The impact of Brexit on commercial contracts Part 1: the potential disruptors

Last updated, 4:40pm, 23 February 2021

Although Brexit itself took place early in 2020, little changed in practice during the transition period. However, with the transition period coming to an end on 31 December 2020 and the UK-EU Trade and Cooperation Agreement having been agreed, businesses should now be in a more informed position to prepare their customer and supplier relationships to mitigate the impact of the inevitable disruption. In this series of articles we look at the key areas where the end of the transition period  will impact on commercial contracts. The most significant effect that Brexit has had on most UK businesses over the past year is uncertainty, making it difficult to accurately assess the cost and effort involved in doing business post 31 December 2020. This uncertainty comes from a number of sources of potential disruption, and of course key in this is the UK-EU trade deal. We discuss the impacts of this below, together with other potential sources of uncertainty:

The UK-EU Trade and Cooperation Agreement

After many months of negotiations, the UK-EU Trade and Cooperation Agreement (“TCA”) was agreed in principle on 24 December 2020, and signed before the end of the transition period on 31 December 2020.  It now applies on a provisional basis, until European Parliament consent has been obtained. A key aspect of the TCA is the implementation of a free trade agreement.  This will provide much-needed certainty as to the trading relationship between the UK and the EU, and covers the following main areas:

1. Zero tariffs for goods exported and imported between the UK and the EU, where those goods comply with the rules of origin. In the absence of a deal, the WTO rules position that would have applied would have made trade significantly more expensive.  Note that this applies not only for new products, but products being returned for repairs etc.

2. Rules of origin rules allow for “full cumulation”, which means that UK-originating products that incorporate EU inputs can still be considered as products of UK origin and therefore benefit from the zero tariff rules. Note that what is known as “diagonal cumulation”, which would cover UK-originating products that incorporate inputs from third countries with which the EU also has trade deals, is not included in the TCA. Traders will be permitted to self-certify the origin of goods. The rules of origin are complex, taking up around 50 pages of the TCA, and businesses will need to examine these carefully to ensure that they are making correct declarations.  Different types of product have different thresholds for what proportion of the product can come from outside the free trade area.  For example, for white chocolate to meet the rules, the total weight of sugar originating outside the area must make up no more than 40% of the weight of the product.  The rules also set out what processing activities count as a “transformation” that lets a product be treated as being produced in the UK, for example yarn dyeing combined with weaving, but not yarn dyeing on its own.

3. Customs procedures will be simplified, including provisions bespoke to the UK/EU relationship such as cooperation at 'roll-on roll-off' ports, and the parties will be exploring the possibility of sharing import and export declaration data. In addition, mutual recognition will be implemented for Trusted Trader Schemes, with streamlined procedures available for eligible traders.  The parties will also cooperate on recovery of customs duties and combating VAT and indirect taxes fraud. However, border checks will still apply to all goods, meaning a degree of disruption at the UK/EU border that has not previously occurred.

Note also that the EU's assessment of the UK's sanitary and phytosanitary regime has been reserved by the EU as a unilateral decision for the EU to take, and is therefore not covered by the TCA, although the UK has been granted “national listed status” which ensures exports of live animals and animal products can continue.

Note also that there are different rules in place that apply to trade between Great Britain and Northern Ireland.  In respect of goods being moved from Northern Ireland to Great Britain, where goods qualify, there will be no new customs processes except in very limited circumstances.  Goods will qualify if they were in free circulation in Northern Ireland (not under a customs procedure or in an authorised temporary storage facility) before they are moved from Northern Ireland to Great Britain (although it is not permitted to use this facility to move goods from the EU through NI to GB in order to avoid customs requirements).  For further detail see the HMRC guidance on moving goods from Northern Ireland to Great Britain.  There are, however, customs declarations required on goods arriving in Northern Ireland from Great Britain; for further detail see the HMRC guidance.

However, unionist parties within Northern Ireland intend to bring a judicial review challenge to the Northern Ireland Protocol.  Those parties have raised concerns that the Protocol damages trade, and will be detrimental to Northern Ireland's status within the UK union.  This, then, creates another area in which uncertainty is likely to continue for some time.

4. Technical barriers to trade will be reduced by a number of measures such as providing for self-declaration of regulatory compliance for low-risk products, and for facilitating other specific products of mutual interest, particularly in respect of the following:
   1. Medicinal products: Mutual recognition of Good Manufacturing Practice inspections and certificates, removing the need for businesses to carry out separate UK and EU inspections of their manufacturing facilities.
   2. Motor vehicles and equipment: Mutual recognition of approvals based on UN regulations, as well as cooperation mechanisms and information exchange.
   3. Organic products: Equivalence agreement to ensure products certified as organic in the UK are recognised as organic in the EU and vice versa, as well as provisions for effective regulatory cooperation and collaboration on the future development of organic standards.
   4. Wine: Simplified certification, document, labelling and packaging requirements for imports to either territory.
   5. Chemicals: Joint commitments to comprehensive implementation of international classification and labelling rules, ongoing cooperation and information exchange.

In addition, the TCA includes a raft of provisions aimed at a wider economic, social and environmental co-operation. There are intended to facilitate trade between the UK and the EU, including arrangements to facilitate business travel and the provision of services, arrangements to ensure continued smooth running of air and road transport, new trading arrangements for energy and telecommunications, and the much-discussed “level playing field” provisions, which effectively prevent a party from “undercutting” the other unfairly by lowering standards in areas such as environmental and climate protection and workers' rights. For further details of the wider co-operation provisions, see “Brexit: Where are we now?” Amongst the provisions in the TCA are the provisions relating to data protection, which will certainly have a bearing on commercial contracts.  There is not, as some had hoped, an adequacy decision for transfers of personal data from the EU to the UK built into the TCA, but it does contain interim measures to ensure the flow of data for a period of up to six months. For further details of the impact of Brexit on data protection, see “How will Brexit impact Data Protection and what should we be doing?” To a degree, there are still uncertainties as to how the UK-EU relationship will work, with many provisions requiring “cooperation” but without, at present, any detailed rules, and there are a number of committees and working parties to be established. No doubt discussions will be ongoing for many years to come, and so the issues that we discuss in Parts 2 and 3 of this article in respect of managing uncertainty will be relevant for some time to come.

Changes in law

The law that applies to UK businesses after the end of the transition period is largely the same, and should remain so in the short term, as EU law is, broadly speaking, incorporated into English law via the European Union (Withdrawal) Act 2018 as a “snapshot” of EU law as it applied at the date Brexit took place (31 December 2020). The UK Government has introduced a raft of statutory instruments covering various aspects of UK law that are derived from EU law. However, in large part these are designed to deal with references to the EU and its institutions that are no longer be appropriate since 1 January, rather than substantive changes to the law itself. For example, changes to the Consumer Rights Act remove the distinction between imports from EEA countries and those from elsewhere. This all means that there will be some changes where the UK interfaces with the EU; for example, UK consumers will continue to have similar rights, but only within the UK jurisdiction, which will naturally lead to the loss of some rights for UK consumers when buying from EU countries (and similarly for EU consumers buying from the UK). Longer-term, however, it is inevitable that the UK legal system will diverge from that of the EU, and there is certainly scope for the domestic law that UK businesses deal with to change over the months and years following the end of the transition period. Clearly, then, there are a number of areas in which Brexit introduces uncertainty into the UK's business environment, even in the light of the UK-EU trade deal. In The impact of Brexit on commercial contracts Part 2: what to consider and The impact of Brexit on commercial contracts Part 3: the practical viewpoint, we look at what businesses might do in order to deal with the effects of that uncertainty on their commercial contracts.

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