UK businesses battling the COVID-19 pandemic may be forgiven for having neglected Brexit over the spring. But Brexit planning should now resume its place at the top of board agendas: the extension deadline has expired, the negotiations for a deal are creeping along slowly and there is every sign that a no-deal Brexit will be conducted amidst quarantines, local lockdowns and a decimated economy.
This blog examines ways in which companies may need to adjust their Brexit planning to take account of the disruption caused by COVID-19 and the possibility of a second wave.
Certain sectors, like hospitality and agriculture, have made no secret of their need to recruit from overseas to fill positions vacated by departing EU workers. In addition to navigating the UK’s immigration rules, businesses will need to deal with quarantine restrictions on incoming workers or even a ban on arrivals from particular countries. Helping recruits move residence cross-border will present a greater challenge than previously. Businesses wanting to encourage key EU workers to apply for immigration status should factor into their planning COVID-related administrative delays. On the other hand, the probable increase in domestic unemployment may create a larger labour pool in the UK.
EU business trips will need careful planning. UK citizens will no longer be covered by the European Health Insurance card from 31 December so will need to check their travel insurance will entitle them to care, including testing for the virus, when travelling. There is also the risk of local lockdowns, and track and trace requirements preventing travellers from returning home. Getting trapped overseas (either in the EU or elsewhere) for an unknown period is not only distressing and inconvenient but could be disruptive to business and comes with the added complication of overstaying a visa in the case of longer trips.
It is likely that there will be some border checks and tariffs on goods traded between the UK and EU next year. The UK government has said that it will delay full checks on imports from the EU. However, the EU is not expected to reciprocate. The UK government has emphasised that UK businesses must prepare now, or risk major queues and supply chain disruption. However, social distancing and pressure on resources at the border will reduce even further any leeway that may be afforded to a carrier whose paperwork is not in order.
The possibility that customs checks will delay hauliers has been widely mooted. The risk is greater in a socially distanced environment. There is also the practical difficulty that, if there is a second wave, drivers may be unable to cross-borders (or face quarantine if they do). We may see more multi-modal carriage, where goods are put on a ferry in the UK and picked up in France, rather than drivers travelling with the freight. At the start of the COVID-19 outbreak we watched as the ‘just in time’ supply chains prevalent in the UK started collapsing in a preview of what Brexit might entail. The risks of COVID-19 supply chain pressure combined with Brexit make this more likely and more complicated. The solutions remain the same, additional warehousing, stockpiling and making supply and distribution more localised. However, the competition for these solutions will increase with COVID-19 and many existing Brexit stockpiles have already been used to smooth over COVID-19 related shortages.
Contractual and regulatory relationships
Government guidance in May emphasised the importance of contract parties working together constructively in the wider national interest to preserve the UK economy against the pandemic. However, the reason we have a legal framework for contracting is precisely because in difficult times parties turn to the courts for resolution. Court claims are predicted to increase, even before Brexit-related challenges add pressure to already strained commercial relationships. Figures from the courts suggest that they are adapting to providing justice remotely, but settling matters, particularly global problems, early and quickly is still a worthy strategy.
Businesses should review existing contractual relationships and how they manage those relationships. A business will often reserve the right to source from a third party in the event of delay, or to convert an exclusive relationship into a non-exclusive one, but often don’t use that right. They should do. Similarly, a customer should review any existing contractual governance and audit provisions to see how its supplier is managing COVID-19 and Brexit-related risks. Insist on remedial steps if necessary, rather than just keeping the contract in the bottom drawer.
Customers should also take extra care to interrogate prices: a low price looks attractive but it won’t be worth retendering later in the year. For their part, suppliers must pay more attention than ever to getting their pricing right and be wary of cutting their prices too far as a response to straitened economic conditions. Racing to the bottom is unlikely to be a sustainable strategy.
It will be important to understand how to exit failing relationships (as opposed to, for example, just relying on a standard force majeure clause) and, at the same time, to consider whether more flexibility can be introduced, for example around price adjustments and delivery times. Above all there needs to be clarity around identification and allocation of risk – with the preparation of a detailed risk register as a starting point – and an effective practical mechanism for ongoing communication between business partners.
Unfortunately, the pandemic will cause the insolvency of businesses of all shapes, sizes and sectors. This is likely to happen at a time when the UK-EU cross-border insolvency regime is in a state of change.
From 31 December, the co-ordination mechanisms in the Recast Insolvency Regulation ((EU) 2015/848) will not apply between the EU and the UK to insolvency proceedings opened after that date. This means that UK insolvency proceedings will not benefit from automatic recognition in the EU and vice versa. Cross-border insolvencies will therefore be likely to become more expensive, lengthy and complex, particularly if multiple EU jurisdictions are involved. Where an insolvent company has assets in the UK and at least one EU jurisdiction, the process of realising and sharing out those assets among creditors will need to be agreed via proceedings in the courts of affected jurisdictions. It was expected that Brexit would lead to a period of economic turmoil and that some insolvencies were likely to follow; however, as a result of COVID-19 we are already seeing a number of insolvencies and we can expect this to increase. The costs and therefore inefficiency of those insolvency proceedings in paying off debts will be compounded by Brexit. Since COVID-19 more companies will now fall into this cross-border gap in the insolvency regime than was expected.
Finally, businesses should ask whether their legal teams will have the necessary capacity to meet the challenges presented by COVID-19 and Brexit. They may be dealing with new regulators, managing changes in legislation, and simple firefighting, possibly at a reduced headcount.