The negotiations for an agreement for the withdrawal of the UK from the EU continue. With the date of departure (midnight on 29 March 2019) looming on the horizon, the focus at the moment is on reaching agreement for an implementation period so as to allow UK businesses to prepare for Brexit whilst preserving current arrangements on access to EU markets.
The question of whether or not the UK will continue to enjoy a regime equivalent to the current free movement of goods, by remaining in the customs union or reaching a bespoke agreement with the EU is a highly charged political issue. The consequences of not reaching an agreement on the free movement of goods will have potentially severe ramifications for businesses dependent upon supply chains exporting to or importing goods from the EU.
Businesses should take steps to ensure that they protect themselves as much as possible from the consequences of political failure to reach an agreement. The implications for trade are potentially very significant. For example, the imposition of tariffs and customs barriers would at least cause delay to shipments and add additional costs to delivery. It could prevent delivery altogether. Regulatory requirements might no longer be met, meaning that the goods cannot be sold. A failure to deliver may well have knock on effects in the supply chain.
Who would bear the losses associated with delay, additional costs and the impossibility of performance? The answer will lie in the terms of contract governing the supply and will depend upon how these risks are allocated. Whilst it will be possible to cater for these eventualities in contracts currently under negotiation, for existing long term supply arrangements it is unlikely that a force majeure clause would readily cover a failure to perform in light of a hard Brexit.
It is also worth bearing in mind that the current arrangements for mutual recognition of judgments and governing law provisions which allow businesses to enforce contracts with counter parties in the EU with relative ease, will also end. Both the EU and the UK have indicated a desire to continue them under a new deal. However, if there is no deal, enforcement of contractual obligations through the courts will be problematic. This can be overcome by adoption of arbitration clauses in cross border contracts. Arbitral awards are readily enforceable under the New York Convention. However steps need to be taken to provide for arbitration in contracts.
Businesses would be well advised to urgently consider the risk involved in their business associated with a no deal Brexit, identifying risk in their supply chain, contract terms and regulatory environment and putting contingency plans in place should there be a political failure to reach agreement.
Michael Frisby is a partner in the Commercial Litigation and International Arbitration team and Gustaf Duhs is a partner and Head of Competition and Regulatory at Stevens & Bolton. For support in reviewing your risks, contact Michael, Gustaf or your usual S&B contact.
Michael Frisby
Gustaf Duhs