08 September 2017

Brexit: Impact on distribution agreements

As negotiations for the UK’s withdrawal from the EU are now underway we look at what this process could mean specifically for distribution agreements, in particular those agreements with an international element.

The current proposed approach of the European Union (Withdrawal) Bill is to repeal the European Communities Act 1972 (ECA) and then incorporate all EU laws into UK domestic law ‘where practical’ to ensure no unintentional gaps are left by the repeal of the ECA. 

The aim being that this will allow for gradual adjustment of each piece of incorporated EU law on a topic by topic basis following the Brexit date of actual separation rather than the impractical task of requiring every adjustment to be completed by that deadline date.  This will also mean a focus can be brought to bear on the issues which need new legislation immediately upon the Brexit date, such as customs or immigration rules to meet the negotiated position.

Given the British Government’s lack of a parliamentary majority, passing the EU Withdrawal Bill is now looking like a very difficult part of the Brexit process in itself.  It is likely to face significant challenges and amendments before achieving Royal Assent by March 2019.  Likewise, legislative changes required in any of the other 27 Member States as a result of the negotiations are also going to need their domestic parliamentary approval.

EU Treaties and Regulations are forms of legislation which are directly applicable, having an automatic status of law applicable in each Member State.  Where EU institutions have exclusive competence they tend to use Regulations as a legislative instrument as, generally speaking, these will have direct effect throughout all Member States without requiring any further domestic implementing legislation being put in place. 

Directives are the legislative instrument which tends to be used, instead of the Treaties or Regulations, in instances of attempts to harmonise laws across the EU.  It puts the onus on each Member State to implement domestic legislation to achieve the desired harmonised approach.  This is usually in relation to topics on which the EU institutions do not have exclusive competence.

Contract Law

It is important to remember that English contract law is a matter of domestic law and there is little, if anything, which derives from European law.  Therefore, in this respect Brexit will have a limited impact on issues such as the formation of contracts, contract interpretation, liability provisions and so on.  Domestic contract law has always been a matter for the English courts and parliament to determine, and this will not change.  A contract which is currently enforceable as a matter of English law will continue to be enforceable after Brexit.

The one outstanding issue which remains to be resolved is the extent to which judgments obtained in English courts continue to be enforceable in other EU member states.  There are a number of options which are being explored in relation to this issue and as yet there is no definitive position.

Competition Law

Distribution agreements often raise competition law issues.  As this is an area of law which is derived from European law, Brexit has a potential impact.

There are currently two parallel systems of competition law – domestic competition law under the Competition Act 1998 and European competition law.  Both are drafted in almost identical terms, save for a different territorial scope.  The basic position remains the same:  

  • for companies trading domestically, the Competition Act 1998 will continue to be the relevant legislation.  Although this is based on European law, it has been put into effect via an Act of Parliament and will be unaffected; and
  • for companies trading into Europe, agreements which have an impact on trade between member states of the EU will continue to be governed by European competition law even if the company is based outside the EU.  The EU authorities have long been happy to take enforcement action against companies based in non EU-countries such as the USA.

In relation to the provisions of the Competition Act 1998, although this is based on European law, it is unlikely that it will be amended as a result of Brexit.   In one area there may be a longer term impact, but this will not affect agreements immediately.  Distribution agreements are often brought into compliance with competition law by drafting within the terms of a “block exemption”.  These are exemptions issued at European level which state that certain types of agreements do not breach competition law unless they contain “black listed” terms.  Under the domestic competition law system, if an agreement falls within the scope of an EU exemption it will also be exempt in the UK. Because these exemptions are put into effect by EU Regulations, the European Union (Withdrawal) Bill will preserve those exemptions which exist as of the date of Brexit.  These will continue to provide protection both under the Competition Act 1998 and for those companies who trade with Europe and must still take account of European law.

The current block exemptions are drafted to expire after a certain period of time, and when the current exemptions expire it is unlikely that the UK will automatically adopt the EU’s new exemptions.  However, the exemption for vertical agreements, which is the most relevant exemption for distribution agreements, does not expire until 2022 and this is the point at which we envisage seeing the first changes in this respect.

Brexit may also make dealing with competition investigations more complex as a result of parallel and potentially inconsistent investigations by both the UK and EU authorities, whereas previously one authority would take the lead. 

Intellectual Property Rights

Many distribution agreements contain provisions dealing with intellectual property rights – whether it is the use of logos in marketing material or rights relating to the products themselves.  We have produced a separate note on how these rights will be affected by Brexit.

Dealing with Uncertainty

Whilst the laws governing distribution agreements are unlikely to be subject to significant change, the nature of the products and/or services to be distributed may lead to additional impacts.  For example, there may be an impact from customs duties or increased red-tape.  If products currently comply with EU standards there may be an impact if the UK introduces divergent standards.

Many of these issues will be the subject of detailed negotiation during the exit process.  However, it is possible to protect your position now to some extent by covering off who will bear certain costs within a contract and potentially even including a process to deal with these changes.  By identifying issues which may impact on your commercial relationships and dealing with them from the outset you put yourself in a good position to adapt to a post-Brexit world.

If you’d like some assistance in considering the steps your business should be taking to manage your distribution arrangements, please contact our Commercial team.

 

© Shulmans LLP 2017
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. Shulmans LLP is not responsible for any activity undertaken based on this information.