Post-Brexit electric vehicle rules present disputes risk

Andrew Herring, Will Carr and Raam Hargun of Pinsent Masons, who specialise in dispute resolution in the sector, said that the new tariffs would put further pressure on automotive businesses at a time of significant cost and pricing constraints.

From 1 January 2024, at least 45% of electric vehicles parts by value must originate from either the UK or EU if manufacturers of those vehicles are to avoid a 10% tariff when exporting the vehicles from the UK to the EU, or vice-versa. The current threshold, provided for under the EU-UK Trade and Cooperation Agreement (TCA), is 40%. It is due to rise to 55% in 2027.

The cost of batteries and fact a large proportion of the components are currently sourced from Asia has prompted senior figures from within the automotive industry to warn of the challenges they will face in meeting the new 45% threshold, the potential for price rises, and of the risk that some car plants may be unviable to operate if tariffs are imposed.

Governments across Europe are seeking to scale-up local battery production in response, but there are growing callsfrom industry for a delay to the revised rules for 2024 taking effect. Mike Hawes, chief executive of UK automotive industry association SMMT, said the prospect of consumer price hikes runs contrary to the need to encourage uptake of electric vehicles to achieve climate change targets.

Andrew Herring said: “The introduction of these proposed tariffs will undoubtedly create additional pressure on this sector, significantly increasing the risk of contractual disputes within supply chains.  The automotive sector has faced significant pressure on costs and prices in recent years and it is no surprise that there is vocal opposition from companies in both the UK and EU member states.”

“Disputes are particularly likely over pricing and contract termination terms. Contracting parties will need to balance the strict legal interpretation of contracts with competing commercial factors including supply chain resilience and fair pricing to avoid the escalation of disputes. This is also likely to require close attention to be given to the termination provisions of existing contracts. The outcome of such contract negotiations must be documented properly to insulate supply chains from further future issues and disagreements,” he said.

“In the absence of agreement, it is possible that drastic commercial decisions may need to be taken to relocate production lines to other jurisdictions. In that worst case scenario, the undoubted disruption this would cause would not be in the best interests of any party within the supply chain,” Herring said.