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Brexit: Trading with EU suppliers and customers

Let’s bite the bullet and get one thing straight. All businesses with EU-based suppliers and customers will find that their contractual relationships are affected by the Brexit decision.

We just don’t know how... Yet.

Seeking clarity
The bad news is that the picture is unlikely to become any clearer for some time. If, as expected, the UK government doesn’t trigger Article 50 until 2017, then the UK won’t leave the EU until at least 2019, assuming our EU partners don’t agree to extend the departure deadline into the next decade. The stark reality is that we’re unlikely to learn exactly how Brexit will affect trading contracts until relatively late on in the process – and let’s be honest, with the political fall-out and big-picture decisions to be discussed and made, trading contracts for individual companies are not necessarily going to be the number one priority in negotiations.

Politicians have argued over the exact proportion of UK law that comes from the EU, but regardless of the precise number of EU rules that bind the UK, many of them will automatically cease to apply the moment that the UK officially leaves the Union, and a great many people will support that, and see it as a positive effect. 

Transitioning legal frameworks
However, many of these laws are good. They benefit the British public as well as British business, and the UK would be foolhardy not to find a way to voluntarily transition them into UK law. What we don’t know, yet, is which laws the UK is going to cherry-pick.

Will the UK ditch the Working Time Directive? The Temporary Agency Workers Directive? The new ‘Right to be Forgotten’? Fishing quotas? VAT on energy bills? The Renewables Directive that is responsible for climate change targets?

Nobody really knows.

One thing to bear in mind – the UK is party to the European Convention on Human Rights not because of its EU membership, but as a result of its membership of the Council of Europe, which is a different beast altogether. We therefore can’t expect to see any wholesale changes to the Human Rights Act, or the British Bill of Rights, purely as a result of Brexit.

Regardless of the outcome, one thing is certain, and that is that the UK Government is going to have its hands full sifting through UK and EU legislation and (much like cleaning out the regulatory attic) putting laws into ‘keep’ and ‘bin’ piles.

All areas of business will be affected one way or the other, and law firms will be keenly monitoring those items that hit the ‘bin’ pile.

For example, did you know that an EU Directive from 2006 says that diabetics who need regular insulin treatment should only be issued with driving licences “in very exceptional circumstances”? I’d be surprised if that one made the ‘keep’ pile. And there are plenty more.

Review your contracts early
Although the laws of the UK and the EU are unlikely to diverge significantly in the short-term, it would nevertheless be important to review existing contracts with EU suppliers and customers with particular focus on:

• Renegotiation of contractual terms: do both parties have this rightdoes either party have a right to renegotiate?

• EU funding: does the contract, or either party’s performance, rely on this in some way?

• Withdrawal of license / authorisation: could this affect either party’s ability to fulfil its contractual obligations?

• Trade tariffs: can either party renegotiate pricing if they tariffs are introduced, and can the contract withstand wide short-term currency fluctuations?

• Free movement of people / goods: would each party still have adequate resource to perform their obligations if the UK were to withdraw from the principals principles that govern these two freedoms?

• EU regulations: if the UK does discard certain EU regulations, will the trading relationship be affected?

• Force majeure: could Brexit trigger this clause and, if so, what is the impact of this?

Undoubtedly our EU trading partners are equally keen to know what’s going to happen, and at present are equally unsure. As things stand, all parties are caught in limbo, somewhere between the CBI’s best-case scenario (where the UK negotiates a free-trade agreement with the EU with tariff-free goods) and worst-case scenario (where the UK is forced to accept World Trade Organisation rules), the latter of which will become more likely if the Visegrad group of countries carry out their threat to veto any Brexit deal.

Hope for the best, prepare for the worst

But is the ‘best-case’ scenario really the best case? It would mean the UK having to implement EU standards and regulations to goods supplied from the UK into the EU, much like we do now, but over time the interaction between UK and EU regulations would slowly diverge. Whether this would be for the betterment of UK business is yet to be seen.

And is the ‘worst-case’ scenario really that bad? The UK already trades with the US on World Trade Organisation rules, and there haven’t been too many people complaining about that. Would it really be that bad if the UK’s relationship with the EU was put on a par with the US? Admittedly, it may mean tariffs being applied to the output of the UK manufacturing industry but, conversely, the UK would gain greater control over regulatory policy, thus (in theory, at least) freeing much of the red tape that has swamped business (and we have all heard people complaining about that).

Here at BPE, we’ve already started drafting contracts with clauses that begin “When the UK ceases to be a member of the EU…”, and such clauses are only going to become more common. Being a member of the International Division of the Law Society, BPE’s commercial team is well-placed to advise businesses on the risks of Brexit, the health of existing contracts and the drafting of new contracts with EU trading partners … but that advice is only going to get clearer over the course of the next two-to-three years as ‘EU independence day’ draws closer.

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.