Brexit update: Canada-UK trading terms, directors duties & trading under WTO rules

By December 1, 2020News

Brexit and the Canada-UK Trade Continuity Agreement

On 21st November 2020, just prior to the G-20 Summit scheduled to start that day, the UK and Canada announced the agreement in principle of a Canada–UK Trade Continuity Agreement which would take effect from the end of the post-Brexit UK-EU transition period due to occur on 31st December 2020. The new Trade Continuity Agreement would, as between Canada and the UK, replace the Canada-EU Trade Agreement (CETA) and, so far as was publicly known as at the date of the announcement, would do so in more or less the same trade terms so that UK and Canadian businesses and consumers would continue to benefit bilaterally from the landmark free trade provisions of CETA.

According to the public announcement, the new Canada-UK Trade Continuity Agreement would extend the elimination of tariffs on 98% of goods exported between the two countries and set “the stage for negotiations toward a permanent and more ambitious deal in the new year”. In that sense, the new Trade Continuity Agreement could be described as an “interim agreement” whereas, according to a press release from the UK Government, the more comprehensive agreement to be negotiated in 2021 could include the potential to go further in areas like digital trade, the environment and women’s economic empowerment.

The new Trade Continuity Agreement remains subject to finalisation of the legal text and the successful completion of parliamentary approval and/or ratification procedures in each country, as appropriate, but the atmosphere of goodwill between the two countries suggests that these formalities may be easy to conclude.

Insofar as the UK has set itself the ambition of having a “Canada-style” free trade agreement with the EU itself, perhaps the new Canada-UK Free Trade Continuity Agreement will act as an encouragement for the UK and the EU eventually to reach a generous free trade and new relationship agreement with each other.

Brexit and UK Company Directors’ Duties

It may be worth going back to general principles when considering the duties of directors of UK companies in relation to Brexit.

UK company directors have a non-exclusive list of general statutory duties under sections 171 – 178 of the UK Companies Act 2006, which they would need to take into account when planning for the life of their companies after the end of the post-Brexit transition period. These duties are:-

>>> the duty to act within their powers;

>>> the duty to promote the success of their companies;

>>> the duty to exercise independent judgment ;

>>> the duty to exercise reasonable care, skill and diligence;

>>> the duty to avoid conflicts of interest;

>>> the duty not to accept benefits from third parties; and

>>> the duty to declare interests in proposed transactions or arrangements.

The duty to exercise “reasonable care, skill and diligence”, in particular, requires a director of a UK company to apply:-

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and

(b) the general knowledge, skill and experience that the director has.”   ( Section 174 Companies Act 2006).

Translating these duties into what directors of a UK company need to do in practice when confronted with the exigencies of post-Brexit planning may depend on many factors, including the requirements of the business or industry sector in which their company operates, but the following checklist points should be borne in mind when trading in or with the EU –

  1. Should a subsidiary be set up in the EU member state(s) concerned in order, for instance, to secure “freedom of establishment” within the EU generally and/or the assurance that the principle of limited liability for so-called limited liability companies will be respected by EU countries where the “real seat” theory of incorporation applies (meaning in effect that a limited liability company which is managed from a particular jurisdiction should really be incorporated in that jurisdiction in order to ensure, so far as possible, that its limited liability will be respected by the courts of that jurisdiction)?
  2. Updating terms and conditions of contract (if necessary) in the context of the cross-border supply of goods and services and assessing and securing supply chains, particularly in the context of manufacturing and distribution industries and businesses;
  3. Regulatory compliance issues (such as complying with product marking systems, geographical origin requirements and product liability rules);
  4. Complying with rules on the cross-border transfer of personal data, a particular challenge as the UK will be a third country for the purposes of the EU’s General Data Protection Regulation ((EU) 2016/679) after the end of the post-Brexit transition period; and
  5.  General commercial contract issues such as the allocation of liability between contractual parties for increased costs due to new tariff and non-tariff requirements.

The responsibility for post-Brexit planning ultimately rests with the directors of most UK companies and they may well have to demonstrate in due course that they have complied with their duties in that regard.

Brexit and Trading under World Trade Organisation (WTO) Rules

On 25th November 2020, the UK’s Department of International Trade (DIT) published updated UK Government guidance on how to trade with other countries from 1st January 2021 if there is no UK trade agreement with the country concerned (whether an EU or a non-EU country).

The guidance note, which is entitled “Trading under WTO rules”, starts with the proposition that “from 1 January 2021, if no trade agreement exists between the UK and another country, trade with that country will take place under World Trade Organisation (WTO) rules”.

With a permitted exception under WTO rules for some developing countries, which are eligible to get trade preferences through the UK Generalised Scheme of Preferences, the guidance note points out that WTO rules state that, in accordance with the principle of Most Favoured Nation (MFN) treatment, the same trading terms must be applied to all WTO members, unless there is a trade agreement in place between the relevant WTO members. “MFN “ means, according to the guidance note, “that the UK cannot offer better trading terms to one country and not another, unless through a trading agreement”. China, India, Brazil and Saudi Arabia are given as examples of countries with which the UK currently trades on WTO terms.

The guidance note gives a non–exhaustive list of some of the issues that businesses will have to take into account when trading on WTO terms and these include:-

>>> Customs procedures and declarations;

>>> Goods in transit – where the MFN tariff rate is generally determined by the country of destination of the goods concerned (being the UK if the goods are imported into the UK);

>>> Establishing the origin of goods for tariff purposes;

>>>  Non-preferential rules of origin – these are normally set by the importer country under WTO rules;

>>> Paying tariffs on imports into the UK;

>>> Paying tariffs on exports from the UK;

>>>  Continuing to comply with regulatory requirements relating to the placing of goods in the market of the importer country concerned;

>>> Protecting intellectual property rights (including rights relating to geographical implications);

>>>  Changes to trade in services – if there is no trade agreement in place between the UK and the host country for the supply of the services concerned, then the supply of those services by way of trade, will, according to the guidance note, be on the terms set out in the host country’s WTO General Agreement on Trade in Services (GATS). These terms are set out in the relevant schedule of specific commitments and list of Article II (MFN) exemptions for the host country concerned;

>>>  Getting business visas;

>>>  Working in the UK;

>>>  Recognition of professional qualifications;

>>>  Government procurement contracts; and

>>>  Other specific issues such as trading with Northern Ireland and making use of freight forwarders.

There is a lot to digest in understanding the new post—Brexit transition period trading arrangements (deal or no deal) and the UK Government is encouraging businesses to take expert advice, where necessary.

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