Preparing for Brexit - Future proofing your contracts

Brexit webinar
Future proofing your contracts
15 December 2016
Commercial, IT and Outsourcing
Tom Bridgford
Matthew Taylor
Litigation and Dispute Resolution
James Lindop
Trade
www.eversheds.com/brexit

Tom Bridgford
Partner
tombridgford@eversheds.com
0161 831 8231
linkedin.com/in/tombridgford
Welcome, your presenters today are:
Matthew Taylor
Partner
matthewtaylor@eversheds.com
0161 831 8245
linkedin.com/in/matthewtayloreversheds
James Lindop
Principal Associate
jameslindop@eversheds.com
0207 919 4718
linkedin.com/in/james-lindop-34037115

• What is the UK Government seeking from the EU?
• Mechanism for leaving the EU
• EEA challenge
• Trade issues
• Legislative framework
• Future proofing contracts
− Risk assessing contracts
− Drafting strategies
− Enforcing agreements
Agenda

What is the UK government seeking from the
EU?

Eversheds LLP | 20/12/2016 |
Free
movement of
goods
Yes excluding
certain
agricultural &
fishery products
Varies by
product based
on bilateral
agreements
Yes Yes
Yes subject
to WTO
rules
Free
movement of
people
Yes
Yes - for
employed
persons
No Possible No
Free
movement of
services /
establishment
Yes Yes – industry
specific
No Possible No
EU
representation
No but veto
through EEA
No No No No
EU budget Yes (reduced) Yes (reduced) No No No
Bound by
EU/Third
Country FTAs
No - can
negotiate alone
or through
EFTA
No - can
negotiate
alone or
through EFTA
Must apply
EU’s common
external tariff
to third
countries
No No
Some Possible Brexit Models?

Eversheds LLP | 20/12/2016 |Eversheds LLP | 20/12/2016 |

• Free trade in goods and services
• Ability for British companies to trade freely with and operate in
the Single Market, with the ability of European businesses to do
the same in the UK
• UK to have freedom to negotiate own free trade agreements –
out of Customs Union
• Ability for the UK to decide for itself how it controls immigration
• Protection of the rights of UK citizens living in the EU
• No jurisdiction for EU courts in the UK
• Not Norway model (EEA) or Switzerland model (EFTA plus
bilateral agreements)
Bespoke free trade deal covering:
What is the UK Government seeking from the EU?
Article 50 Negotiations

• UK must take a “decision” to leave the EU “in accordance with
its own constitutional requirements” by giving two years’ notice
• UK Government intends to give Article 50 notice by end of
March 2017 but…
• Appeal to Supreme Court (leapfrogging the Court of Appeal) to
decide whether an Act of Parliament is needed before notice can
be given
• Hearings 5 to 8 December with judgment in early January 2017
• Key question – can the Government give notice to the European
Council of the UK’s decision to leave the EU under Article 50
using its Crown prerogative powers?
Article 50 Treaty on the European Union
Mechanism for Leaving the EU (1)

• Inability of Royal Prerogative to repeal domestic law
• No preservation of Royal Prerogative in ECA
• Devolved powers – Northern Ireland, Wales and Scotland
• Northern Ireland – Good Friday Agreement, Anglo-Irish
Agreement and devolved powers require Northern Ireland
Assembly approval for Article 50 notice
• Scotland – 300 years of constitutional precedent states
cannot repeal Scottish law by exerting Royal Prerogative
– Claim of Right Act 1689 and Act of Union 1707
Brexit Challenge – Key Issues

• The Supreme Court could refer the question of interpretation of
Article 50 to the ECJ – something which both sides have said
they would like to avoid
• Outcome will determine whether Theresa May’s March 2017
deadline for triggering Article 50 is achievable - some suggest
that Brexit could be delayed by up to two years
• Politics in France, Germany, Italy…(as well as UK)
• Michel Barnier, the European Commission’s Brexit negotiator,
has said:
• UK will have 18 months to negotiate a deal with the EU to allow time for
it to be approved by the Council, the European Parliament and the UK
within the two year deadline set out in Article 50
• European Commission’s position is that the negotiations would only
cover the withdrawal agreement
• Negotiations will not start before notification
• the Single Market and its four freedoms are indivisible – cherry picking
is not an option
The Article 50 legal challenges – Implications
Preparing for Brexit

• UK/EU negotiate and conclude an agreement setting out
the withdrawal arrangements taking account of the
framework for future relationship together
• Withdrawal agreement – needs to be agreed by
qualified majority of Council and simple majority of
European Parliament
• Trade agreement – will need:
• European Parliament approval by simple majority; and
• Unanimous consent and ratification of all EU Member States
• Will there be parallel negotiations?
• Will there be a transitional agreement?
Article 50 Treaty on the European Union

• Article 127 of Agreement on the European Economic Area
• Likely to cause further disruption to UK Government
• Might it offer a transitional lifeline post Brexit?
The EEA Challenge

• EEA – created 1994
• UK is a member of the EEA
• Iceland, Lichtenstein and Norway PLUS all EU Member
States (in own right as well as through the EU)
• Access to the Internal Market governed by EEA
Agreement – all four freedoms but outside Common
Agricultural Policy and Common Fisheries Policy
• Free movement of people
The latest challenge to Brexit
Is Article 127 the new Article 50?

• UK Government claims UK will automatically cease to be
an EEA State once it leaves the EU
• Potential judicial review action by British Influence
claiming:
• Membership of EU is not a pre-condition of continued EEA
membership – not expressly stated in EEA Agreement
• UK must trigger Article 127 EEA Agreement and give 12 months’
notice to leave the EEA
• No obligation for the UK to leave the EEA – Article 127 is a
voluntary act
• Remaining in the EEA could assist the UK’s negotiating
position and prevent a “cliff-edge” Brexit
EEA Challenge

• EU is one territory without any internal borders or regulatory
obstacles to the free movement of goods and services
• Single market means:
• ban on customs duties and formalities
• ban on measures against 4 freedoms (goods, capital, services and
people) unless justified
• passporting
• For international trade, EU is a single customs territory with a
single customs tariff. EU signs treaties on behalf of member
states
• Single market is sustained by:
• mutual recognition
• harmonisation
General principle behind EU laws to ensure a single market
Principles

• No import taxes on goods from another member state
• Imposition of a common external tariff on goods from
countries outside the EU
• Goods imported into the EU can move freely between EU
member states without further customs checks
• Therefore reduced administrative and financial trade
barriers
• Limits freedom of individual member states to negotiate
their own trade deals
Means tariff free trade
EU Customs Union

http://trade.ec.europa.eu/doclib/docs/2012/june/tradoc_149622.pdf
Free Trade Agreements and the EU
The current state of EU trade

• On Brexit, UK will lose benefit of EU’s free trade
agreements but will be able to negotiate its own free
trade agreements
• Already interest from a number of countries – Australia,
Canada, China, Ghana, India, Mexico, New Zealand,
South Korea, US
• Preliminary talks with India
• UK can negotiate terms of free trade agreements but
cannot conclude them before Brexit – exclusive EU
competence
Trading with the Rest of the World

• If no UK/EU FTA, products traded between UK/EU will be
subject to MFN tariffs
• Each WTO member has a schedule of commitments setting out
trading terms (e.g. tariffs, quotas)
• Currently no UK specific schedules
• Post-Brexit, UK will have to ‘disentangle’ its commitments from
the EU’s
• Easiest option – ‘rectification’, but no WTO member must object
• Cannot copy quotas – will need to be re-allocated between the
EU and the UK
• WTO expects no disruption to trade
Default Position: WTO model

• Under MFN, members cannot normally discriminate between
their trading partners – if a concession is granted to one
country, it must also be granted to all WTO members
• But some exceptions
• if countries have agreed a free trade agreement that applies to particular goods
or services
• developing countries can be given special access
• countries may raise barriers against products that are considered to be traded
unfairly from specific countries
• National treatment - treat foreign and local supplies/products
equally
• Only applies once a product has entered the market – charging
customs duty on an import is not a violation of national treatment
even if locally produced products are not charged an equivalent tax
Most Favoured Nation & National Treatment
WTO principles of trade

• Products traded between UK/EU could be subject to tariffs or
quotas
• Exact level of tariffs will depend on classification/origin of a
given product e.g. 2.8% on certain radar apparatus, 5.5% on
certain chemicals, 10% on cars and 22% on certain trucks
• Impact of new/additional tariffs will be most pronounced on
products traded at low margins
• Increased non-tariff barriers to trade e.g. border controls,
added layer of administrative regulation and ‘red tape’/delays
Tariffs and Barriers to Trade

• Opportunity to revamp customs procedures and push for a
complete digitalisation post-Brexit
• ‘Single window’
• UK can adopt the existing EU rules
Customs formalities
Tariffs and Barriers to Trade
Trade between EU Member
States
Trade between the EU and
non-EU countries
Registration with customs
systems
No Yes
Goods in temporary storage No Yes – up to 72 hours
Documentation For exports:
 Intra-community supply declaration
For imports:
 Intra-community acquisition
declaration
An extensive set of documents is required.
For exports:
 Export declaration
For imports:
 Commercial invoice
 Freight documents
 Valuation statement
 Conformity certificate/CE marking
 Import declaration
 Packing list
 Proof of origin requirements

Impact of Brexit on UK laws deriving from the EU?
EU Law
Acts of
Parliament
Secondary
Legislation
RegulationsTreaties Directives
European
Communities Act
Other Acts of
Parliament
Statutory
Instruments
Statutory
Instruments
International
Law International Treaties and Conventions

Legislative issues
“Great Repeal Bill” to remove European Communities Act
1972 and enshrine all existing EU law into UK law

• Government has stated that a Great Repeal Bill (the “Bill”) will be put
before Parliament designed to:
• repeal the European Communities Act 1972; and
• convert the entire body of existing EU law, wholesale, into domestic law.
• Parliament will then be free to repeal/amend/improve the body of
existing EU law at its leisure.
• The Bill needs Parliamentary consent and may face opposition
particularly from devolved administrations (eg under the Sewell
Convention)
• The Bill deals only with EU generated law – it will not have an impact
on reciprocal rights under multi-lateral treaties
The Great Repeal Bill – proposal
Legislative issues

• Even if the Bill receives Royal Assent there may be problems
• References to EU regulatory authorities to which the UK will not have access will
need to be amended to prevent legislation being legally unworkable
• Legislation in its current form not designed to be used or enforced by a non
member state – will other member states reciprocate?
• A ‘Denmark Model’ would require UK to be bound by, or at least pay due account to,
decisions of the CJEU – unlikely to be acceptable to the Government under current
plans
• But if the UK is no longer subject to the jurisdiction of the CJEU we face divergence
of interpretation in EU generated legislation
• The UK is a signatory to the Hague Convention on Choice of Court
Agreements and the Lugano Convention only by virtue of its
membership of the EU
• If the UK does not accede to these conventions in its own right it will
lose the benefit of reciprocal arrangements on jurisdiction and
enforcement with non-EU countries:
• EFTA countries (Norway, Iceland and Switzerland) under Lugano
• Mexico and Singapore under Hague
The Great Repeal Bill – potential problems
Legislative issues

• Impact on supply chain
• Trade: border measures such as tariffs, customs procedures, new
costs and delay
• Rules of Origin
• Contract terms – eg delivery
• Availability/cost of labour
• Cost impact
• Currency issues
• Regulatory issues?
• Eg REACH/CLP/Biocides
Impact on existing contracts?
How could Brexit impact your contracts?
Is your business considering:

• for scope to vary / clarify now?
• Change control
• Governance clauses
• for grounds to get relief for / renegotiate newly onerous contracts
• eg material adverse change clauses; force majeure; hardship clauses
• provisions for change in law/material regulatory change
• price adjustment clauses
• warranties on regulatory conformity (or specs written based on assumptions of
particular conformity)
• for termination rights?
• for areas of dispute
• Eg grant of licence to use in “EU” – does that include UK?
Review your agreements:
Reviewing existing agreements
Risk assessment of existing agreements

• Treat “Brexit” as something that affects ability to perform
(including delay and imposition of quotas or new anti-dumping
rules that makes it impossible or difficult for you to supply)?
• Treat it (simply) as a costs issue?
• Treat it as something to be resolved (eg it becomes subject
escalation/dispute resolution)?
• who can be the expert here?
• Treat it as something that gives you additional rights (such as
the right to exit)?
• Allow someone else to perform (a designated
entity/affiliate/ subcontractor)?
Possible approaches to drafting new agreements
New contracts

• Definitions
• Clauses that deal with increased costs/price adjustments/
hardship
• Clauses that deal with delay/inability to perform/force
majeure
• Change control/renegotiate/rewrite clauses
• Termination clauses
• Other clauses/issues
• Dispute resolution
Various types of clauses
New contracts

• Dangers of using the term Brexit?
• “Brexit”
• Article 50 definition/“withdraws from the EU”?
• But what if the UK stays in EEA or if there are transitional
arrangements?
• Focus on impact that will arise from 2019/the effect you
want to achieve
• A “Brexit Event”
• imposition of a “Barrier” (trade and non trade)
• a specific piece of legislation is repealed/amended
• a particular licence is lost or a particular consent is required
Possible definitions
New contracts

• “Barriers” (eg non trade barriers)
• any restriction on investment or operation
• any discriminatory measure
• loss of mutual recognition/principle of equal national treatment and
MFN treatment
• change to regulatory standards
• “Trade Barriers”: tariffs, quotas, loss of any free or
preferential treatment, customs requirements, rules of origin,
any requirement that must be met by a party before the
contract goods or services are able to circulate freely within the
EU/EEA
• “Loss of access to a free trade agreement”
• the UK (and therefore UK companies) no longer being able to benefit
from a trade agreement between the EU and a third country –
impact on this agreement?
New contracts

• Does it merely change performance / price or does it make
performance illegal?
• General change in law arising from “Brexit”
• A change in law that results in a specific loss of an existing
“freedom” under the EU Treaties
• loss of participation in the Customs Union under Articles 28 and 30
TFEU
• loss or reduction in free movement of goods
• loss or reduction in free movement of services
• loss of right of freedom of establishment
• loss of free movement of workers
• A change/repeal of a specific regulation or loss of a licence
granted under a specific regulatory regime
Approaches to change in law
New contracts

• “Brexit Change in Law”
• a new law introduced or implemented as a result of the invocation of Article 50, as a
result of Brexit or in contemplation of or with the intention of Brexit occurring
• a change in law or a repeal of an existing law which amends or repeals (but does
not replace or re-enact on the same terms) an EU regulation of direct effect, a law
implemented because of an EU directive etc or a law which overrides any UK
national law or legal principle (does this catch what is to be the Great Repeal Act?)
• a new law or a change in law which affects [materially] the provision or supply of
the contract goods or services [as a result of the UK no longer being able to access
the single market on the same terms as it was able to access it prior to Article 50
being triggered] (does this catch loss of a FTA?)
• Complications
• devolved authority to regional Parliaments
• potentially separate deals for Scotland/Wales/Northern Ireland?
New contracts

• Territorial considerations
• EU “from time to time” vs listing the countries you mean
• Do references to the EU include the UK going forwards?
• UK – impact of Scottish devolution?
• What about RPI?
New contracts

• “Brexit Costs”: any additional or increased costs incurred by a party
arising directly or indirectly as a result of a Brexit Event/Brexit Change in
Law/a new Trade Barrier/non-trade barrier/imposition of a tariff
• should it cover transaction/compliance costs of customs procedures, including rules
of origin requirements?
• ensure the definition picks up all tariff issues if components originate from or are
routed through EU
• should it cover the consequences of delay/needing a longer time to deliver goods or
supply services because of new or increased regulatory hurdles (and/or deal with in
delivery dates section)
• doesn’t cover effect of quotas that might be imposed (treat as FM?)
• A “Costs/Exchange Rate Event” eg sterling falls/rises below a certain
level/certain assumptions used in pricing become incorrect – who bears
these?
Costs
New contracts

• Increased staffing costs if EU labour no longer available
• Costs provisions won’t deal with issues arising when you
cannot obtain labour at all
• Regulatory divergence costs?
• Restructuring costs?
• Verifying these additional costs – audit?
Costs
New contracts

• “Brexit Hardship Event”
• How to define – is it already capable of being contemplated?
• Teeth or no teeth?
• Consequences can include ability to pass on costs or termination
Costs
New contracts

• Impact of delays
• Variable delivery dates?
• Excuse events?
• How best to mitigate?
• Brexit as a “Force Majeure Event” (but it would have
to affect, delay or hinder performance: ability rather than
cost – eg financial institution losing passporting rights; eg
imposition of quotas)
Delay and inability to perform
New contracts

• “Brexit MAC”
• something that materially and adversely affects the business of a
party, which could include change in exchange rates and
commodity prices
• Change control clauses
• Governance clauses
Dealing with change
New contracts

• Termination clauses
• Triggers – for example if:
• unable to perform because of a Brexit Event/Brexit Change in Law;
• costs more than x;
• unable to agree costs;
• unable to agree changes?
• Unilateral or mutual?
• Transition/handover
Termination
New contracts

• Risk mitigation clauses?
• Hedging?
• Consider allowing others to perform on your behalf?
• Provision of assistance and information – eg in relation to
customs formalities/origin etc
• TUPE
• Likely to continue to apply in medium term
• Regulatory divergence
Other considerations
New contracts

• Products sold in the EU must comply with EU product
regulations (currently embedded in UK law)
• Eg WEE, CE marking directives, REACH and General Product
Safety regime
• CE marking on products indicates they comply with EU
legislation
• Post Brexit?
• either access by UK to the EU harmonised regime
• possible transitional period?
• or regulatory divergence?
• How would you deal with this in your contract?
Product compliance/regulatory divergence
New contracts

• Means of resolving disputes
• Governing law
• contractual obligations
• non-contractual obligations
• no change to the drafting now
• Jurisdiction
• exclusive jurisdiction
• Enforcement
• Arbitration
Dispute resolution
New contracts

• Current situation
• At present, European law helps parties who want to bring and enforce legal proceedings against companies in other
European Countries:
• Service – the EU Service Regulation and the Recast Brussels Regulation
• In essence, where the European regime confers jurisdiction on the English courts, then:
(i) the court’s permission to serve proceedings outside the jurisdiction is not required; and
(ii) service can be easily effected through the EU transmission method (typically through the courts or
government other bodies)
• Enforcement – Brussels Convention, the Lugano Convention and the Recast Brussels Regulation
• Very straightforward since 10 January 2015 - judgments from one EU country can be enforced in another EU country
without following any special regime.
• Life after Brexit
• As with everything else, it is far from clear what terms will be agreed about these issues as part of any Brexit deal.
• Likely that agreement will be reached to continue some form of reciprocal arrangement; but this is not guaranteed.
• What could this mean?
• Service – no reciprocal service regimes in place such that:
(i) an application may have to be made to the court before proceedings are even served on the other side
just for permission to serve outside of the jurisdiction (adding costs and delays); and
(ii) actually effecting service on a company in an EU country may be more difficult and take a lot longer.
• Enforcement – no reciprocal enforcement regimes in place (including, potentially, the Hague Convention) such
that:
(i) it will be a matter of local law in every individual country; and
(ii) there will be no certainty as to the ability to enforce or the costs or duration of enforcement
action (potentially rendering judgments worthless).
Future litigation problems?
New contracts

• Any Solutions?
• Service
• Think about incorporating other service options in your contracts. For example:
• setting out a contractually agreed method of service which can be followed in respect of legal
proceedings; or
• nominate a service agent within the jurisdiction on which service can be effected.
• Enforcement
• Potentially very difficult to avoid these difficulties.
• One option is to consider increased use of arbitration rather than court proceedings as arbitral awards
can be relatively easily enforced under the New York Convention. However, there are downsides with
arbitration (costs, lower disclosure obligations etc) which need to be borne in mind.
• Other options?
• These challenges may increase the use of alternative dispute resolution methods being built into
contracts (eg binding expert determination procedures) so as to avoid service and enforcement
difficulties.
• If you think there could be difficulties with enforcement other contractual measures could help. For
example (i) including specific rights of set-off or (ii) putting in place a retention fund for disputed
sums.
Future litigation problems?
New contracts

Useful links
Eversheds Brexit hub - www.eversheds.com/brexit
Contractual risk analysis and Brexit proofing –
Guiding businesses through Brexit
Contractual risk analysis and Brexit proofing for your IT
and Outsourcing arrangements –
Consumer law risk analysis and Brexit proofing –
Brexit - How this will impact on EU-wide litigation

eversheds.com
©2016 Eversheds LLP
Eversheds LLP is a limited liability partnership
Tom Bridgford
Partner
+44 7766 511501
tombridgford@eversheds.com
Matthew Taylor
Principal Associate
+44 781 015 1278
jameslindop@eversheds.com
Partner
+44 774 019 2377
matthewtaylor@eversheds.com
James Lindop

Preparing for Brexit - Future proofing your contracts

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