Dan Dowen, Commercial Contracts Senior Associate Solicitor at Berry Smith Lawyers, considers 3 points that businesses should consider when assessing the potential impact of Brexit on their commercial contracts
Brexit will likely, in some form, impact the commercial contracts of many business across the nation. The simple question is, to what extent? The answer will depend on several variables and, to truly understand the full impact that Brexit will have, businesses should be looking at individual transactions and associated contracts, on a case-by-case basis.
- Currency and Pricing
Potential fluctuations in exchange rates could have a significant effect on your commercial contracts. Of course, we have seen some alarming changes since the Brexit vote first took place in 2016. The vote itself resulted in the pound dropping lower in value against the dollar than at any point in the past 31 years. Although the pound has since made some recovery, uncertainty looms over the potential impact Brexit could have on currency.
Fluctuations in currency rates are common across international trade and, should a contract be of low value, it is unlikely that such fluctuations will have a significant impact. However, many of my clients are party to international contracts worth hundreds of thousands of pounds, whereby a small change in a currency rate could come at a significant cost to them.
Therefore, when you review existing contracts, consider what contractual mechanisms have been included in your contracts to address currency exchange fluctuations. Have you any scope to vary the price or share the burden / risk of volatile exchange rates? Increasingly since Brexit, more organisations have found manufacturing, production and delivery costs have increased. Again, consider those contractual mechanisms at your disposal which could mitigate the effect of such changes and hopefully offer your business some form of protection. Does your contract allow you to automatically increase prices as and when necessary? Are you fixed in for the duration of the contract? Or does it offer you some form of half-way house in terms of an annual price review? These are some of the important questions to consider.
It is also important to note that businesses should not solely focus on customer contracts. Consider the entire supply chain – you may only supply products in the UK and therefore feel quite comfortable with potential currency / pricing fluctuations, but have you considered where your products or raw materials come from? Do you have suppliers who may be able to increase their sale price? Again, what contractual mechanisms do you have in place? Only once you have asked yourself these types of questions will you be able to fully understand the true impact on your contracts.
- Delivery timeframes, deadlines and delays
We have already seen images in the news of the many miles of queuing trucks at various ports around the UK which is likely to lead to delays in the provision of goods.
This is because any business wishing to import / export goods to and from the UK need to comply with full customs procedures that require additional declarations, documents, guarantees and paperwork to be completed.
Businesses should therefore ensure processes are in place to meet compliance requirements on time, whilst taking into account the delays that increased border formalities could have on its supply chains.
From a practical perspective, such delays could also have an impact on the quality of goods on arrival due a shortened shelf-life. This could expose suppliers to the risk or goods being rejected and needing to be replaced which again may lead to additional costs. It may even lead to complaints, negative publicity and potential financial penalties.
Therefore, consider those contractual commitments, asking yourself the following as a starting point:
- Have you agreed a fixed delivery date?
- Are delivery dates estimates only?
- Have I agreed to any penalties for delayed / late deliveries?
Once you identify your responsibilities and potential points of exposure, you will then be able to take pro-active action with your customers in terms of extending delivery dates and renegotiating delivery terms.
The UK is no longer part of the European Union, but it is still a part of Europe.
This may not appear on the face of it to be a major factor, but certain contracts do come with some form of territorial exclusiveness and the fact that the UK has now left the EU may significantly impact how you can perform your contract.
Check whether definitions of ‘Territory’ refers to the ‘European Union’. If so, does it list the members, or does it state those members at the time the contract is entered into or as updated from time to time. It is essential that you understand whether the UK still falls within the territorial scope as they may not be an automatic right of amendment.
A change in the definition of territory could also create restrictions on the freedom of movement which may lead to additional costs and delays if staff, labour or contractors are not able to move as freely between borders. It is critical to evaluate the effect this may have on meeting deadlines under any supply of goods contracts and assess the impact it may have on your ability to supply services under any services contract.
What is clear, from Brexit, is that to truly understand its impact on your commercial arrangements, an internal audit of your commercial contracts should be undertaken. Once you have identified the potential risk and liability, you will then be able to take proactive action to protect your business. We, at Berry Smith, are able to assist and advise on any commercial contracts that you may have in place.
For further information or assistance, please contact Dan Dowen at firstname.lastname@example.org or alternatively call 02920 345 511 and ask for the commercial team.