Supply contracts and Brexit
Wednesday, April 17, 2019
With Brexit around the corner and continuing uncertainties for businesses that have benefited from free movement of goods and services, anxiety continues about the fate of supplies between the UK and EU countries.
With Brexit around the corner and continuing uncertainties for businesses that have benefited from free movement of goods and services, anxiety continues about the fate of supplies between the UK and EU countries. There appears to be most public concern about the food and beverages and medical supplies sectors. Preparations are supposedly being made for the worst case scenario of no deal.
Fast food outlets, bakeries, restaurants, hotels, cafes, supermarkets, pharmacies, hospitals, small and medium size retailers in the UK which depend upon timely supplies of goods, often on a just in time basis, including perishable ones, are particularly concerned about disruptions and delays to supply and higher costs in the future from possible customs duties and administration costs.
How will the supply contacts with suppliers from EU countries be affected if there is no deal?
If the supply contract is under English law, as there will have been considerable time between the referendum and the dates between May to October 2019 when the UK can leave the EU, many businesses would have made contingency plans or varied their contracts to allow for parties to deal with the adverse changes that Brexit could bring, by mutual agreement. Nonetheless where businesses have not made such preparations, it is worth considering what could be the possible outcome.
For example, if a supplier is unable to deliver goods on time, if time is of the essence in the contract, it could affect both the supplier and the customer. The reason for not delivering on time could be due to bottlenecks caused by increased checks and paperwork at borders, customs duties or circumstances beyond the control of parties. The supplier could be liable to the customer for not delivering on time and the customer could be affected in terms of its obligation to third parties. For instance, if baked goods or food are not delivered to a bakery, shop or caterers on time from another country in Europe, the bakery or shop or caterers in the UK will not be able to provide for its customers or meet orders to institutions or local deliveries. The same situation can be faced by pharmacies supplying certain vital medicines to patients or institutions. In these circumstance, what remedies are available?
For parties to rely on the doctrine of frustration, which is where neither party is liable to the other for damages arising out of non-performance from the date of the supervening frustrating event, it is necessary that the frustrating event occurs after a contract has been entered into. The frustrating event must also be one which makes the contract physically or commercially impossible to fulfil, or transforms the obligation to perform into a radically different obligation.
Further, the frustrating event must not have been in the contemplation of the parties when the contract was entered into and it must not have been due to the fault of either party. This means that if the contract was entered into after the referendum in 2016, this remedy may not be available, unless certain radical changes in the law which was not contemplated makes the contract impossible to perform or transforms the obligations. Frustration of contract cannot be pleaded if there is another clause in the contract that deals with events beyond the control of parties, such as force majeure, dealing with hardship and so on.
In recent cases, the courts in England have also disallowed parties from relying on frustration of contract where it was found on facts that alternative methods of performance were possible, or it was merely more expensive to perform, or it was inconvenient due to fluctuations in the economy. In this category could fall delays at borders or additional administrative costs, if it is still possible for suppliers deliver the goods to businesses in the UK and vice versa.
If there is a force majeure clause to deal with a situation where non-performance of the contract is outside the control of a party, the clause in the contract must define what circumstances are covered under it. Whether or not the force majeure clause will assist in relation to circumstances arising from Brexit would depend upon what the clause actually states, as “force majeure” is not a Common Law concept. This means that a party relying on the force majeure clause normally has to show that it is not able to perform its obligations under the contract because of a reason beyond its reasonable control. It does not cover situations where it is merely more expensive or there are delays, or there are other means of performing the contract.
In the event of a no deal Brexit, if there is a dispute between the parties over performance and a judgment is given by the English Courts against a party located in an EU country, it may be more difficult to enforce. This is because leaving the EU means there will be no automatic recognition of English court judgments by the courts in the relevant EU country. Action in the courts of the relevant EU country where the other party is located would be required unless the party has assets in the UK.
Hopefully some interim arrangements will be put in place to cover the reciprocal enforcement of judgments between the UK and jurisdiction in the EU.
This publication is for general information only and is not intended to provide legal advice.