With the transition period coming to an end on 31 December 2020 and a deal still not agreed, what are the commercial implications of Brexit and how do these affect existing distribution agreements?
From 1 January 2021, parties may face increased costs in performing a contract due to the introduction of tariffs, compliance with new customs procedures or changes to tax treatments. Increased costs in providing goods/services may make the fees payable under a distribution agreement too low and could even render agreements to be unprofitable.
A supplier should look to include clauses that share the burden of increased costs in providing the goods/services.
A distributor, on the other hand, should try and control any increases by introducing adjustment mechanisms and by maintaining the right to terminate the contract if costs rise too high.
Fluctuations to the foreign exchange rate may also impact the price paid/received under contracts, depending on the currency fees are to be paid in. We saw a sharp drop in the value of the pound sterling following the UK’s vote to leave the EU and several slumps during the 3.5 years since. There are likely to be further fluctuations due to the economic uncertainty of a no-deal Brexit in conjunction with the economic consequences of the Covid-19 pandemic.
It would therefore make commercial sense to introduce mechanisms to protect against changes in currency value be it a fixed exchange rate, a mechanism to proportion any shifts going beyond an agreed exchange rate tolerance or otherwise. The best solution in each circumstance will be subjective to the agreement in question.
Changes in law or economic circumstances may affect a party’s ability to perform its contractual obligations. For example, delays at border control or with customs checks may cause a party to default on delivery timetables. In the absence of express provisions, a party seeking to rely on such changes to seek relief from performance may actually find themselves liable to the other for breach of contract.
At a minimum, parties should analyse their contracts to determine the extent of their liability for non-performance and identify those contracts that pose the highest risk. Attempts should also be made to renegotiate or limit liability where non-performance is likely to be an issue.
Parties should be aware that standard force majeure clauses are unlikely to cover events like market volatility and case law has determined that changes in economic circumstances affecting the profitability of a contract will not be considered a force majeure event or grounds for frustration. Parties should not attempt to rely on either in the event that they are unable to perform their duties and seek legal advice as to their options in the circumstances.
At the end of the transition period on 31 December 2020, the rights and duties of the parties to a distribution agreement are unlikely to be affected by any changes in law as the relationship between a supplier and distributor are mainly governed by the contract between them. It is therefore important to ensure that you have a sound contract in place tailored to your business and/or transaction.
Our commercial team would be happy to assist you with reviewing existing contracts, advising and drafting new ones and providing practical and strategic advice on future-proofing your agreements.