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 LindopTrade

www.eversheds.com/brexit

Tom [email protected] 831 8231linkedin.com/in/tombridgford

Welcome, your presenters today are:

Matthew [email protected] 831 8245linkedin.com/in/matthewtayloreversheds

James LindopPrincipal [email protected] 919 4718linkedin.com/in/james-lindop-34037115

mailto:[email protected]

https://uk.linkedin.com/in/tombridgford


https://uk.linkedin.com/in/matthewtayloreversheds


https://uk.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 bilateralagreements

Yes YesYes subject

to WTO rules

Free movement of people

YesYes - foremployed 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

Mechanism for leaving the EU?


• 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


EEA challenge


• 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

Trade Issues


• 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

http://trade.ec.europa.eu/doclib/docs/2012/june/tradoc_149622.pdf


• 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

Legislative issues


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


Future Proofing Contracts


• 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; egimposition 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


Questions? Comments!

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 –Guiding businesses through Brexit

Consumer law risk analysis and Brexit proofing –Guiding businesses through Brexit

Brexit - How this will impact on EU-wide litigation

http://www.eversheds.com/brexit

http://www.eversheds.com/brexit

http://www.eversheds.com/global/en/what/services/commercial/risk-analysis-brexit.page?

http://www.eversheds.com/global/en/what/services/commercial/risk-analysis-brexit.page?

http://www.eversheds.com/global/en/what/services/outsourcing-and-offshoring/risk-analysis-brexit.page?

http://www.eversheds.com/global/en/what/services/outsourcing-and-offshoring/risk-analysis-brexit.page?

http://www.eversheds.com/global/en/what/services/commercial/consumer-contracts-risk-analysis-brexit.page

http://www.eversheds.com/global/en/what/services/commercial/consumer-contracts-risk-analysis-brexit.page

http://www.eversheds.com/global/en/what/articles/index.page?ArticleID=en/Competition_EU_and_Regulatory/Brexit-impact-EU-wide-litigation240616

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Tom Bridgford

Partner+44 7766 [email protected]

Matthew Taylor

Principal Associate+44 781 015 [email protected]

Partner+44 774 019 [email protected]

James Lindop


