Threats to exporters if no Brexit agreement is reached
Brexit provides economic threats to exporters, with such things as higher tariffs, and stricter border checks and packaging regulations. In addition, are a number of uncertainties to the legal framework, such as what a no-deal Brexit (no-deal) would mean for key contractual terms in cross-border disputes, when the current laws that underpin their validity are predominantly EU law?
Should no agreement be reached by 29 March 2019, the direct effect of EU Law in the UK will cease at that time. The government has advised that in such an event, most of the existing civil judicial cooperation rules will be repealed. In their place, the domestic rules, which the UK legal system currently uses in relation to non-EU countries, would apply. This clearly presents risks of contractual uncertainties as we creep closer to Brexit with no signs of assurances as to whether or not an agreement will be made.
Making contractual uncertainties certain
Contracts which are governed by English Law
The Rome I Regulation allows parties to choose which countries laws should apply to their contract. In guidance published in September 2018, the government announced that all parts of the UK will retain Rome I rules on applicable law in contractual matters, whether a transition deal is agreed or not. As such, a no-deal scenario will cause no change to contracts which state that English law is the applicable law, and there will be no practical difference in the UK or in EU Member State courts.
As long as the choice of English law is made expressly, or demonstrated by the terms of the contract, it will be upheld by a court in an EU country. English law will therefore continue to govern the interpretation, performance and consequences of a total or partial breach of obligations of the contract.
Contracts which include English jurisdiction clauses
Currently, English jurisdiction clauses are entitled to recognition and protection due to its inclusion within the EU and as such falling within the scope of the Brussels I Regime. If there is a no-deal scenario, the UK will automatically fall out of this protection. The potential risk is that the validity of an English jurisdiction clause may be determined by the domestic law in another country.
To avoid this, you should ensure that there is an arbitration clause contained within your contracts. As arbitration falls outside the scope of the Brussels I Regime, any contract containing such a clause, would be unaffected by a no-deal scenario. Not only would this help parties avoid the risk of wasting time and money on litigating abroad, but it would provide certainty and clarity with respect to the terms of the contract that have been agreed.
Safeguarding your position
Having an Authorised Economic Operator (AEO) status is an internationally recognised quality mark, which indicates that a company’s role in the international supply chain is secure and that their customs controls and processes are efficient. It provides the benefit of giving quicker access to certain simplified customs procedures, and in some cases the right to ‘fast track’ shipments through customs and security procedures. You need AEO status more than ever, and if you do not currently have it, we would recommend obtaining it prior to Brexit.
A further benefit is that the management of data and physical records post-Brexit will be of even greater responsibility to ensure an effective flow of goods and services. Having an AEO licence and investing in efficient IT can mitigate these challenges. Businesses must have in place policies and procedures for Brexit and appoint specific business personnel, including, if feasible, a devoted ‘Brexit co-ordinator’.
Steps to obtain AEO status:
- Compliance with customs and tax requirements.
- Maintenance of a satisfactory system of managing commercial/transport records.
- Being financially solvent for three years.
- Demonstrating practical competence.
The mantra ‘fail to prepare, prepare to fail’ could not be more applicable. Whilst there are a number of uncertainties with respect to what a withdrawal agreement may look like and, indeed, what impact Brexit will have more broadly, there are measures which exporters can implement to provide more certainty which, in turn, will make them feel more confident moving forward.
Businesses should ensure that their contracts contain a clear choice of law clause and a provision for arbitration. Consideration must also be given to defining who is responsible for the costs of shipping goods abroad. Where possible any increased costs should be passed on, but failing this you may wish to invoke ‘break’ provisions.
Having AEO status will aid Mutual Recognition Agreements (MRAs) to facilitate and simplify cross-border trade. These agreements, between two or more countries to recognise a specific process or procedure in relation to the manufacture and sale of goods and services, will become especially important after Brexit to ensure that British exporters meet the conformity standards of existing European Agencies that lay down essential standards of compliance. Without such agreements in place the safe and secure transport of goods would be impractical.
Read other items in Marine Brief - December 2018
Read other items in Commercial Brief - January 2019