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Business after Brexit: Trading with Europe
Wonder how Brexit will affect your business?
Alinea provides an overview of the current commercial landscape and legislation, and guide to distribution - highlighting vertical agreements and procedures to considering when entering into new contracts or renegotiations.
The United Kingdom started trade negotiations with the European Union on 2nd March 2020, led by David Frost, the UK's chief negotiator of Task Force Europe, in discussions with Michael Barnier, who serves as the European Commission's Head of Task Force for Relations with the UK.
On 25th February 2020, the Council of the European Union published a press release on EU-UK relations: Council gives go-ahead for talk to start and adopts negotiating directive authorising the opening of negotiations for a new partnership with the UK outlining a commitment to engaging a free trade agreement with zero quotas and zero tariffs, and cooperation on customs and regulatory aspects.
This was followed by the Uk parliamentary publication of The Future Relationship with the EU: The UK's Approach to Negotiations. The paper outlined a commitment to establishing a Comprehensive Free Trade Agreement (CFTA) including a no quotas or tariffs aspiration, and a regulatory commitment with parity to EU - Canada Comprehensive Economic and Trade Agreement (CETA) and the EU-Japan EPA agreements, outlining provisions of direct interest to citizens and businesses in areas such as transport, industrial supply chains, agricultural products, fisheries, services, data protection, provisions for a level playing field, mobility of citizens, the fight against crime, money laundering and terrorism, foreign and security policy. The prime minister has outlined that if good progress had not been made before a summit in June 2020, the UK will prepare to leave on WTO terms similar to the EU's current trading relationship with Australia.
European competition law is used within the European Union, which promotes the maintenance of the European Single Market, by regulating anti-competition conduct to ensure that companies do not create cartels and monopolies against the public interest. A legacy of the UK's participation within the EU has been the integration of a neoliberal free trade policy encouraging competition and anti-protectionist measures. Unless the EC adopts a more regulatory and protectionist stance in future, in which it could be inferred that the UK will adopt comparable measures, it is likely that the UK will remain aligned with the European Commission's competitive directives. The European Commission has expressed a concern that entering into a similar, low regulatory agreement with the UK as Canada, Japan/Korea and South Korea could place the UK at a significantly more competitive advantage than member states due to proximity.
On the trade negotiation table, options include:
- Membership of the European Free Trade Association (EFTA) or - Iceland, Lichenstein, Norway and Switzerland are part of the EFTA, established on 3 May 1960 following the signing of the Stockholm Convention on 4 January 1960. This serves as a trade bloc for countries unwilling or unable to join the European Union. Participants have high-level access to the European Market, and have to comply with the EU's high regulatory standards.
- Membership of the EEA - Iceland, Lichenstein and Norway are part of the EEA, whereas Switzerland has adopted a complex set of bilateral agreements with the European Commission
- A Canada style Central Economic Free Trade Agreement - preferred by the UK government, the UK has expressly outlined a desire to retain regulatory governance and sovereignty.
- An exit on World Trade Organisation terms as outlined within the 2019 European Union Withdrawal Bill, in a trade relationship which would look similar to Australia's relationship with the EU, and resulting in duty and VAT payable on the same terms as the rest of the world, (other than countries exempted).
The Competition Market Authority (CMA) has published guidance on the functions of the CMA under the Withdrawal Agreement, outlining how an EU exit will affect the CMA's powers and processes for competition law enforcement, ('antitrust', including cartels), merger control, and consumer protection law enforcement during the Transition Period, towards the end of that period and after it ends.
European competition law derives from Article 101 to 109 Treaty on the Functioning of the European Union (TFEU) as well as a series of Regulations and Directives.
The four main areas are:
- Cartels, or control of collusion and other anti-competitive practices, under article 101 TFEU
- Market dominance, or preventing the abuse of firms' dominant market positions under 102 TFEU
- Mergers, control of proposed mergers, acquisitions and joint ventures involving companies that have a certain, defined amount of turnover in the EU, according to the European Union merger law.
- State aid, control of direct and indirect aid given by Member States of the European Union to companies under TFEU article 107.
Transition period During the transition period, EU law (with the exemption of certain provisions) applies in the UK until 31st December 2020. TFEU will continue to apply during this period, the European Union and the Court of Justice of the European Union will continue to have powers conferred upon them by EU law in relation to the UK and natural and legal persons residing in the UK, and the European Courts and CJEU will continue to have jurisdiction within the UK.
Legislation The UK has published two key pieces of primary legislation which give legal effect in UK law to an EU exit and to the Withdrawal Agreement.
- The European Union (Withdrawal) Act 2018 essentially repeals the European Communities Act 1972 with effect from Exit Day, and brings across certain EU legislation (retained EU legislation) to form part of domestic law.
- The European Union (Withdrawal Agreement) Act 2020 (referred to as the 'Withdrawal Agreement') Act 2020 postpones the effects of the Withdrawl Act until the end of the Transition period.
- Following receiving Royal Assent on 26 June 2018, and pursuant to section 3 of the Withdrawal Act (although subject to the exceptions contained in section 5 of the Withdrawal Act), directly effective EU legislation, including EU regulations, decisions and EU treaty articles, 23 so far as operative immediately before EU Exit, are brought across and form part of the UK’s domestic law on and after EU Exit.
- Following exit day, the UK Supreme Court and Scotland’s High Court of Justiciary 27 are not bound by any retained EU case law
- For further information on retained EU law consult - House of Commons Library – The European Union (Withdrawal) Bill: Retained EU law; and House of Commons Library – The status of ‘retained EU Law'.
Companies that believe that they may be involved in a transaction which may trigger the UK merger control thresholds in the EA02, should consider seeking legal advice.
An outstanding issue which remains to be resolved is whether judgements made in English courts will continue to be enforceable in other EU member states. There are a number of options being explored in relation to this issue, and as yet no definitive position.
Distribution Agreements distribution agreements are typically put into place when one party on its own buys goods from a manufacturer or reseller; the supplier; and resells them to customers.
The advantages of using a distributor rather than an agent include:
- In selling to a distributor, the supplier may be able to pass on a large degree of the risk associated with the products.
- A distributor should be more motivated to sell the stock it purchases from the supplier, since it takes on greater risk of failing to sell.
- A supplier will not generally be liable for any liability incurred as a result of the distributor’s activities, whereas the principal is liable for the acts of its agent.
- The appointment of a distributor will avoid the need for a supplier to have an established place of business within the distributor’s territory, which will reduce the supplier’s administrative costs, and may also be beneficial for tax reasons.
- The supplier will not need to monitor accounts with a number of customers, but only with the distributor.
- In the UK, no compensation or indemnity is payable to a distributor on termination of the distribution agreement.
The disadvantages include:
- A supplier has less control over the activities of a distributor than it would over its own agent. Therefore a distribution arrangement may not be suitable for products where the supplier or manufacturer requires contact with the ultimate customer (for example, tailor-made products), or where the supplier wishes to maintain tight control over the marketing and pricing of the products.
- Where the supplier appoints an exclusive distributor for a territory, its entire credit risk in respect of sales into that territory is concentrated on the distributor, rather than with each customer, as would be the case with an agency arrangement.
- A distribution agreement is far more likely to be at risk from competition law problems than an agency agreement.
Different distribution models include:
An exclusive distribution arrangement is one where a supplier agrees to sell the contract products only to the distributor within a certain defined territory and agrees not to appoint other distributors or sell the products directly to other customers within the territory.
Such an arrangement is frequently used to exploit a product within a new territory. The supplier appoints a distributor with local knowledge and usually an established business within the territory. The distributor in turn agrees to take on the high risk and costs associated with promoting a new product in return for the knowledge that, as exclusive distributor, it alone will benefit from its sales and promotion efforts. The supplier has the advantage of knowing that the distributor will be motivated to sell its products, particularly if a restriction is placed on the distributor prohibiting it from selling competing products. The supplier can use the threat of withdrawing the exclusivity if target sales are not met by the distributor within a specified period.
A “sole distribution agreement” is one whereby a supplier appoints a distributor as its only or sole distributor within a territory, but the supplier reserves the right to supply the products directly to end users. The meaning of the term should always be clarified within the agreement.
Such an arrangement combines the advantages of exclusive distribution for the distributor, with the advantage for the supplier that it is free to promote the products itself within the territory and to continue to deal with any customers it may have had in the territory before the appointment of the distributor. Such an agreement would contain similar provisions and restrictions to those in an exclusive arrangement, but it would afford more control by the supplier over the territory, should the distributor fail to meet the required minimum purchase targets.
The Vertical Restraints Guidelines (which relate to competition legislation) also refer to “dual distribution”, where a supplier of goods or services also acts as a distributor of those goods or services in competition with its independent distributors (who may or may not be sole distributors). Sole distribution is therefore a form of dual distribution.
A non-exclusive appointment gives the supplier complete freedom both to sell directly and to appoint other distributors within the territory. The terms of the appointment will be far less onerous on the distributor than those within an exclusive or sole appointment, as it will need to compete with the supplier and other distributors in terms of both pricing and promotion of the product
A supplier, in appointing a distributor as part of a selective distribution system, agrees to appoint additional distributors only if they meet certain criteria. This effectively limits the number of additional distributors who will be appointed within the territory. Selective Distribution Agreements restrict the number of authorised distributors and the possibilities of resale. The restriction of the number of dealers depends on selection criteria linked to the nature of the product. A difference to exclusive distribution is that the restriction on resale is not a restriction on active selling to a territory, but a restriction on sales to non-authorised distributors. Selective distribution arrangements are perceived as particularly suitable where the nature of the product requires an enhanced level of service or advice at the point of sale to the customer and where the supplier or manufacturer will be required to provide after-sales support. The practice of selective distribution is widely used by luxury brands to ensure that outlets which retail their goods meet a certain criteria and code of conduct, to best represent the image and values of the brand, safeguard creativity and innovation, and maintain a consistent standard and quality of service. Usually, as part of the arrangement, distributors must also agree only to sell on the products to end users or to other approved distributors. In this manner, the supplier retains tight control over the manner in which its products are marketed and it will generally have greater influence over the marketing of the product.
New or existing contract negotiations in light of Brexit
When entering into a new contract with a European entity, businesses are advised to:
- Conduct background research into the proposed territory to identify potential distributors with a good knowledge of the product type, and preferably a proven track record.
- Conduct due diligence to ensure that the distributor can fulfil the contract properly, which will include the purchase and maintenance of adequate stocks of the product, meeting promotional and advertising costs, and sometimes providing an after-sales service.
- Check the credit-worthiness of the distributor, particularly if the goods are provided on credit and the supplier may be wholly dependent on the distributor for payment in respect of sales in the relevant territory.
- Scrutinise the distributor's other commitments to ensure that they will not conflict with or hamper effective promotion and sales of the contract products. In this case, the distributors existing product range, and the presence of any competing products will be an important factor.
- Confirm the state of jurisdiction should arbitration arise.
- Confirm which body will be liable for any additional VAT and import/export duties
- Confirm which body will be liable for customs clearance procedures
- Confirm which body will be liable for compliance with governance procedures and adherence to a regulatory framework.
Online for e-commerce retailers, the opportunity to price goods in sterling and sell abroad may place may be advantageous, as they may having a competitive pricing comparison in comparison to domestic retailers in the EU, due to the fall of the value of sterling against the euro. This may be impacted in the long term by EU controls on sales to EU countries, dependant on the outcome of the trade negotiations and tariffs put in place. Substantive e-commerce retailers may wish to establish a base in the EU to sell products there.
Criminal Cartel Offence The cartel offence scheme is governed exclusively by UK domestic law and will not be directly affected by an EU exit.
VAT For UK businesses supplying services into the EU If the UK leaves the EU without a deal, the main VAT ‘place of supply’ rules will remain the same for UK businesses. The current ‘place of supply’ rules determine the country in which you need to register and account for VAT. These rules are developed in line with the international standards set out by the Organisation for Economic Co-operation and Development (OECD) and can be found on the OECD website.
For UK businesses supplying digital services to non-business customers in the EU, the ‘place of supply’ will continue to be where the customer resides. VAT on services will be due in the member state where your customer is resident.
Vertical agreements are mainly used within the distribution of intermediate and final goods and services, and franchises. The objective of competition law within the UK has been the protection of the single market, using undistorted competition to create a level playing field, and the removal of any artificial barriers which threaten the foundation of that system.
A legacy of the UK's participation within the European Union has been a strong influence on encouraging a free market. The UK has promoted a liberal, pro-competition stance to national and EU policy, Whilst other member states such as France, during the Lisbon treaty dialogue, have endorsed protectionism and intervention, the UK is likely to stay aligned to the EU within competition law, unless the EU adopts protectionist measures. In this scenario, it could be anticipated that the UK would be forced to adopt a comparable stance.
There are 2 systems of competition law;
- Domestic competition law falls under the Competition Act 1998, and European Competition Law both are drafted in almost identical terms apart from the territorial scope.
- For companies trading into Europe, agreements which have an impact on trade between member nations will continue to be governed by European competition law, even if the company is based outside of the EU. The EU authorities have notably been prepare to instigate enforcement action against companies which fall outside of the EU.
Distribution agreements are brought into compliance with competition law by drafting in terms of a 'block exemption', which enables companies who own less than 30% of the market share to integrate vertical restraints such as quantity forcing, or indirect resale price management (RPM) practices, for instance; fixing the distribution margin; fixing the maximum level of discount the distributor can grant from a prescribed price level; making the grant of rebates or reimbursement of promotional costs by the supplier subject to the observance of a given price level within the EU; linking the prescribed resale price to the resale prices of competitors; warnings, penalties, delay or suspension of deliveries or contract terminations in relation to observance of given price level. The integration of optimising vertical restraints examining price and quantity across the manufacturing and distribution process may be helpful in improving profitability and encouraging non-price competition, improved quality of service and the negation of "free riding". Vertical restraints may also be used to recoup investments, either through "non-compete" obligations or "quantity forcing" for the duration which it takes for the investor to recoup the investment.
Exemptions listed at European level state that certain types of agreements do not breach competition law unless they contain certain hardcore restrictions.
Under the domestic competition law, if an agreement falls within the scope of an EU exemption, it will also be exempt within the UK. The EU Withdrawal Bill will take into account exemptions which exist as of the date of Brexit.
These will continue to provide protection both under the Competition Act 1998, and for companies that trade with Europe and must take account of European Law.
The EU are in consultation with stakeholders including The European Cultural and Creative Industries Alliance (ECCIA) in the discussion of any amendments to be made to the Vertical Block Exemption Rule which expires in 2022. It is unlikely that the UK will continue with the comprehensive integration of the EC block exemptions rules following expiry in 2022. This are currently being reviewed to include new precedents set, particularly in terms of precedents set in new technology, ESG policy, and the integration of the digital and e-commerce market.