Businesses need to identify and carefully consider all contracts that involve a trading relationship or include a supply chain with any other businesses based within the European Union (EU), in preparation for a post-Brexit UK.
Partner Mark Alexander recently presented a TED style talk on the implications of Brexit and shares his thoughts in an article below.
Any contracts that are still running which were entered into before the referendum, will have been prepared on the assumption of tariff free access, free movement of labour, EU funding as well as a harmonised legal and regulatory regime. It may even be that owing to the uncertainty around the position on Brexit since then, more recent contracts still include some or all of these assumptions.
Whilst the post-Brexit landscape is still far from clear at the moment, businesses can nevertheless look to manage the potential scenarios that either a ‘soft’ or a ‘no-deal’ Brexit will bring. It is our opinion that businesses should base their strategy around a no-deal Brexit, to ensure readiness for the changes to contracts and supply chains that may be triggered.
Here are some key considerations in the event of a no deal Brexit for any business when looking at their existing contracts and supply chains:
- Assessing costs and risks that may arise from future legal and regulatory differences between the UK and the EU – as an example, manufacturers need to be aware of the potential changes to the use of CE Marks. If the UK leaves with no deal, then the conformity tests carried out in the UK, which enable the use of the CE Mark, will not be recognised in the EU. This means that where the products have been manufactured and assessed in the UK, they will need to be ‘reassessed’ in the EU in order to retain the CE Mark, which could be a costly exercise.
- Reviewing pricing mechanisms in contracts such as regulatory requirements, currency fluctuations – how will a weak pound impact on the commercial viability? Following the referendum in June 2016, sterling has lost around 18% of its value and has remained roughly 1.14 on average against the Euro since then. Margins for anybody having to acquire supplies from the Eurozone have been squeezed in that time. Challenging the cost risk in currency fluctuation is difficult as neither side will willingly want to assume risk for something that is entirely outside of each parties control and entirely unpredictable. Consider whether your contracts currently contain any provisions that deal with these aspects? If not, how do you propose to manage any variations with your customers?
- Review potential tariffs and increased transaction costs – Unlike VAT, if customs duties are to be charged then these will not be recoverable and represent a below-the-line cost to businesses. How will these be dealt with? In the event of a no-deal, what are the potential tariffs that may be charged? Consider the WTO along with the latest UK Tariff Guide which sets out the potential duties that could apply.
- Ensuring any intellectual property is protected, particularly Trademarks – in the event of a no deal, existing EU Trademark registrations will no longer include protection in the UK. Businesses that have a valuable brand may want to consider applying for a national UK trademark for certainty. Patents by comparison are not currently expected to change significantly as it stands, as the UK has currently indicated it wishes to remain a member of the European Patent Convention which is not based on EU membership
- Key workers and skills required in order to fulfil the contract - if free movement of workers does not continue as before, the pool of workers with the expertise and experience available in the UK is likely to diminish. Visa requirements may make it difficult to recruit from Europe and move employees within the EU, and with skills gaps affecting a number of industries, recruitment and retention of key staff will only become harder. Ensure you identify and incentivise your key members of staff wherever possible – this exercise is possibly more important now than ever before.
- Awareness of contract terms that the other party may trigger post Brexit – for example, review any penalties for delays, in the event that there are issues at the borders with customs declarations. The practical result of a no-deal is that the same customs rules that apply to non-EU goods entering the UK will start to apply to goods from the EU – this could be a process that many are unfamiliar with which may cause issues, and delay.
- Businesses need to understand the overall impact of a no deal Brexit on any contract or supply chain. Identify the key contracts that might be impacted by Brexit. If a contract is high-risk, then consider renegotiation or what can be done to limit the risk to your business.
Ultimately, if a contract becomes so economically unviable, it may be that one party will want to try and cancel or terminate the contract. If there are no specific clauses or rights that enable this to happen though, then it can be tricky. A word of warning here though – it needs to be understood that generally speaking a force majeure clause can only be exercised where a contract is genuinely impossible to perform. It is unlikely to enable a contract to be terminated unilaterally just because it becomes less attractive economically.
If any new contracts are being entered into, then it is imperative that you try and cater (as far as possible) for the implications of a no deal Brexit. Contracts will need to include change control mechanisms, detailed governance procedures and risk management of the potential changes the parties face. By ensuring that there are other options to consider in the event of difficulties wherever possible, businesses can limit their exposure. Can key supplies to equipment be acquired sooner in order to ensure they are already in the UK before any Brexit?
Consider whether your contracts could include the ability to substitute specific materials to something similar, which is more readily available in the event of there being difficulty in acquiring those materials in the future.
It is also possible to carve out specific scenarios which would enable one party to unilaterally terminate the contract – the imposition of significant tariffs for example, or the prospect of there being significant delays, along with the inability to obtain the correct supplies if there are difficulties at the borders.
Notwithstanding the above, businesses also need to try and identify where Brexit offers opportunities as well as managing the potential risks and threats. Businesses should ensure technology is harnessed wherever possible to ensure the UK can compete and thrive in the future market – whatever form that takes. Strategies need to be devised and implemented to ensure the continuous upskilling of employees and future trade markets, along with identifying any potential new trade partners to increase existing market share, as well as developing new markets.
Flexibility – both in the way in which trade is undertaken, and the way markets are explored – will be the key in navigating the future.
Please do get in touch for further advice to help prepare your organisation for a post-Brexit landscape.