If you are trading between the UK and the EU, there could be a lot of disruption in October, whether we leave the EU with or without a deal. The situation in some ways is similar to force majeure – an unforeseen event which can cause disruption and damage. But until it happens, you won’t know how badly it will affect your business.
If you are an agent or distributor of a company in the EU or you regularly trade with companies in Europe (or vice versa), you need to think about the repercussions which a hard Brexit might have on your business. The impact could be practical – e.g. do you need to pre-purchase goods to avoid the risk of border delays after October 2019? Or they could affect pricing and profit – e.g. the risk of new tariffs.
It is also important for businesses dealing with the EU to realise that whatever happens on October 31, there are going to be ongoing changes affecting your business relationships – for months or even years to come. For example, if new tariffs or regulations are imposed in the UK and/or the EU as a consequence of negotiations with the EU after Brexit (as well as before).
Talk to your counterparties as soon as possible
Reach agreement on how to share the risks. This can form the basis of your Brexit clause.
Introduce a Brexit clause
How does a Brexit clause work?
For example, an EU company (“Austroco”) sells engines to the UK and is invited to sign a 15-year maintenance contract with the customer, “Angloco”, which wants a fixed annual service charge. They agree that the contract will be priced in euros.
Austroco proposes a Brexit clause because it is worried about new import restrictions and regulations that affect their industry. It can also see potential problems for its EU-based personnel travelling to work in the UK. Angloco meanwhile is more worried about the currency risk — if the value of the pound falls against the euro, the service agreement could become too expensive.
After some negotiation the parties agree a Brexit clause in the contract that has a cost-sharing mechanism: if new regulations come in during the three years after Brexit as a result of new laws or regulations which are due to Brexit, they will split the difference between them. But if the extra cost for either side is more than £100,000 in any year, the party that suffers the cost will have the right to terminate the contract.
5 things to think about with Brexit clause
Here are some possible issues that businesses may want to consider when reviewing or negotiating their contracts:
- Customs duties and tariffs: If these are introduced on trade between the UK and other EU countries, be sure to have some wording that says how they will affect the payment terms under the contract.
- Personnel: If your contract for example involves sending a team of engineers to the UK from Europe (or vice versa), what happens if new visa requirements are introduced that make this difficult to achieve? And if you already employ citizens from other EU states, how might their status be affected if there is a change in immigration law?
- Currency: Any contract involving pricing that has a currency risk should consider wording to deal with that risk. But if the impact of Brexit sees a continuing fall in the value of sterling an escape clause or renegotiation provision could be essential.
- Standards: If EU quality standards diverge from those in the UK, how might this affect manufactured products or the supply of services and whose standards will apply under your contract?
- Trademarks: Anyone who has registered an EU trademark has protection throughout the 28 member states. If we leave, will that EU mark still give protection in the UK?
Giles Dixon is the founder of ContractStore, which provides legal document templates online, helping businesses to reduce legal costs. To support UK and EU businesses, it has recently updated its collection of Brexit clause templates