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The European Single Market is one of the EU’s greatest achievements. It has fuelled economic growth and made the everyday life of European businesses and consumers easier. Twenty seven (27) years has passed since the creation of the Single Market, which was originally (ironically) proposed by the British Government to its European Union (EU) equals. Therefore the extent to which the UK has been intertwined with the EU has been underplayed significantly. For many of the industries, in particular the creative industries, Brexit will continue to cause disruption for a long time and this will be far more reaching than has been reported.
Commercial Contracts are the mechanism used which enable industries to flow smoothly and are the backbone of trade across multiple sectors. The way commercial contracts are drafted is crucial and the contracts entered into between UK entities and their EU counterparts have previously encouraged and facilitated trade, due to reliance on a predictable and stable arrangement.
So what happens now? The impact on commercial contracts will surely be disruptive and many questions come to mind; How will commercial contracts change?, What will it mean for the creative industries?, Will it be compulsory to add a Brexit clause for protection during the transition period?
A brief look at the current political position and the history of the EU.
The EU comprises of twenty eight (28) European countries and is an economic and political union. The benefits of membership are free trade and free movement of people, to live and work in whichever country an individual chooses and also access to fifty three (53) free trade deals which the EU has obtained. The UK joined in 1973 and now that it has left, it is the first member state to withdraw from the EU and now has acquired third-country status.
The UK officially left the EU on 31st January 2020 due to the Prime Minister Johnson’s Brexit deal that was backed by MPs following forty seven (47) years of membership. The UK left holding a withdrawal agreement. Within this agreement is a transition period. During this period, EU law will continue to apply in and in relation to the UK until the 31st December 2020. It is expected that the two sides will negotiate a free trade deal and other aspects of the UK’s future relationship with the EU regarding security law, data sharing and law enforcement.
The general principles of EU law, The EU Treaties and the EU free movement rights and will then cease to apply in relation to the UK and aforementioned EU regulations will only continue to apply in domestic law but only if they are not amended or annulled by regulations under the European Union (Withdrawal) Act 2018. Lastly, if a trade deal can be agreed on time, the UK’s fresh relationship with the EU will start immediately after the transition period has ended but if no deal has been agreed, the UK may have to trade with nothing in place and predictably this may mean checks, (which will cause time delays), and tariffs, (which will incur costs) on UK goods travelling to the EU.
English Contract Law
English contract law is chiefly originated from the common law. English contract law will be mostly unaffected by Brexit, predominantly when used in a commercial contract because commercial contracts are subject to limited statutory intervention (UK statute law). The parties’ choice of English law should continue to be respected post-Brexit. In relation to contractual obligations, the Rome I Regulation (593/2008/ EC) is to be consulted as it states that Member states’ courts would be necessitated to abide by that choice of law.
In a contract, a Brexit clause is essentially identical to a ‘change’ clause. A Brexit-specific clause can be drafted to activate either automatic changes or a procedure whereby deliberations are held with a view to modifying the contract, due to distinctively defined, (Brexit-related) events. It should also set out the contractual consequences of that event for example termination of the contract, (in severe circumstances). Businesses should also consider negotiating amendments to terms that are materially affected and to include clauses that allow contract renegotiation or termination if the price changes considerably which should include costs relating to taxes and tariffs; if the exchange rate fluctuates more than a certain percentage; the contract turns unprofitable or illegal; Force Majeure provisions that deal with a change in law that cause additional costs. Each contract and resolution needs to be bespoke for individual businesses.
So regarding Commercial contracts here are some Situational Analytics and Recommended Strategies for nine (9) main clauses:
How will Brexit impact the supply chain? Think about how freight and logistics arrangements may be impacted by future border arrangements.
Strategy: Organisations must consider the performance and look at the cost of this performance by third parties such as subcontractors and suppliers. It is advisable to analyse whether any of these costs can be passed on.
Commercial contracts may refer to certain obligations being fulfilled in a particular “territory”. If this territory is defined by reference to the EU, consideration should be given to whether the UK will be included in this definition, post-Brexit.
Strategy: In order to overcome the uncertainty of whether the UK will be included in the definition of territory, define succinctly the contract’s territorial capacity to factor in the exit of UK from the EU when drafting this clause. This will be important for many commercial agreements, particularly agency, distribution, franchising and other licensing arrangements.
In what currency must payments be made and are the prices fixed in one currency? Who bears the risk of exchange rate fluctuations during the contract term and can charges be amended to reflect the exchange rate? There is a high possibility that the contract price may increase due to changes in import or export duties, tariffs or taxes.
Strategy: In order to deal with the impact of increased import and export costs, consider stating what the appropriate currency is for the contract; assess how to allocate the risk of future changes in pound versus euro currency; consider the potential impact of import tariffs and VAT changes. Often there is an express clause in the contract that allows a supplier to increase the price if there are changes to the costs of production therefore this will need to be assessed and applied, if relevant, to the customer according to the contract terms. If appropriate it is advisable to include a price adjustment mechanism that covers potential additional costs arising from Brexit and the percentage by which it can increase.
Situational Analytics: Who pays tariffs? Could the provision of goods or services become subject to additional/increased tariffs on exports to and imports from the EU, or to and from countries the EU has a trade deal with? Are sales subject to Incoterms? Which ones?
Strategy: One may want to consider the extent to which prices should include or exclude any new taxes, duties or similar levies.
Movement of persons
Situational Analytics: Could a risk of labour shortages lead to delays/difficulties in performing obligations? Will the loss of freedom of movement, lead to increased labour costs?
Strategy: Assess whether and to what extent you may circumvent the need to have personnel moving from the UK to the rest or EU or vice versa for the performance of the contact.
Data Protection – Are there data transfers from the: EU to the UK; UK to EU; and/or other countries; where such transfers could impact on arrangements with the EU? If so, will Standard Contractual Clauses or other mechanisms be needed to ensure those transfers can continue?
Strategy: This is a continuously developing area and therefore one would need to monitor developments in the legal framework which governs these types of transfers to make sure there’s no impact, if one is reliant on transferring personal data between the UK and the EU.
Parallel Regulatory Regime
Strategy: Negotiate who will be responsible for achieving compliance and be responsible for noncompliance upon existence of a new applicable parallel regulatory regime. Consider whether the performance of rights and obligations rely on EU competition/block exemptions?
Situational Analytics: On what basis can you terminate the contract? Can you terminate as a result of Brexit? Can you terminate early? What is the cost of termination?
Strategy: Consider including an early break or notice clause. Another consideration is to have a hardship clause which would allow a party that is facing increased costs or delays to the supply chain to renegotiate the contract or terminate. It would be difficult to terminate a contract for any perceived hardship post-Brexit because in order to have been able to terminate on this basis, the contract would have had to be specifically been provided for pre-Brexit. Under English law, a party can terminate a contract if the contract is frustrated. This means if an event has occurred that renders the performance of the contract illegal, impossible, or radically different to what was originally contemplated by the parties. The effect of frustration is to end the contract and discharge the parties from further liability. In a recent case decided in 2019, Canary Wharf (BP4) T1 Ltd & ors v European Medicines Agency , the High Court held that a commercial lease would not be frustrated because of the UK’s withdrawal from the EU. What about using a Force Majeure clause by a party to end the contract? On exercising such a clause, a party can cease all its obligations if an event occurred that was unforeseeable and beyond the reasonable control of the parties such as adverse weather conditions, flood, war, or terrorist attack. In the Canary Wharf case the High Court had said that Brexit would not be regarded as a force majeure event therefore it could be argued that any adverse effects occurring as a result of Brexit (rather than the event of Brexit itself) could be said to be unforeseeable and therefore be interpreted to be an event of force majeure.
It is doubtful that arbitration will be affected by Brexit so consideration should therefore be given as to whether arbitration would be a better method of dispute resolution.
Think carefully about dispute resolution clauses; these clauses should be drafted to make clear which courts are to have jurisdiction in the event of a dispute. Rules which address these issues are currently contained in the Brussels Regulation; address issues of jurisdiction and enforcement.
Industry Specific Succinct Observations Post-Brexit
The Technology Sector
In the UK, the technology sector is diverse and it is becoming extremely significant to the UK economy. In 2016 and 2017, the technology sector grew 2.6 times faster than the rest of the sectors and is stated to be worth over £180 billion in 2018. The industry is also important to employment in the UK: there was a 16.5% increase in the number employed in the digital sector between 2011 and 2018. While facing the disruption caused by Brexit, the industry is undergoing expeditious changes as new technologies are developed. Tax structures and regulations are being tailored to address these changes. On questions on how to regulate in the face of technological breakthroughs and stimulate innovation, the UK government has recently published a White Paper on this and from the 1 April 2020, the government is moving forward with a Digital Services Tax. This is a tax chargeable at 2% on revenues of businesses that provide a search engine, online marketplace or social media platform to UK-based users.
The Fashion Industry
Thirty billion pounds, that’s how much the UK fashion industry is worth. It also employs practically as many people as the financial sector. Companies who previously relied on the ability to freely move product throughout Europe will now have to formulate a new strategy as the supply chains of many companies will now be compromised due to the UK having acquired third-country status. Is London’s reputation as a global cultural capital in serious danger?
Here are some suggestions on how one should navigate the Fashion Industry post-Brexit:
Talent, Hiring & Employee Rights – Since we are currently in the transitional period, freedom of movement will continue, this means that UK nationals will be able to work in the EU, and vice versa. Under Boris’s current proposed deal, EU nationals living in the UK and UK residents living in the EU will be able to retain their residency and social security rights. If an individual decides to stay in the UK for more than five years, this individual would be eligible for permanent residence. For companies that have EU, EEA or Swiss citizens presently working for them in the UK, these employees will have to apply for settled status; this needs to be approved before June 2021. Overall, obtaining and sponsoring European talent will obviously be more problematic and more expensive after the transitional period. Companies will therefore have to look in to the domestic pool of talent for the majority of their labour targets on a long term basis, especially with regards to junior positions.
Samples & Shows – An essential way for various small companies to create momentum and accelerate is to show a collection at a major international fashion week; UK based designers usually present in London. This is the moment where young and up-and-coming designers can acquire financial backers and wholesale accounts, before taking their collection to one or more of the “Big Four”; Paris, Milan or New York, where concluding buying decisions are frequently made. In order for designers to be able to show their collection in say Paris, transporting sample collections in and out of the country are crucial. After the transition period the cost is likely to significantly increase and become complex. Goods in a pristine state, like the majority of fashion samples, would be viewed as an ‘example’ and therefore subject to full duty so an immediate solution may be to get the samples to be exempted from custom duties. To do this, they need to be in a state that they cannot be resold: either cut up or stamped with the word ‘sample’ in permanent ink. Another solution is for companies to apply for an ATA Carnet, which provides tax and duty relief for temporary imports and exports.
Labelling – Until the UK government delivers its own UKCE marking, CE certification marking, (which identifies what the product is, conforms to environmental protection, health and safety standards within the EEA), will continue. However, this will not be recognised in the EU and therefore the EU will insist on CE marking on any of its imports from the UK. In addition to this and after transition period takes full effect, there will be new labelling requirements for all products imported into the UK, (such as the company’s name and address, as well as the country of origin if this differs from its address it will need to be stated), from the EU or European Economic Area (EEA).
Tariffs & Supply Chain –Businesses will need to get an EORI (Economic Operator Registration and Identification) number because without one, it will be impossible to transfer anything imported or exported from the EU. To obtain this number, one would need to declare oneself as an exporter under a UK EORI. If a person is exporting to an EU branch of the person’s own business, then this does not apply. Businesses should be eagle eyed and prudent with regard to their paperwork: checking the correct tariff codes, EU import tariff rates and export declarations along with additional certification for products containing furs and exotic skins. (Typically, EU tariffs are 4 percent on yarn, 8 percent on fabric and 12 percent on clothing; however businesses will need to assess this against precise tariff codes of each product being shipped out).
The Hair & Beauty Industry
Research shows that the British beauty industry employs and supports nearly 600,000 people, more than those employed in the law and social work sectors and makes a bigger contribution to the UK’s gross domestic product (GDP) than motor manufacturing or publishing. This industry is now worth £30 billion to the UK economy and some of its success is down to the “selfie culture”. Will this change post-Brexit? With regard to the strict safety laws that govern cosmetic products, the CTPA (Cosmetics Toiletries and Perfumery Association) a body that represents the voice of the industry and has stated that it will not change. What about the ingredients used in beauty products? At present, EU legislation obliges the UK that bans the use of over 1200 ingredients that are believed potentially detrimental. With our friends over in the USA who currently only ban 9 ingredients, it is essential to keep these high touchstones via EU legislation being duplicated during the transition period in to UK legislation. Lastly, to ensure acquiescence and administer safety of cosmetic products on the market and acquaint applicable authorities in Member States should a critical disadvantageous effect occur, EU law states that Responsible Persons (RPs) are in place. Post-Brexit the allocation of RPs by cosmetic firms has to be different. All EU-based RPs will no longer be acknowledged by the UK and businesses in the UK would require a UK-based RP and vice versa for UK-based RPs in the EU.
Entertainment, Music and Media
Prior to Brexit, legal & contractual provisions concerning UK music and its exploitation were quite complex and UK music strongly depended on international trade. For example, Pan-European music licensing arrangements and collective licensing arrangements have mostly been shaped by European law over the last 10 years. Having entered Brexit, relying on international trade will be expensive and challenging to navigate. This will affect artists, rights holders and music users in the areas of entry and work visas, carnets, equipment levies; inspections and additional customs; border restrictions for those who obtain their livelihood from Live and touring businesses, festivals and music production. Since the position of the UK after the transitional period is not clear with regards to deals, it is therefore advisable that the inclusion of contractual provisions that assist in mitigating risk in the event of legal restrictions or changes that negatively impact concerts or production in European countries are considered by promoters and managers.
Intellectual Property and its Relationship with EU Law
Across Europe and to a large magnitude, IP laws are blended; much of the UK legislative framework in IP has been constituted of directly effective EU Regulations and duplicated EU Directives. However, as from the end of the transition period, the European Union Withdrawal Act 2018 will abolish the European Communities Act 1972 (“ECA 1972”). In order to prevent a regulatory vacuum, EU Regulations relevant to IP will be replicated into domestic UK law by means of statutory instruments.
EU Trade Mark Registrations Operate Post-Brexit?
Simply, EU trade marks no longer cover the UK. All registered EUTMs will be cloned into new UK registrations by the 31 December 2020. The new registered trade mark (equivalent rights) will be referred to as a comparable trade mark (EU). The legal status of the trade mark would be the same as if it had been applied for and registered under UK law. The registration will retain the filing date recorded against the corresponding EUTM. It will be created automatically and provided free of charge to the registered owner with the inheritance of priority and seniority dates. The registration will maintain its present EUTM registration number, the only difference will be that it will start with UK0009…. so it is easily distinguishable. It will be a completely self-sufficient UK trade mark which can be challenged, assigned, licensed or renewed independently from the corresponding EUTM.
Legal Road LLP knows how important it is to have well thought out and drafted contracts and can assist in manoeuvring the commercial industry post-Brexit by providing strategic commercial contracts which take in to account the current economy.