At the time of writing, it would be a brave soul who would now predict the ultimate outcome emanating from the Brexit referendum decision (e.g. hard Brexit, soft Brexit or no Brexit). If Brexit in fact occurs, then after any transition period (currently agreed until 21 December 2020) it is likely to result in import or export customs duties, changes in VAT, significant exchange rate fluctuations, new technical, commercial or financial standards, rules and regulations and additional administrative burdens. Therefore, parties who are considering entering into commercial contracts involving a UK party (whether as Supplier or Customer) should be anticipating potential Brexit scenarios, because the consequences could include extra costs and delay in supplies.
1. Risks for Supplier or Customer?
Some Customers may seek to force the Supplier to take all Brexit-related risks.However, a prudent Supplier cannot evaluate the exact impact and would have to evaluate the worst case, leading to higher fixed prices and longer delivery times.Therefore, a Customer may also decide that it is better for the Customer to absorb the Brexit risks, so that the Supplier’s offer is not unnecessarily inflated.
2. Choice of INCOTERM.
There is a trend towards multiple jurisdiction frame agreements in some industries.Be careful if considering the adoption of a single applicable Incoterm.For example, INCOTERMS 2010 DDP would mean that the Supplier is responsible for customs clearance in the Customer's country, including payment of customs duties (whatever the level) and obtaining the necessary authorizations from the authorities (which might well be subject to delays post-Brexit). A prudent Supplier should therefore avoid committing to DDP for UK-related contracts, at least until any applicable customs duties are known and the new customs regime is fully staffed and operational.
3. Compliance with Applicable Laws.
It is common for Suppliers to agree to comply with “all applicable laws and regulations” which is important for a Customer, to be sure that the Supplier’s products can be lawfully sold and used.Often it is not specified whether these are the laws and regulations applicable at the date of signature or all future laws and regulations.
In the context of Brexit, a Supplier may find itself in the position of being expected to comply with new laws or regulations, but not having a mechanism in the contract permitting compensation for such changes.It would not be prudent to rely on a “force majeure” clause, because this would normally only cover “unforeseeable” events and would only excuse the performance but would not cover the Supplier’s extra costs.
We do not think that it is necessary to develop a Brexit-specific clause for most contracts.However, we do believe that the parties should consider including a generic “change in law” clause.This clause should clearly state that if the Supplier suffers a delay or incurs extra cost due to a change in laws or regulations (whether by repeal, modification of existing ones or the introduction of new ones) the Supplier would be entitled to compensation for such extra cost and/or an appropriate extension of time for performance.
4. Existing Contracts.
A Supplier should audit existing contracts to avoid “sleep-walking” into problems later.If issues are identified, the Supplier can take the opportunity to terminate or re-negotiate such contracts where possible.