Have you thought about having a Brexit clause in your trading contracts?
Although formal negotiations for the UK to leave the European Union have begun, and we are due to leave the EU in March 2019, there is no clear information on how this change of status will affect businesses. So, if you have long term relationships with suppliers, buyers, agents or consultants and if those relationships involve EU citizens or trading with other countries in the EU, how do you plan for Brexit?
Part of the answer is a Brexit clause in your long term contracts. This especially applies to businesses with buyers, agents or distributors in Europe and to those who act as agents or distributors in the UK for suppliers based in the EU. Ryan Air have famously added one to theirs – for these very reasons.
Our Brexit clauses document, A248, has 12 different examples of Brexit clauses to cater for a range of possibilities.
Risks of Brexit
The Brexit risks for British companies in a long-term relationship with buyers or suppliers in the EU include:
- Financial – due to new tariffs and customs duties. If you are an importer, how will your contractual arrangements be affected if new import duties are imposed? Similarly, how will your agents or distributors in Europe be affected if new tariffs are introduced?
- Human resources – if visa restrictions are imposed on travel between the UK and EU, could it affect technical support services and supply of labour to your business?
- Regulatory – if the rules governing your business activities or products diverge from those in the EU. In an extreme case this might mean trade has to stop altogether – e.g a fish processor whose Spanish suppliers no longer have access to fish stocks in UK waters. Or if UK standards are changed after Brexit so as to diverge from those in Europe, will this impact on your business dealings with customers or suppliers in Europe or elsewhere?
- Territorial – if you have a contract that assumes you have free access throughout the EU and/or that the UK is part of the EU, will the contract still be effective after we leave?
How to Add a Brexit Clause
Without knowing whether or not we will leave the Single Market and/or the Customs Union or whether the Government will be able to negotiate a tariff free trade agreement with the EU, a protective measure you can take right now is to introduce a Brexit clause in any new long-term contracts that you sign. And you should also consider proposing one for your existing suppliers and customers.
It is quite common to have a “material adverse circumstances clause” in a long term contract which states that if a new and unforeseen situation arises which has an adverse impact on one or both of the parties, they will meet in a good faith effort to try to overcome the problem, probably by varying the terms of the contract and/or if this cannot be achieved, then either party can bring the contract to an end.
A Brexit clause can follow a similar pattern – but as Brexit is no longer an unforeseen situation, a clause to deal with the Brexit effect needs to be more focussed on the specific risks that might cause a problem, and tailored to refer to the potential impact on your business.
For example, it can say that if, as a result of the UK leaving the EU, your manpower supply company in Poland is no longer able to supply labour for your building company or the numbers are limited to less than X , either party would have the right to terminate the contract.
Alternatively you might want to anticipate a change and how to deal with it – e.g. if the UK ceases to be a member of the EU and import duties are imposed on the supply of raw materials that you process for a supplier in Germany, the parties will use their best endeavours to find a duty-free source of those materials to mitigate the extra costs and/or to agree a cost sharing formula to absorb them.