12 Dec 2018

The ongoing political drama at Westminster is severely testing the patience of businesses. Commenting on the Conservative Party's "no confidence" vote on 12 December, Stephen Martin, director general of the Institute of Directors, said:

"The last thing businesses needed today was even more uncertainty – and yet politics has managed to deliver on that once again. Many business leaders, along with the rest of the country, will be tearing their hair out at the state of Westminster politics at the moment."

The urgent need for clarity has prompted many businesses to seek contractual reassurance from their suppliers and potential suppliers. In recent months, we have seen a significant surge in the use of "Brexit Readiness Questionnaires". Many ask for confirmation that suppliers have Brexit resilience plans in place. Some go further, and call for confirmation that continuity of supply will be maintained once Brexit has taken effect.

Be careful: your answers could have significant legal effect.

Deal or no deal?

At the moment, there can be no guarantee that the Withdrawal Agreement and Political Declaration (WA) will be approved. Uncertainty on that point was extended on 10 December by the government's decision to delay the "meaningful vote", and not much reduced by the government's 11 December promise to hold the vote by 21 January. Rejection of the WA would leave the UK on the path to a "no deal" exit currently built in as a default outcome of the EU (Withdrawal) Act 2018. Avoiding a "no deal" exit, whether by revoking the Article 50 notice, negioting an extension or finding a "Plan B" would require further primary legislation. On any credible scenario, the Westminster saga has some way to go.

One result is that no business responding to a Brexit Readiness Questionnaire can be sure what Brexit currently means. If the WA were to be approved by a resolution and then implemented by an Act of Parliament, then there would be a transitional period at least up to 31 December 2020. If the UK were to leave on a "no deal" basis, then there would be no transition. For purposes ranging from customs and border control to personal data processing and road haulage licences, the UK would be a "third country" from the moment its Article 50 notice expires on 29 March 2019.

Representations and misrepresentations

It might be tempting to give positive answers to a Brexit Readiness Questionnaire if it increases the chance of winning new business or of retaining significant customers. However, a reply confirming (for example) that continuity of supply will be maintained would, for legal purposes, be a representation. Should it prove to be untrue, or even over-optimistic, then it may well become an actionable misrepresentation. In that case, the customer might be able to walk away from the contract and claim substantial damages.

Damages for misrepresentation are intended to put an injured party back to the position it would have been in had it not entered into the contract. The general rule is that an award of damages for misrepresentation will seek to compensate the claimant for losses caused by relying on the misrepresentation. Consequently, damages can include elements such as wasted negotiating costs, lost bargains or opportunities. In some cases, misrepresentation damages can be significantly greater than damages for breach of contract.

A misrepresentation is "actionable" if it induced the claimant to enter into the contract. Given the critical importance of "just in time" supply chains to manufacturing, chemicals processing, pharmaceuticals and retail, it is highly likely that a potential supplier's response confirming continuity of supply would meet that test.

New contracts?

Parties tend to think about representations when negotiating a wholly new contract. Promises and statements that are considered commercially important then tend to be written into the contract as warranties (or sometimes as "warranties and representations"). Those contractual provisions are then governed by an "entire agreement" clause, which typically provides that there can be no action or claim in respect of any warranty or representation that is not set out in the final contract document. Those clauses are effective, and provide a useful measure of contractual risk management, unless the misrepresentation is found to have been fraudulent.

However, parties may not be quite so focused where there is an existing contractual relationship, perhaps based on a framework or master services agreement. In those cases, parties might overlook the fact that replying to a question about Brexit Readiness could be a representation in relation to contracts formed under that umbrella agreement. For example, it is common for a framework agreement to provide an overarching, general set of terms that will govern future orders. Often, the framework provides that a new contract is formed each time there is an order, allowing the parties to adjust particular terms or specifications to suit the circumstances. In those cases, a general response confirming Brexit Readiness might become an actionable misrepresentation in relation to any subsequent orders.

What does Brexit resilience mean?

Many of the Brexit Readiness Questionnaires we have seen focus on the supplier's ability to meet delivery deadlines and minimum quantity requirements. They reflect the customer's legitimate need for continuity and predictability of supply.

While a "no deal" Brexit remains possible, obtaining contractual comfort from suppliers that continuity will be maintained is an extremely useful risk mitigation measure. However, suppliers should ensure that their replies do not create unmanaged risk and potential liability. Consider:

  • Whether stocks of materials, components or other supplies within the UK are likely to be sufficient to cover demand in the period following a "no deal" Brexit
  • Whether key intermediaries, such as freight forwarders or customs brokers, have certifications and accreditations (such as Authorised Economic Operator) likely to assist with customs and border clearance in the event of significant backlogs
  • Whether arrangements are in place to cover the risk of haulage contracts being in short supply due to restrictions on relevant permits or licences, or to hauliers' decisions to divert business to EU27 member states
  • Whether key staffing or other personnel issues might arise from a "no deal" Brexit.

It may be extremely difficult to arrive at a clear answer through any internal investigation of those issues while the final timing, form and effect of Brexit remains unclear. If you cannot find a clear answer within your business, then any answer that you give in response to a Brexit Readiness Questionnaire must be written with great care, and with an eye to possible liability.