Brexit: Impacts on Supplier-Customer-Relationships

What was to be expected has now been confirmed: The withdrawal agreement between the EU and the UK has been rejected by the British Parliament. The political consequences of this vote are uncertain. Basically, there are three options: (i) postponement of the withdrawal date, (ii) cancellation of the Brexit or (iii) withdrawal without any agreement.

For EU-based suppliers with customers in the UK, the latter option, known as "hard Brexit", would have the following significant consequences for existing contractual relationships.

Place of Jurisdiction

The place of jurisdiction determines which court is competent in the event of a dispute. For German suppliers with customers in the UK, it was so far recommended to agree on German law and a place of jurisdiction in Germany. The recognition and enforcement of judgments in the EU – and thus also of judgments from Germany in the UK – is until now ensured by the European Regulation (EU) No. 1215/2012. As a result of the Brexit, however, the Regulation would no longer apply to the UK. In the absence of new regulations, a bilateral agreement of 1960 between Germany and the UK on the mutual recognition and enforcement of judgments in civil and commercial matters would apply. However, the requirements for recognition and enforcement stipulated in this agreement are far more cumbersome than those in the European Regulation. For future supply relationships suppliers should therefore agree on an arbitration clause. However, the choice of German law is still recommended. Hence, existing framework agreements should be amended by supplementary agreements accordingly. Judgements already given against UK customers should be enforced prior to March 29, 2019.

Incoterms 2010

The use of Incoterms has to be reviewed in case of a hard Brexit as well. In any case, suppliers can further agree on an EXW clause (ex works, supplier's premises). Under this clause the supplier's obligations regarding risks and costs end with provision of the goods at the supplier’s premises. In case of F-clauses (e.g. FCA/free carrier), C-clauses (e.g. CPT/carriage paid to) and D-clauses (e.g. DAP/delivered at place), it is recommended to agree on a designated place of delivery in continental Europe. Since delays in delivery can be expected due to customs clearance at the UK border, providing for a designated place of delivery in the UK would lead to an obligation on the supplier’s side to bear costs due to the delay (e.g. demurrage or additional remuneration for the carrier). In addition, the supplier would be liable without limitation for damage caused by the delay. If the parties agree on a DDP-clause (delivered duty paid), the supplier would furthermore be responsible for import clearance. Therefore, German suppliers should avoid agreeing on a DDP-clause from now on. In case that a customer does not accept an EXW-clause, the supplier should insist on a F-, C- or D-clause (except DDP) providing for a designated place of delivery in continental Europe.

In this case, the risk of delays at the border would be borne by the customer.

Price Adjustments

If the supplier (e.g. due to the agreement of a DDP clause) is already obliged to customs clearance of the delivered goods, the associated additional costs cannot be asserted against the customer. So called "Force majeure clauses" included in many supply agreements providing for contract adjustments in the event of unforeseeable events, do not apply in case of a hard Brexit: Since the announcement of the referendum at the end of 2015, the Brexit can no longer be considered an unforeseeable event. Therefore, contracts concluded after 2015 cannot be amended based on a Brexit. For the same reasons, statutory provisions on contract adjustments (e.g. Section 313 of the German Civil Code ("BGB")) do not apply either. In consequence, suppliers should include specific purchase price adjustment clauses in supply contracts. Such clauses should explicitly stipulate the customer’s obligation to bear additional costs due to price increases caused by Brexit.

CE Labeling

The CE labeling is one of the most relevant "labels of quality" at European level. By affixing the CE marking, a manufacturer assures that a product complies with all EU directives and requirements applicable to such products. In the case of a hard Brexit, the CE marking requirement would no longer apply to products placed on the UK market. However, it is to be expected that the UK will implement similar or stricter national product requirements that EU-suppliers will have to comply with and which might result in additional costs. Therefore, suppliers should include a contractual obligation stipulating that the customer has to bear such costs. With regard to deliveries from the UK to the EU, European product requirements (including the CE labelling) still apply.

Conclusion

It is still unforeseeable whether a Brexit will actually take place on March 29, 2019. The uncertainty exists and remains. Therefore, suppliers should consider amending their existing supply contracts and General Terms and Conditions of Sale.