identifying and addressing the challenges and risks in advance, and this not just for UK businesses. It is important to be prepared for new changes and to act in time.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
