The United Kingdom's looming departure from the European Union presents serious challenges for retailers and other businesses whose supply chains operate in the UK. Brexit will significantly shake up international commerce, given the difficult path to an individually negotiated free trade agreement with the EU and the risk of a "no deal" Brexit. This risk is heightened by the very short timescale for reaching any trade agreement. And while many have been holding back from implementing costly changes to logistical arrangements, pending greater clarity regarding Brexit, the UK's imminent EU departure and a more sharply focused political landscape suggests that it is time to take a fresh look at your supply chain.
Whether or not you are directly affected by Brexit, a supply chain review can confer additional benefits by providing an opportunity to ensure that your existing distribution arrangements provide suitable efficiencies and are commercially and contractually fit for purpose. Any efficiency-enhancing review should also include an assessment of whether distribution agreements (particularly when based on more permissive US models) are safe from being struck down and/or being subjected to fines and possible civil claims for violating EU or UK competition law.
What does Brexit look like after the UK General Election?
Following the General Election on December 12, 2019, a new Conservative government has been returned to power with a mandate to ensure that the UK formally leaves the EU by January 31, 2020. The newly elected Conservative government will enact the withdrawal agreement that was previously negotiated with the EU. It should be noted:
- This merely provides temporary respite before a new trade agreement must be agreed with the EU by the end of 2020; and
- Any failure to negotiate such a new trade deal by the end of the current 2020 transition period would result in an abrupt exit from the EU's structures on December 31, 2020, with resultant dislocation through the imposition of tariffs and loss of EU free movement rights.
The Conservative government's apparent determination to pursue divergence from EU rules, while seeking a comprehensive EU trade deal within only a year, is likely to imperil the prospects of achieving any trade deal, other than on a very limited basis. The Conservatives have indicated that they would not seek any extension to the transition period, although the EU has indicated that it would be prepared to do so. The fragility of this political process and short timescale for negotiating a trade deal all suggest forward planning is in order.
Key Questions and Impacts for Retailers
A Brexit impact assessment needs to be undertaken by any business that has yet to perform this exercise, in order to evaluate the risks that continue to lie in wait under a "no deal" Brexit. This will include a consideration of the following with respect to goods flows between the UK and EU:
- Where are your goods sold or purchased?
- Do they travel to/from the UK?
- If so, with what frequency?
- Is the component or finished good important and/or of high value?
- How easily and quickly could the good be substituted if it becomes unavailable?
- Where are goods warehoused?
- Could goods, currently imported into the UK from a third country and destined for onward sale within the EU, be imported directly into the EU?
- What is the applicable law relating to any Brexit-sensitive contracts?
- When were the contracts written – before or after the June 2016 Brexit Referendum; was Brexit (in its ultimate, potentially "hard" form) considered foreseeable and addressed contractually?
- Do contracts pre- or post-2016 contain force majeure provisions and, if so, what does the relevant clause provide?
- Is the contract short-term, or does it entail long-term supply?
- Do you have firm lead times for the delivery of goods?
- Does any contractual provision provide that "time is of the essence" (i.e. stipulate that any delay is a breach allowing termination and a claim for damages)?
- How quickly might any Brexit-affected agreement be terminated (with or without cause) under its terms?
- Are any up and downstream contracts in an attenuated supply chain on the same or different terms (for instance leaving one out of a number of parties exposed to asymmetric risk)?
- In what currencies must payments be made and have any potential currency exposures been addressed?
- What price rises might you need to implement or be asked to accept? When would these be sought or announced?
Trade Tariffs on Goods and Customs/Border Delays
- New or increased tariffs may be payable on both imports and exports, whether of raw materials, components or finished products. This may affect the costs incurred by a supplier or the market into which the customer sells the finished goods.
- Changes to export/import controls are possible, depending on what form Brexit takes. Dealing with the changes is likely to result in delays in receiving and delivering goods and raw materials, affecting the ability to meet contractual commitments and driving up costs.
Licences and Consents, Regulatory or Otherwise
- Are there relevant regulatory regimes that are applicable, such as REACH?
- Are labelling, content composition or other sector-specific safety rules (such as those for textiles) applicable to your goods?
UK companies may no longer benefit from EU-wide approval or registration schemes and goods manufactured in the UK may no longer be certified as produced in the EU.
The UK will also become a third country for the purposes of the EU General Data Protection Regulation, and this will mean that transfers of personal data between the UK and EU could become more difficult. For instance, if the existing UK data protection regime is not recognised by the European Commission as providing an adequate level of security for data subjects, businesses may need to put in place contractual clauses or implement binding corporate rules that guarantee such security and assure data subjects of their data protection rights. This post-Brexit environment could make pan-EU contact or processing centres difficult to maintain and may make the UK a less attractive data hub or data centre for international businesses.
Brexit may render some resources scarce (refrigerated trucks, cold storage facilities, lorry parks, port facilities) and there may be arguments that could be raised around foreclosure or abuse of dominance, if the owner of the facility behaves in an anti-competitive way.
Review can Include Health Check on EU and UK Competition Law
In addition to Brexit and the risks that it may present to market penetration and maintaining the bottom line, EU and EU Member State competition authorities have never been more active and intrusive with respect to supply chain issues. They have been vigorous in pursuing and fining commercially rational business strategies that were designed to induce distributor investment, but which regulators perceived shaped routes to market in an anti-competitive manner. Any business will be bound by EU competition law rules both before and after Brexit, when trading within the EU and therefore needs to be aware that:
- Fines can be as high as 10% of group global sales.
- Anti-competitive terms are void and unenforceable and, depending on the law applicable to the contract, any such terms may invalidate the whole agreement (both of which could create significant commercial uncertainty).
- Third parties harmed by any anti-competitive activity may bring civil suits.
- Reputational damage may occur and valuable management resources are likely to be tied up in time-consuming fire-fighting, rather than in being deployed in proactive activity, beneficial to the business.
Now is the time to conduct a supply chain audit to ensure that you are ready for Brexit, with or without a UK trade deal with the EU. You should map your supplier and customer base and focus on those contractual relationships with the highest value to your business which may be vulnerable to disruption. Assessing Brexit-related risks can be allied to an evaluation of the commercial suitability of existing supply agreements. Such an exercise can identify and rectify inefficiencies and redundant distribution models and address any competition law concerns, thereby mitigating risk and protecting and enhancing profitability. Steptoe can bring its depth of experience and commercial awareness to help you with the necessary contractual, competition and trade law analysis. Please contact either Stephanie Sheridan or Paul Hughes, both of whom would be very happy to discuss the necessary steps further.