Feature article - Key considerations when entering into contracts post-Brexit
Miles Robinson, partner, and Daniel Cook, senior associate, at international law firm Mayer Brown, discuss the key considerations in the chemicals industry when drafting contracts post-Brexit
Those in the chemicals industry involved in the drafting and negotiation of commercial contracts should consider the effect of the UK’s withdrawal from the EU on those contracts. In particular, they should look at the commercial, regulatory and legal impact of Brexit on contract performance, and ensure that Brexit has not led to any unintended consequences arising from how the contract is drafted.
Specific challenges exist in the chemicals industry, particularly in relation to supply chains and regulatory requirements, and as such careful consideration should be given when reviewing existing contracts or entering into new ones. There are seven key considerations, which are discussed below.
Post-Brexit, anyone entering into a contract involving the supply of goods between the UK and EU member states will need to think about various issues. In relation to customs, there is the risk of delivery problems if long delays at the Channel ports continue.
As the UK and the EU are no longer in a customs union, customs checks and formalities now apply, which can be time-consuming and burdensome. This has already been identified as a key concern for the chemicals industry – a global chemical company recently revealed it has experienced "substantial friction" from the new trade barriers caused by the UK's withdrawal from the EU.1
Another supply chain issue is which party should bear the economic risk of any future tariffs. This risk will need to be addressed in the pricing mechanism. In particular, parties will need to consider the ability to vary prices in the event of future tariff changes.
While a full-scale trade war is unlikely, this is still an important consideration to be addressed in the relevant documentation. Understanding the supply chain to ensure that it can continue to function smoothly is also vital, particularly because the introduction of UK REACH (see below) has impacted different supply chains in different ways. Companies will need to understand their supply chains and tailor their services accordingly.
New regulatory requirements
REACH ceased to have effect in Great Britain (GB, i.e. England, Scotland and Wales) from 1 January 2021. A new ‘UK REACH’ regime now applies to businesses that import, make, sell or distribute chemicals here, whether as raw materials or in their finished state. REACH still applies in Northern Ireland.
A key impact of this is that, although those in the chemicals industry will be familiar with the legislative regime, it may now apply differently to them. For example, GB-based companies that were downstream users or distributors prior to the end of the transition period under EU REACH will become importers. As such, many entities are now putting in place contracts with respect to UK REACH-related Only Representative appointments.
The arrangements are likely to be different depending on factors such as whether they have to accommodate only intra-group matters, or take account of tolling arrangements, for example. Data sharing arrangements are also being updated to take account of the need for specific arrangements and pricing structures in respect of UK REACH.
Contracts will need to be put in place for managing matters such as making downstream user import notifications and future registrations. Companies should also ensure that their contracts refer to the ‘correct’ REACH regime, depending on the products or materials in question.
Time will tell whether the UK is true to its word about setting its own course in terms of the regulatory regime for chemicals. This would invariably create a divergence in regimes, potentially making performance of contractual obligations more difficult and/or expensive. All companies operating in both the UK and EU will now need to be cognisant of any changes.
In the meantime, many businesses are already grappling with the minutiae of whether specific amendments to legislation that are contemplated to have effect in the future under EU REACH have already been included (deliberately or otherwise) in the UK/GB chemicals regime. Divergences are already manifesting themselves, for example with regard to matters such as Poison Centre regulations.
Provision of cross-border services
Given that the free movement of services between the UK and EU has now ended, there are a number of considerations companies in the chemicals industry should bear in mind if they deal in the provision of services. The UK now has a points-based immigration system that treats EU and non-EU citizens equally.
Any company now wanting to hire from outside the UK will need a sponsor licence to hire most eligible employees from outside the UK and will have to apply for permission in advance. They will need to factor the additional time and costs associated with this into their timelines and budgets. UK suppliers, particularly those supplying cross-border services, may want to reserve the right to transfer their rights and obligations to group companies in the EU, in anticipation that future trade barriers could adversely affect the supply of these services at a later date.
There have been some important changes that companies will need to be aware of post-Brexit and this will require careful consideration of any contractual documents that deal with IP, such as licence agreements. Exhaustion of IP rights occurs in the EEA when a genuine IP-protected good is placed on the market anywhere in the EEA, by or with the right holder's permission.
Once this occurs, the IP rights holder cannot prevent the movement of those goods within the EEA. Post-Brexit, parallel imports into the UK from the EEA continue unaffected, as goods placed on the market in the EEA by, or with the consent of the right holder, will continue to be considered exhausted in the UK.
However, the EU has not yet followed suit and it remains unclear whether IP-protected goods placed on the UK market will be considered exhausted in the EEA. UK businesses may, therefore, need to obtain the consent of the EEA right holder to export IP-protected goods to the EEA. They should check whether they currently do so and, if so, determine if the rights' holder permission is required for those exports and assess how their operations and commercial contracts may be affected.
Existing licence agreements may include a definition of licensed territory as referring to the EU or EEA. Depending on the wording of the contract, this may be construed as at the date of the licence agreement or from time to time. As a result, business might need to update the territorial extent of the licence agreement to expressly refer to the UK.
EU TM and Registered and Unregistered Community Design rights no longer cover the UK. However, equivalent UK rights (called a ‘comparable trade mark’, ‘re-registered design right’ or ‘UK continuing unregistered design right, respectively) will be automatically created. The EU TM right (called a corresponding EU TM) will continue to cover EU Member States.
A new UK unregistered design right called a ‘supplementary unregistered design right’ is available. This provides the same protection as the Unregistered Community Design Right but covers only the UK. Companies in the UK are no longer entitled to claim EU database rights in respect of databases created after 31 December 2020 or to register a .eu domain.
There is no action to take with regard to patent rights. The current system of national patent protection obtained through the UK Intellectual Property Office or the European Patent Office (which is not an EU institution) remains unchanged.
Governing law, jurisdiction clauses & enforcement
While parties may be concerned about the impact of Brexit on governing law and jurisdiction clauses, there is no reason to switch away from English law. Brexit will have no impact on the reasons why this is a popular choice of governing law for commercial transactions. The Rome I and Rome II regimes on governing law are substantially unchanged, so where parties choose English law, this will ordinarily be upheld throughout the EU.
The English legal system is widely respected for its impartiality and for the reputation and experience of its judiciary, so the English courts will continue to be a popular forum for international business disputes (even where the relevant documents are not governed by English law). London will thus remain one of the world’s leading dispute resolution centres post-Brexit.
The EU framework on jurisdiction and the mutual enforcement of judgments no longer includes the UK, other than for proceedings initiated on or before 31 December 2020. While Switzerland recently gave its consent for the UK to re-join the Lugano Convention (which is broadly similar in many respects to the EU framework) it is unclear if and when the other Lugano states will also consent. However, the UK is a now party in its own right to the Hague Convention on Choice of Court Agreements (HCCCA) of 2005. The EU is already a party to this, so it will apply between the EU and the UK going forward in the absence of any EU/Lugano framework.
In broad outline, the effect of the HCCCA is that contracting states are required to uphold clauses that give the courts of a convention state exclusive jurisdiction; and enforce final monetary and non-monetary judgments made by those courts. Certain contracts, such as employment, are outside its jurisdiction. The HCCCA can only apply where the contract includes an ‘exclusive choice of court agreement’, i.e. an exclusive jurisdiction clause. Such a clause will be deemed exclusive, unless the parties have expressly provided otherwise.
Where the HCCCA does not apply, the English courts would nevertheless generally give effect to exclusive jurisdiction clauses. Whether an English jurisdiction clause would be upheld by an EU or EEA member state in a particular case would be a matter for the EU or Lugano regime and/or its own domestic law, but such clauses are generally widely respected.
Cross-border service of documents
The EU framework for cross-border service of documents no longer applies to or in the UK, but the 1965 Hague Convention equivalent will apply as between the UK and the EU instead. It makes good sense to include in contracts a clause nominating an agent for service within the jurisdiction, so as to avoid the costs, delay and potential practical difficulties of having to serve out of the jurisdiction.
Enforcement of international arbitration awards
For companies in the chemicals industry seeking to use alternative dispute resolution, Brexit has not had any impact on the New York Convention, under which international arbitration awards are widely enforced. It is worth considering whether arbitration might be a suitable alternative to providing for disputes to be resolved through court proceedings. However, where the HCCCA applies, Brexit alone should not be sufficient reason to depart from any preference for having disputes determined exclusively by the English courts.
Good contract negotiation is a matter of anticipating uncertainty and agreeing how risk should be allocated – and Brexit is no different. In addition to addressing the above issues before entering into new contracts, it makes good sense to review existing standard terms and any key contracts that have remained in place post-Brexit to make sure that they are still fit for purpose.
* - Also contributing to this article: Oliver Yaros, partner, and Tim Baines, counsel, both of Mayer Brown
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Note: 1 - https://www.theguardian.com/politics/2021/feb/24/brexit-trade-delays-getting-worse-uk-border-survey-finds