Third Brexit Case Study: Review your UK supplier contracts
Danish businesses should review their contracts with UK business partners and proactively initiate discussions with them to avoid misunderstandings and tackle potential problems before they materialise. In this article, we highlight some key contractual terms to review in supplier agreements. The next article in the series will focus on the distribution and sales agreements.
A Danish company's UK suppliers
As the Brexit negotiations continue, more and more of our clients ask us to advise on how their business, specifically regarding their UK business partners, will be affected by Brexit. In this Brexit case study, we will be taking a closer look at how the contractual relationship between a Danish company (the importer) and its UK supplier (the exporter) will be affected by Brexit.
Brexit may affect lead times and custom duties
After Brexit, the UK will no longer be a part of the EU's single market, which amongst other enables the free movement of goods, capital, services and labour. An element of the EU's single market is the EU Customs Union, which the UK is a member of today. For our Danish company, the EU Customs Union has the effect that today there is a common customs policy between Denmark and the UK which allows manufacturers to move goods around the EU without cost or delay related to customs.
Even though different solutions are being discussed, it is still undecided whether the UK will remain in the EU Customs Union or not, although the most likely scenario is that UK will leave the EU Customs Union. If the UK leaves the Customs Union, it is expected that a customs border will be set up between the UK and the EU. If that happens, our Danish company as an importer should be wary of the potential effect on the lead times offered by the UK supplier and transportation costs, as a customs border will, generally, also entail additional levies and checks which will affect delivery times and transportation costs negatively.
In addition to lead times, it should also be considered who is to pay custom duties. By example, agreed INCOMTERMS delivery clauses should be revisited in order to check who is responsible for payment of customs duties, e.g. if a so-called "DDP" clause (DDP stands for Delivered Duty Paid under INCOTERMS 2010) should be agreed.
Our Danish company should review its supplier contracts
As a rule of thumb, our Danish company should be vigilant of all contracts with a UK counterpart which are subject to English law and/or provide for the delivery of goods or services to or from the UK. These types of contracts may be affected materially by Brexit.
The individual contracts should be reviewed thoroughly for anything that could be materially affected by Brexit. In the following, we will give a few examples of issues to be considered:
If the contract is to be governed by "English Law", then following Brexit, an interpretation of this term will not include EU laws which are not directly implemented by the UK. In turn, over time, the substance of English law may change materially from what we know today. Thus, we recommend to consider whether the choice of law could be changed, if not to Danish law then to another EU member state's law, e.g. Germany or Sweden.
Post-Brexit the Brussels I Regulation regarding the mutual recognition of court decisions between the EU member states and the UK may cease to exist. This means that a court decision in Denmark is not directly enforceable in the UK, and that a UK court decision is not directly enforceable in Denmark.
Therefore, our Danish company should consider (if possible) amending or at least trying to negotiate a change of venue to arbitration. The New York Convention applies to arbitration awards, which as a result are recognised by, and enforceable in, both the UK and Denmark.
Material Adverse Effect Clauses
Contracts may include clauses which give a party the right to re-negotiate and/or terminate for convenience, if Brexit constitutes a material adverse effect. Our Danish company should review the wording of the clause and consider whether it will trigger as a result of Brexit.
Contracts may dictate a certain area in which the contracts will have effect. If the area is defined with reference to the EU, our Danish company should contact its supplier and clarify whether England, Scotland, Wales and/or Northern Ireland will continue to be within the scope after Brexit.
Burden of change of law costs
EU may impose additional requirements on products without UK following the same changes in requirements. Thus, we recommend examining the supply contracts thoroughly to determine which party will have to bear the additional costs related to new laws implemented on the EU market. By example it would be ideal from our Danish Company's perspective if it appears that the products imported at all times must live up to law requirements in the EU.
Changes in exchange rate
Since the UK voted to leave the EU, we have seen relatively large fluctuations in the EUR/GBP exchange rate. We expect these fluctuations to continue as negotiations proceed, whereas Brexit's effect on the exchange rate after the withdrawal date (currently set to 30 March 2019) is in its nature also uncertain. Therefore, if our Danish company ends up renegotiating its supplier contracts, other than the considerations listed above, we also recommend handling the risk of currency fluctuations (e.g. by having prices in EUR or a pre-agreed method and/or maximum of fluctuations in price) or to cater for such exchange rate fluctuations in the Danish Company's financial setup.
Finally, in general we recommend having a constant focus on the Brexit negotiations to be able to have a proactive approach to contracts affected by Brexit. Many of our clients establish a Brexit task force where areas of responsibility are clearly divided, and where the task force has reporting responsibilities within the company in question. On that basis the company in question can take informed and proactive measures regarding Brexit.
Kromann Reumert's assistance
If Danish companies or other contract holders with a UK counterpart have questions regarding the interpretation of their supply contracts in the light of Brexit or have other questions regarding the impact of Brexit on their existing contracts, we would be happy to elaborate further.