15 January 2019
Reading time (1-10 minutes): top end
Sophistication level (1 (idiot) – 10 (expert)): 6
Entertainment value (1 (turgid) – 10 (side-splitting)): not for me to say
This is a guest article by Dick Jennings of R.D.Y Jennings & Co, Solicitors (www.jenningslaw.co.uk)
A. THINKING ABOUT YOUR CONTRACT RISK
a. Let’s grasp the nettle. Almost all businesses, of every kind, will be significantly affected by Brexit in ways that they need to identify so as to manage pro-actively. And no business will understand those risks, and so be able to manage them, unless it does a methodical job of identifying what risks they face and how those risks might play out.
b. There may be substantial opportunities as well as big risks. But, again, only for businesses which see those opportunities coming and can seize them before their competitors do.
c. The maximum risk scenario is, for all of us, a “no deal” Brexit, so that is what this note focusses on. If the UK strikes a deal of some kind with the remaining EU states (the “EU27”,) many of those risks might reduce, disappear or be put off for the length of any transition period. But the only sensible thing for any business to do, as always, is plan for the worst.
B. DOWNSIDE RISKS
a. Here are some key areas of business risk, common to all trade sectors, which arise from your business dealings and arrangements:
i. IMPOSSIBILITY OF PERFORMANCE: some businesses will have contracts which they literally cannot perform after Brexit. Freight hauliers, for instance, may find themselves legally barred from carrying a load from one point in the EU27 to another point in the EU27. If your business is legally bound to do something, and fails to do so, it will be liable for the resulting damage. So it’s imperative that you spot any such risk in advance, check whether either the small print of the contract (e.g. a force majeure clause) or the law of the contract (e.g. the doctrine of impossibility, or of frustration, in English common law) offers you a way out and, if not, plan for the least painful work-round.
ii. OTHER FAILURES OF PERFORMANCE: no-deal Brexit may create major risks of you failing to perform customer contracts on time, for instance if supplies from abroad are delayed by congestion at airports or sea ports due to the sudden ending of EU single market access. Note that this risk might apply to imports from any source, not just from the EU, if they arrive in the UK at a port affected by such congestion. Your business risks being contractually liable for failing to supply onwards to its own customers on time. In a world where many businesses will be nursing big losses, and potentially in desperate situations, you can expect any such right of claim against your business to be pursued with zeal. It is imperative that you review the small print of your supply contracts to identify what risks you have of such liability and, if so, whether you have any escape route from liability or any right of onward claim (against a supplier, perhaps, or against an insurer). Armed with that knowledge you then need a strategy for managing that risk in the optimal fashion.
iii. OVER-COSTLY PURCHASE COMMITMENTS: does your business rely on buying any supplies in from an EU27 source, or at Euro (or, come to that, US dollar) prices? You have two big risks here, and each could increase your costs by 10-15% or even more. A no-deal Brexit results in import duty costs, as well as additional import administration costs, being added to your purchase price from 30th March on. And there’s the inevitable further fall in sterling exchange rates, which will make those € and $ prices more expensive. (If you have escaped both risks, by buying from EU27 suppliers at a sterling price which includes delivery ex-UK port, congratulations!)
iv. FIXED PRICE SUPPLY COMMITMENTS: similarly, be aware of any commitment which your business has to supply customers at fixed prices. If your costs suddenly balloon (see above), those fixed prices might overnight become loss-making. If you do have such a commitment, does the small print allow you any get-out? There are several types of boilerplate clause which could help.
v. THE CONTRACT WORDINGS WHICH PART COMPANY WITH REALITY : everything changes on 29th March and a lot of contract provisions will suddenly mean radically different things. Most obviously, “the European Union” will suddenly mean something different. So, for instance, a distribution contract which entitles your business to distribute a product anywhere you like within the EU, will suddenly exclude the UK from your sales territory. But there are many similar effects which need to be watched for, some of them buried deep in the small print. If, for instance, a contract binds your business to meet EU regulatory standards, it may become impossible to comply with in some key respect due to the UK no longer operating under those standards.
vi. REGULATORY UNCERTAINTY: the European Withdrawal Act provides that all EU law translates on 29th March into UK law, so that when we wake up next morning the full legal framework is effectively just the same. But of course in reality it isn’t so simple. EU competition laws, for example, are worded in terms of supervision from Brussels. When on 30th March they are suddenly part of UK law, how do we deal with the fact that provisions for Brussels to supervise are, post-Brexit, complete nonsense? The government’s answer in the Act is simply to say (section 8(1)) that “A Minister of the Crown may by regulations make such provision as the Minister considers appropriate to prevent, remedy or mitigate—(a) any failure of retained EU law to operate effectively, or (b)any other deficiency in retained EU law, arising from the withdrawal of the United Kingdom from the EU”. This is a breathtakingly wide power. But, consistently with the government’s planning failures across the board, few such regulations have yet been made. Your business needs to spot any key business uncertainties arising from this mess and plan to act in the most bomb-proof manner available so as to minimize resulting risk.
vii. SUPPLY CHAIN RISKS: problems can hurt your business even if they are further up, or down, the supply chain rather than directly affecting your business. You therefore need to consider not just (for instance) whether your business buys a critical supply from an EU27 supplier, but also whether your own suppliers do so and so on up the supply chain. If the supply chain screws up anywhere along its length, that will hurt your business whether or not your business is actually a party to the transaction concerned. Potentially more so, because if the affected contract isn’t with your business, the risks are all the harder for you to manage.
viii. INTELLECTUAL PROPERTY RISKS: too big a field to be explored here, but vital for you to manage. A small example: at present, someone who has legally bought a trade marked product can re-sell it freely anywhere in the EU, without the trade mark owner’s permission. The trade mark owner is said to have “exhausted” its rights by the initial sale, and after that people are free to sell on as they choose. This will cease to apply, as between the UK and the EU27, on 29th March.
ix. DATA PROTECTION: another big field, and an increasingly important one for your business. A small example will suffice for now: watch out for contracts which ban you from transferring data outside the EU. A lot of contracts do so, in order to comply with EU data law. Needless to say, that is going to be a headache when the UK is itself outside the EU.
C. UPSIDE RISK
a. It’s not all doom and gloom. There are some upside risks. But, again, it is imperative that you spot these well in advance so that they don’t slip through your fingers. A few examples:
i. BENEFICIAL FIXED PRICE ARRANGEMENTS: for every party at the wrong end of a fixed contractual price, there is a party at the right end. If you are selling into the EU27 at a fixed Euro price, or indeed elsewhere in the world at a fixed dollar price, that is likely to be well worth hanging onto: it’s likely to be worth more in sterling after Brexit. By the same token, your buyer may try to wriggle out – so see that coming, review the risks, and minimize the chances of it’s happening.
ii. COMPETITOR DIFFICULTIES: if you are struggling with all these headaches that’s a problem, but if your competitors are doing so that can be an opportunity. If you have planned better than they have, there may be significant competitive advantage to be won.
iii. SALES OUTSIDE THE EU: one of the big hopes behind Brexit is that leaving the EU will enable the UK to increase its trade with other countries. It may do so indeed, but that again needs a lot of planning. The immediate impact of Brexit may be negative in all major markets, due to the disruption of existing trading arrangements with those markets via the EU, so it is all the more vital for you to do your homework on such new opportunities in such an unstable situation.
D. HOW TO AUDIT YOUR RISKS
a. The starting point has to be a brain-storm session to review your overall Brexit-derived business risk. The classic four-box categorisation of strengths, weaknesses, opportunities and threats is a good tool for that. You need your trusted accountant, and a suitably skilled commercial lawyer, in on that process from the start.
b. The aim of that will be to identify possible areas of risk, and also possible mitigating factors (such as potentially useful provisions in the small print of contracts), which need exploring further.
c. Then you will have some idea of what you’re looking for, and where. At that point the exercise should move on to a limited, structured, but detailed, audit of contract documents, regulatory requirements, insurance cover terms and so on. In some businesses this might be quite a limited job. In others, particularly businesses which are highly regulated, highly exposed to import/export, or highly dependent on long-term contracts, it may be rather larger.
d. Depending on your trade sector, some of the risks affecting your business may apply equally to your competitors. In that case there may be scope for you to get sector-specific guidance from a trade association, from an obliging common supplier, from a professional adviser specialising in that sector, or even from a government department with responsibility for that sector. Such guidance may be particularly well informed. It may also be very cost-effective. You need to make the most of it – but you and your own professional team will still need to put the time in yourselves, to get your own heads round the issues and translate your understanding into actionable decisions for your own business.
e. Apart from that, it is down to you and your professional advisers. Just make sure those advisers have really put the work in to understand what is needed of them. Brexit is a new challenge to all of us. You can’t assume that even many years of experience will fit a legal adviser to pick up a project like this and run with it safely.
E. THE CALL TO ACTION
a. Unless you have already audited your business risk as suggested in this note, the least bad time to start doing so is RIGHT NOW! Remember, even a couple of hours brain-storming the subject in outline is better than nothing.
b. If I can help you in that, please do pick up the phone, or email back to me. I will only charge you for my time if and when you have specifically instructed me to do a job for you on a fee-paying basis.
c. P.S. You would be right to wonder why I consider myself qualified to advise on all this. My answer would be three-fold. First, someone’s got to. Second, I have put in the hard yards to get my head around the issues, and there is no substitute for that. And third, my career has prepared me particularly well (studied economics and business management, not just law; trained in a top City law firm with exposure to big international contracts; senior in-house posts in the head office management of two major PLCs; a long specialisation in legal risk management; a long involvement in supply chain management – I am one of only a handful of solicitors in the country to be a full member of the Chartered Institute of Purchasing & Supply; and a track record of writing and lecturing on supply chain issues). With all that I am, at best, still only a one-eyed man in the land of the blind. This is a completely new challenge for all of us, an evolving challenge, and we’d all better not forget it.