With the future of the UK and Brexit still remaining unclear, Ian Chapman-Curry, David Lowe and Clark Sargent discuss the issues arising in contract and commercial law if the UK leaves the EU.
Whatever the outcome of the Brexit negotiations will be, businesses need to be prepared for every eventuality. Gowling WLG's Brexit Unit advises clients on planning for the future, offering expertise in areas such as strategic planning, contingency risk management and managing transactions.
Ian Chapman-Curry: Hello I'm Ian Chapman-Curry and I'm a pensions lawyer at Gowling WLG with a fascination for all things Brexit. In this series of podcasts we've brought together leading experts from across Gowling WLG to cut through some of Brexit's knottiest issues. In this episode I'm joined by David Lowe, a partner and head of commercial contracts and Clark Sargent who is of Counsel in our disputes resolution practice.
We are going to be talking about the issues arising in contract and commercial law with Brexit so it's a massive topic to cover. Where on earth do we even start with that David?
David Lowe: It's a good question because it's dominated all the national conversation now for years. The big change that almost any form of Brexit is going to introduce is a hardening of the border between the UK and the rest of the EU.
Unless we remain in the EU or we do something that looks very much like that every other form of Brexit creates that border and so for me that is the big change that we need to think about because as soon as we have a harder border between the UK and the EU cost and risk arises which wasn't there before, so we then need to work out who takes that cost and risk.
If I've made something in Swansea and I need to take it to Frankfurt, the person who takes those goods over that border is going to take cost and risk. So who is that? Is that the seller or the buyer? That will depend on what the contract says. Now any contract for sale of goods probably will say where the delivery point is and it may even use say an Incoterm (International Commercial Terms) like an:
- FCA (Free Carrier);
- FOB (Free On Board);
- ExWorks (also referred to as EXW);
- DDP (Delivered Duty Paid)
which will very clearly say here's the delivery point, the seller is responsible for everything up to the delivery point and the buyer is normally responsible for everything afterwards.
Now right at the moment none of this really matters, the truck will go, it won't be particularly expensive and the buyer and seller will have sorted it out between them. They won't need to worry about what happens if the truck gets stuck at Dover or what happens if there's an export tariff or an import tariff because none of that is relevant.
But, in a new Brexit world, all those issues matter. Where the delivery point will matter. If the seller in Swansea, if the delivery point actually is at Swansea this is all the buyer's problem and the seller will just wash his hands. While, of course, if the delivery point is in Frankfurt it's going to be the seller's problem and it's going to be the seller, then, that is going to suddenly find themselves facing a big expense.
What we're seeing is a lot of companies doing a lot of work on is looking at their contracts, seeing their delivery points and trying to understand the allocation of cost and risk between them.
What we're seeing with new contracts is people going "okay I need to worry about this arising in the future". Who's going to be responsible for the tariffs? Who's going to be responsible for crossing the border and the costs and risks of delay?
An EU seller, a German seller is going to try his best to say well I'm only liable the German side of the border. Anything after that point is going to be you in the UK because, as one German counterparty said to me, you voted to leave the EU so it should be your cost and problem.
But you can see the problem that it is giving to people is an unknown and uncertain cost and risk. We don't know when it's going to be, we don't know how much those tariffs are going to be. We don't know what the delays are going to be. We don't know which certificates are going be needed on entry and exit of the UK and therefore it's a very difficult risk for anyone to manage and take and so we are seeing people having protracted arguments about who takes that cost and risk.
We're seeing some people being very pragmatic and just say 50/50. We don't know what it's going to be but let's just agree it's 50/50. While we're seeing non-UK EU people say it's your problem leading to difficult problems and we are also starting to see people change their supply chains to avoid the issue entirely. If I'm a German buyer why don't I just dodge this issue entirely and buy from Spain instead of the UK because I've got certainty that the cost isn't going to impact me.
Clark Sargent: In nearly every sector the amount of the tariff has the potential to be more and in some cases very significantly more than the profit margins you expect to make in that sector.
David: So we've been talking about delivery point and Incoterms and tariffs. There is one thing that businesses can do. The UK government has issued draft tariffs of what it's proposing to do so there is at least, a signpost out there for businesses to go, "okay these are my goods and the customs classifications, I can now look at what the UK government proposed back in March, I can now see where I'm probably vulnerable or where I may not be".
You know many goods will have low or no tariffs in which case you may, depending on your own circumstances, relax. Equally, it will highlight to you where you have got goods that may be vulnerable to high tariffs and which are going to be particularly instrumental. So that's something that businesses can actually do in this time of considerable uncertainty.
Ian: And we're also seeing that with those contractual negotiations it's also a reflection of where the power might lie in terms of who has to take on the risk and if you badly need the product you might have to take more.
David: Absolutely. So if you're a big buyer who can source this stuff from anywhere in the world, and you're based in Germany say, then you're going to say to the UK seller it's their problem, their risk, and their cost because the UK seller can't go anywhere else. Equally, if you're a big UK seller selling something unique then your Italian buyer might be prepared to take the risk because after all they can't go anywhere else so the negotiating power between parties is absolutely fundamental to all these discussions.
Ian: And it's fascinating that you've some of the practical side-stepping of contracts because if you source from within the remaining EU 27 that problem magically goes away. It's not great for UK plc but from a contractual point of view that's where that happens.
Clark, if you've got some of those existing terms in place that might be problematic on a bit of due diligence is there anything within those that you can think to do? What's the practical next step for people in those situations?
Clark: Well there's a couple of things here. I mean just in relation to that very issue, if you've got a contract which is silent on that point you might think "I'll run off to Court and I'll get them to imply a term into the contract". That's something you could do. I happen to think that a UK Court is quite likely to duck that because we have seen there have been a few cases on this sort of thing over the last few years in the UK Courts.
For example, when parties are building something and forget to allocate who applies for planning permission. One of the options open to the Court (and I see them doing it here) is they're just going to go over to you, it's that liability is going to fall somewhere in the contract and wherever, you know, it will fall naturally in what you, in how it's going to work on the ground and how that falls is how it's going to lie and I'm not getting involved to change it by writing a clause in your contract that you two never thought about at the time. So I don't see parties getting out of it that way.
David: And so Clark that would mean if I were a UK seller and a German buyer who hasn't contemplated the border then the Courts are going to say somebody always has the job of crossing the border even though currently it's invisible. If it's a UK seller then that's your problem or if it's the German, if it's the right construction of the contract, it's always the German buyer who has to cross the border then it's the German buyer. The Court doesn't need to imply anything there.
Clark: Absolutely. It will probably say we're going to find a provision in here (i.e. the contract) that allocates title and risk and you're just going to follow that because that's what those clauses are for. You don't need any more. You don't need to do more than that.
Ian: Is anyone riding in on a white horse with two "Fs" -frustration or force majeure - looking at some of those things to perhaps save the day? Any chance of that?
Clark: I wouldn't call it a white horse. I'd call that a dead old nag.
So look, we have had a case on this recently and unfortunately I would love to say that I thought it was a dead old nag before the case came out that the answer was no. Actually the case came out, the case went through the Courts, the decision was issued and the answer was no.
Ian: I think you were fairly sceptical to give you credit where credit's due.
Clark: That was the BMA case, the European Medicines Agency which has property in London and unsurprisingly they simply can't be headquartered in London once Brexit has happened. They have to go back into continental Europe and that makes sense. They wanted to say that their lease agreement was frustrated by Brexit. The Court said "no it wasn't". Basically if that case wasn't good enough then no case is going to be good enough. And, as a matter of legal analysis, there are a couple of issues that you've got with any kind of frustration argument. One is that to get frustration off the ground you have to show that the thing you are saying frustrates your contract was not foreseeable at the time and therefore it's not your fault for not putting it in your contract.
We had a referendum in 2016, that was three years ago. That referendum was flagged in the Queen's Speech the year before that, that was 2015. Politically we were talking about Brexit periods before that so unless this is an old contract once you get to 2015 you've got no hope at all as it was foreseeable. In the BMA case they actually said in 2011, Brexit wasn't foreseeable. It was argued that it was simply because article 50 has always been in the European treaties. Court said no that's really pushing it a little bit, it wasn't foreseeable then but it's got to be before 2015.
David: That's why that case is really important because if, even though it wasn't foreseeable in 2011, if even then it's still not frustrating then there's no way any contract since then can be frustrating.
Clark: The other thing is it's not just about foreseeability it's got to make the performance of the contract radically different than what was contemplated at the time of the contract.
It getting a bit more difficult or a bit more pricey to do it isn't seen by the UK Courts as enough to frustrate the contracts and we've seen that absolutely it's a force majeure case. There was this case regarding Tandrin [Tandrin Aviation Holdings Ltd v Aero Toy Store LLC  EWHC 40 (Comm)] which is in the airlines industry and it was just about pricing structures which had changed and become uneconomic because of the global downturn and that wasn't enough to get them out of the contract. So the bottom line is I think we're over.
David: The one exception, though, is there might be some contracts there that genuinely are impossible to perform because of Brexit. I'm thinking of curious regulatory issues arising. Maybe, just maybe, they might be able to use frustration. But I think it's a very limited class and I haven't seen one yet that I think would tick that box.
Clark: I mean I think you're right so once you get away from price and into regulation or licence or a quota or something like that you've got more of a chance because you may be able to say it's a physical impossibility. But even then you know it would be possible if you... I mean depending on what kind of companies you're talking about here but it would be possible to do it if you manufactured it in France.
Ian: And we are seeing, this is not just theoretical, we are seeing the establishment of branches to ensure that licensing regimes that will apply in the EU27 can still be met even if the bulk of research is carried on in the UK, for example.
Clark: And also remember that it's got to be not reasonably foreseeable and radically different, so even if you can get over radically different you might not be able to get into a 2017 contract you knew that Brexit was going to happen. You knew that there was going to be something Brexit-y or regulatory happening so you should have provided for it. So this is going to be difficult.
David: In my work though Clark, I don't rely on frustration in my contracts, I would always have a force majeure clause. So would that help me?
Clark: You're then down into straight contract interpretation, which is considering whether your force majeure clause has a reference in it that means Brexit.
David: And I think your average force majeure clause, and every one of them is different but the average one usually says something about something happening outside the reasonable control of the parties which makes it impossible or difficult to perform and I think we would probably draw an analogy with the frustration case because we know the Courts sort of see force majeure as a sort of 'contractualised' frustration, they are going to be loathe, unless you very specifically said Brexit is a force majeure, to do that in my view.
Clark: I agree. I mean just for hilarity's sake what I would love to see is Nigel Farage saying Brexit was an act of God in which I was God. But other than that it is hard to envisage that we will have wording which you can point at and go "look that means Brexit". Almost to the point the Courts will be saying well something means Brexit rather than anything else, so it is targeted at Brexit rather than "oh look it was really targeted at something else". But now that Brexit is happening you are able to put it in and hope it's a get out of jail card.
Ian: So it is tough with the existing batch of contracts. If you are facing a blank piece of paper and looking at a whole new set of contracts, David, is there any wording that you would be looking to insert that might cover some of the uncertainty around Brexit for those future contracts?
David: Yes, so every time we have had a significant legal event over the last 30 years of my career and before, I don't know the European Monetary Union, the Euro, Y2K, modern slavery, GDPR ... the standard response is "I need to get a clause and put it in my contract". So you can tell the age of the contract by which of these relics it has in it. If it has an EMU clause in it you know it goes back into the 1990s.
There has been a shift of people asking if they can have Brexit clause. That's how they have always solved these issues before, so they put a clause in. I have seen some attempts by people to try and do that. But actually it is really difficult because it is about price, cost and risk. It isn't just an irritating thing on the side that they have got to deal with (e.g. I've just got to put a modern slavery clause in the contract) so just putting a clause in doesn't really help.
Ian: And I think that is a great point in terms of thinking about GDPR, which is our most recent experience and as painful as that was for many people to go through, it was affecting a narrow sliver of activities unless you were a cloud computing company and that was all of your work. Brexit has the potential to affect a whole range of things in the commercial reality of the company, it is much more encompassing.
David: It is much more difficult when you actually start thinking about drafting something. Firstly, you've got to say what do we mean by Brexit? Of course, we all know there are lots of different shades of Brexit, so do we mean only the hardest of hardest Brexit when we leave the EU and have no future trading relationships with them? Is that what we mean by Brexit? Or is it a really soft Brexit where we join the European Free Trade Area, does that qualify as Brexit? So we have got a definition issue.
Then you have got the consequences. A Brexit has happened, then what? Well it is easy to write down saying "the parties will have a chat" and you see that quite a lot. Fair enough, that's always very sensible but of course they are not obliged to agree.
Maybe there is a sugar tariff and they supply sugar to the UK and there might be a 20% tariff, of course the buyer in the UK is not going to want to pay for that and will refuse to do that, so what happens next in that clause? Where do you go? Do you go to an expert? Well what's he or she going to say about that? Do you allow the contract to end early? Well that might be appropriate for some contracts, but typically people if they've contracted for a term of three years want to do a term of three years, as it would have made commercial sense to do it. So if it can be terminated early does the other party get compensated? So actually it starts getting really hard and that is why you will not see Brexit clauses generally because it is really hard [and] you are dealing with this unknown risk with unknown consequences and just putting it in a clause and crossing your fingers doesn't work.
Clark: You and I talked about this in June 2016 and we batted it around for about half-an-hour and I think where we got to was "if you want a Brexit clause you might as well write a break into your contract in March 2019". And I think we have had that conversation between us a couple of times since and I don't think we've come out with a better solution than that. But now that we are here you can't really write a break for October 2019.
David: No, I mean if you are entering into a contract ahead of October 2019, well you know it is coming up, so shouldn't you deal with it? I mean that is one of the reasons why I am seeing people being slow to enter into long-term contracts.
Ian: Exactly, and that on a small scale is then multiplying across the UK and why we are now seeing slow-downs across all the indicators for manufacturing and service capability because why would you with the degree of uncertainty?
That has only become even more so given that it turns on the head of the Conservative Party leadership election as to what flavour of Brexit they will be pursuing, let alone whether they'll be successful.
So all of that looks like there are huge issues to work through, there's challenges and wherever there are large issues and challenges and grey areas, that sounds to me like there are going to be plenty of disputes coming down the track once the dust settles on all of that. Is that what you would see, Clark?
Clark: Well look there certainly might be some disputes over this mightn't there. And you know the Courts are probably steeling themselves that they might have to set one or two precedents, even if that is a "we are not going to sort this out for you" precedent.
Whenever you start talking about disputes and Brexit, it is worth saying that you always end up being in a chat about governing law, jurisdiction, service and enforcement.
Again, it is easy to say this isn't it, but there is no real prospect of Brexit making any of that stuff easier - it can only get harder.
We are quite an integrated sort of judicial co-operation system under the EU umbrella. If we leave with a transition or a withdrawal agreement or whatever, some of that will be preserved but possibly all of it but not for sure. If we leave with a no-deal Brexit on 31 October  then all of that stuff is going to finish that day.
Suddenly there isn't the certainty that we are used to around governing law and jurisdiction. Now governing law and jurisdiction are actually the ones where if it is in your contract now, if it is in your contract in the future, it is likely the courts in the UK and courts in continental Europe are all used to basically enforcing contracts if the parties have picked Germany or France or Poland or where ever they have picked either for governing law or for jurisdiction. The court wherever it is will probably accept that because why would they override the parties' interest unless you are under some sort of local provision like employment contracts or something like that?
The two that are tricky I think, are enforcement and service.
Service - that happens at the moment, there's EU regulations on that. You know it is true to say that service in Europe is easy-ish, it is certainly not as easy as serving in the UK but it is easy-ish, but you have to go through a bit of a process.
When that falls away, we will be back to local law and parties are going to find it very frustrating just because they got so used to it happening where suddenly you might end up somewhere obscure in Europe and suddenly service becomes a problem, you know like a four or five month wait while you sort out service. You've issued a claim, you want to get on with it, you just want the answer and suddenly you've got four months where you try and just serve the claim form let alone do anything else with it.
Secondly, enforcement is actually going to become a lot more difficult where we will have no reciprocity with Europe at that point, so you cannot take an English Judgment necessarily to a German Court, a French Court, any Court and just say "the merits are sorted, I have this judgment, it has been done, just give me the money".
You will have to go through the local process of getting that judgment recognised which, you know, the big country that we don't have reciprocity with at the moment is the US and basically in the US that means re-litigating it on the basis that I have to be right because I've already won in England, but I have to go through the Court process again to get to that point.
That is going to be very difficult and that's of course why people talk about arbitration because we have a system there where actually everybody recognises arbitration awards and will enforce them, but that has got nothing to do with the EU, that is under the New York Convention.
Clark: All the parties are signatories so that is why people are starting to look at arbitration a bit more and asking if they should arbitrate? But, of course, that's just one of the things in the balance now, should you arbitrate. There are all sorts of issues about the difference between litigation and arbitration and that is not for this podcast, but just to flag those are issues that are all coming.
David: I am flagging to clients who have cross-border EU contracts they should think about arbitration. My experience is that most people don't really want to change from what they are doing at the moment because they like the system as it is and they are crossing their fingers that some kind of withdrawal deal will be done and therefore some kind of deal will be done on the enforcement. But I am seeing the odd person who is going for arbitration just to be safe, especially if it is a very high value strategic contract.
Clark: All of this goes if we fall out badly with the Europeans because when you look at it, it is obvious that it is not just English people who will want to take their Judgments into Germany, German people will want to bring their Judgments into England.
It is just like flying an aircraft and all that stuff, every piece of common sense screams that you will do a deal on this because it just makes sense because it'll just be really annoying for everybody if you don't. But if we fall out very badly with Europe then that may just override everything and if we don't get a deal and we are just left to our own devices and on that, it will hurt us more than them.
Ian: Yes. And the danger is that the pool of common sense is not as full as it might have been in previous years there is still plenty of scope for us to do something daft in the next few months.
David: An area I think we will see a lot of litigation about is going to be around definitions of territory in distribution agency and other exclusive agreements. So, imagine that you are appointed as a distributor and for the entire territory of the EU you have exclusive rights and then the UK comes out of the EU. Does that mean that you as the distributor have just lost this really big important part of your territory? Or, is the right interpretation of it, is whoever was in the EU at the time the contract was entered into? Now regardless of whatever the legal merits, we'll come back to that, the fact that's just a big economic impact is going to fuel litigation, it is going to be worth people having a fight, arguing over just what did territory mean to the member states of the EU. What does that mean?
People will be having to look very, very closely at the contract. Did it say and make it clear it is member states of the EU from time to time? Good news, that'll mean it will flex, but bad news for the distributor but good news for certainty because it will be clear what the position is. Or does it say member states of the EU as at the date of the agreement? Well that is definitely good news for that distributor and good news for certainty, but if it just says 'the EU' or 'member states of the EU', that is unclear and that will fuel litigation. What do you think Clark?
Clark: I think you're absolutely right.
If it isn't clearly defined in the contract this becomes an easy way to try and get rid of UK-based distributors who are doing okay but they are not doing quite a good enough job, they are an exclusive long-term contract at the moment and this just becomes an easy way to try and get rid of them because you have a fight over this point and you might win it.
So I absolutely see that there could be claims on this. It is worth saying that there isn't any existing case law on what EU territory means. There isn't really any existing case law on what something analogous might mean like when you have 'group company', because 'group companies' change from time to time just like EU territories can change from time to time.
So, we don't really have any case law to go back on and say it is going to be like this or it's going to be like that. It will all go back to first principles, so it will be really interesting. Because of that I do happen to think that the answer will be, and perhaps slightly against expectation, it will mean the 'EU territories at the date of the contract and not EU territories from time to time'.
And it is things around the peculiarity of if you have, say a UK-based distributor with rights in the EU territories and suddenly that means it's not his home territory, that is just going to be a bit odd.
David: Just going back, what was the intention of the parties at the time? What do these words mean and to say that the parties intended that if the UK came out of the EU you the UK-based distributor, lose the UK just feels odd, and so that is the kind of thinking that is going to be going on in the Judge's head isn't it?
Clark: Well the other thing is, imagine a country joins. Let's say Russia joins. So you are a US manufacturer, at the moment you have a distribution agreement with a UK company for EU territories, exclusive in the EU territories, and you have a distributor from Russia, exclusive in Russia. If it means from time to time, and then if Russia joins, you suddenly have two now competing distribution agreements. That can't be right can it? So it is that sort of first principle stuff that means it has got to be at the moment that you did the contract, that's what I think.
David: Unless the wording is clearly saying otherwise.
Clark: Obviously if the wording is otherwise then the wording is otherwise and you all knew that Russia might come in or that the UK might go out because that is what from time to time means.
Ian: More for the certainty if not the sanity of everyone involved rather than any overriding legal cases that inform it. And what about, we talk about EU law and we work with a lot of EU legislation which is beautifully impenetrable in places and we all think that some of it is difficult, but you haven't seen nothing yet in terms of what might be coming down the tracks with different types of retained laws.
Clark: This concept of EU retained law. This is lovely and it is obviously the sensible thing to do, you bring it into UK law as of the date that we leave, but it is an enormous body of law.
If we had a book called EU Retained Law as at 31 October 2019 and we could all go and get that book off the shelf and open it and it told us what the law was as at that date, that would be lovely.
But there isn't that book and EU law is just like every other law, its fluid, it changes all the time.
Somebody has to capture the snapshot as at the very date, so that raises a question, how are we going to do that, how are we going to snapshot exactly what it is?
For example, it isn't just that it is EU law, it has got to be EU law that has been recognised by the ECJ and the UK in certain instances. Who determines what that is? You can see there being issues around that and then there's the issue with transition.
If we have a transition, are we capturing the law on 31 October  or are we capturing it at the end of the transition? What are we going to do, even just what are we going to do about if we are aligning law, just how are we going to keep up with this stuff?
Ian: It is a huge issue and we are seeing all the legal publishers putting quite a lot of resource into this. The National Archives taking the lead from the Government side.
But, like in other areas, like with the hard border, technology is not going to solve everything it is only as good as what goes into it and what is available, and it is a fluid situation as you said. It is not a definitive code that we can just turn to.
Thank you very much David and thank you very much Clark. That wasn't just food for thought, that was an all-you-can-eat buffet of Brexit-related issues. I'm sure that in the coming months we'll have you back to unpack some of those in more detail when we get more certainty on any of this stuff.
So thank you all for joining us on this Brexit podcast. If there are any issues that you would like us to focus on, just get in touch.
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