E-contrast: Brexit - Litigation Risk for the Food and Beverage Industry?

11/03/2019

Brexit - Litigation Risk for the Food and Beverage Industry?

AUTHOR(S): Michael Finn Partner – Dublin michael.finn@matheson.com

PRACTICE AREA GROUP: Commercial Litigation and Dispute Resolution, Food and Beverage

The food and beverage industry, Ireland’s largest indigenous sector, is currently facing into an unprecedented challenge with the UK’s imminent departure from the EU. The UK market is by far the most important export market for this sector with an export value of €4.4 billion (1). The precise impact Brexit will have, and the opportunities it may present, is unclear..

The withdrawal agreement (2) envisages specific provisions for the food and beverage industry at the time of the UK’s exit from the EU, but this, of course, is subject to that agreement being adopted.

As is well publicised, Ireland’s food and beverage industry has been contingency planning for some time in the event that the withdrawal agreement is not adopted. Notwithstanding these contingency plans, there is an increased litigation and regulatory risk for this sector as a direct result of Brexit. For example, the sector may be facing an increased risk of contractual disputes between supply chain partners or logistics service providers as a result of delays at custom points. For those in the industry whose contingency plans involve the stockpiling of certain essential goods or materials, there is an increased risk of disputes with insurers (aside from the increased exposure to theft or fraud) in the event that insurance cover is not increased to take account of the additional stock and there is a loss. Directors and officers should also bear in mind that they are at increased risk of potential litigation from shareholders stemming from the level of contingency planning for Brexit.

There is also exposure to potential disputes or regulatory investigations over compliance with the post-Brexit regulatory requirements in the UK.

What happens in the event of no-deal?

The UK government has published a number of technical notices to UK food and beverage producers which provide guidance in the event of a “no-deal” scenario. While these notices are addressed to UK producers, they do however offer some guidance for Irish producers.

The key areas focused on in these notices are:

geographical indications (“GI”);
export and import of animal products;
labelling; and
tariffs and customs duties.

A GI is a sign or labelling placed on products that have a specific geographical origin and as a result possess certain qualities, characteristics, or reputation attributable to that particular place. A notice published on 5 February 2019 (3) indicates that the UK will have its own GI scheme that will mirror that in the EU, ie using the same classes provided by the EU scheme. UK producers will have three years to comply with the UK GI logo scheme. The notice states that Irish whiskey, cream and poteen produced in Ireland will have EU and UK GI protection and will not be required to apply for further protection. UK producers will have to reapply to the European Commission in order to regain EU protection and the right to use the EU GI logo.

Export and Import of Animal Products

The UK Government has stated that in the event of a “no-deal” withdrawal, the health and identification marks required on the labelling of animal products produced in the UK must be updated, removing EU references (4).

Labelling

Unless the EU and the UK reach an agreements in advance of 29 March 2019 whereby both recognise each other’s standards, the EU emblem must be removed from products produced in the UK, and the EU organic logo must be removed on organic products produced in the UK. References will also need to be removed from all food and beverage labels, including products where some ingredients are made in EU countries (5).

The food and beverage industry will also have to consider any UK legislation that is enacted in relation to labelling and whether current EU labels would be compliant. If the UK enacts legislation that is not in compliance with EU laws, and further if current EU compliant labels are prohibited by such legislation, producers will have to modify labelling of products being sold in the UK market.

Any product that have been placed in the UK market on or before 29 March 2019 will be acceptable to be sold until those stocks are exhausted, regardless of whether the labelling complied with UK legislation. The European Commission has published guidance in relation to the concept of goods placed on the market prior to the withdrawal date (6). This publication also offers guidance in relation to considering whether goods will be subject to the payment of imports and export tariffs and duties.

Tariffs & Custom Duties

The UK Government also states (7) that customs and excise duties, and declarations that apply currently between the UK and non-EU countries will cease to apply between the UK and the EU from 30 March 2019. Trade will therefore be on the default World Trade Organisation terms, which are often significant for food and drinks products. The WTO's "most favoured nation" rule provides that the UK cannot simply lower these tariffs for the EU, or any other specific countries, unless it agrees a trade deal with that country. For UK food and beverage producers exporting to the EU, the tariffs will be on average 35.9% on dairy products, 15.5% on animal products, and 21.1% on sugars and confectionary. Lower tariff rates are set on cereals, fish, and fruit and vegetables (8).

There will be further logistical difficulties in the event of a “no-deal” Brexit, when exports and imports will be required to cross border control points and deal with further administrative burdens. On top of the payment of VAT, customs and tariffs, and paperwork requirements, product checks such as veterinary checks will have to be carried out. It is also possible that Irish cargo travelling through the UK by land, on the way to the EU, will have to go through two custom controls, when entering the UK and when leaving the UK to enter the EU. This will greatly increase the cost and time for importing and exporting food and drink produce, especially as such delays will impact the short shelf life of these products.

What happens in the event of a negotiated exit?

In the event that the UK does ratify a withdrawal agreement prior to 29 March 2019, there is likely to be a transition period during which the laws of the EU will still apply to the UK. This would likely be the best possible outcome for the industry. This transition period may be in place until 31 December 2020, and may be extended further. During this period EU law will apply to and in the UK. Further, if a backstop is agreed upon, a single customs territory between the EU and the UK will be created during the transition period, which shall apply until an agreement has been reached following 31 December 2020. If no such agreement can be reached, the provisions set out in the withdrawal agreement shall apply following the termination of the transition period.

For the food and beverage industry this means that the current status quo will be maintained, and it will not be until 2021 when changes will be seen in relation to food and drink legislation and labelling, and customs and excise duties.

The Irish Government has published a contingency plan in the event of a “no-deal” Brexit, in the form of a Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019, and a Brexit Contingency Action Plan (9). The Bill provides for amendments to existing legislation that will be required in the event of a “no-deal” Brexit. The contingency plan offers some guidance to Irish citizens and industries, and sets out steps being taken by the Irish Government that are relevant to the food and drinks industry.

For example, the Government is increasing staffing and ICT systems in Revenue and at ports and airports, including veterinary staff, to ensure that any necessary infrastructure will be in place and operational by 29 March 2019 in order to reduce delays expected as a result of import and export controls. The Government is also considering the disruption to the so-called land bridge that is used by Irish importers and exporters to transport goods through the UK to international markets, and locating new routes that could be used following Brexit. Further, the EU has confirmed that the UK can join the Common Transit Convention. This reduces the requirement for additional customs checks for goods passing through one country on the way to their final destination in another. This will hopefully enable Irish carriers to continue using the UK as a route to continental Europe, and offers some certainty for carriers focused on this route.

Summary

Whether the UK will leave the EU on 29 March 2019 and be it with or without a withdrawal agreement, or whether the Brexit process will be extended, remains uncertain. However, it is clear that the impact of any of these scenarios will be felt by the Food and Beverage industry. This will be seen in all aspects of production and trade from ingredients, labelling, distribution and customs checks, insurance and the payment of tariffs and excise duties. Certainly, the ratification of a withdrawal agreement would provide certainty. However, the food and beverage industry should be prepared in either event, to adjust current trading patterns, plan for increased costs, consider potential UK legislation regarding packaging and labelling, and also potential litigation as a result.

This article was co-authored by Senior Associate, Aoife McCluskey.

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