Brexit, synonymous with uncertainty, leaves a bevy of concerns for businesses when it comes to commercial contracts. What you need is surefire way to deal with any risk or uncertainty that might arise. This is it.
On March 29, 2017 the UK government served formal notice under Article 50 of the Treaty on European Union to terminate the UK’s membership in the EU. A two-year time clock has been started as the countdown to March 2019 begins, when the UK hopes a freshly-minted EU/UK trade agreement is set to be finalized. This means if you’re a multinational company who does business in the UK or EU, your time clock just started too.
Brexit creates a range of uncertainties (what will Britain’s future relationship be with the EU, with non-EE countries? What will be the impacts?) and means companies will have to take a long look at their contracts. This will likely consists of reviewing: terms—can you or do you shorten them so they’re more easily refreshed; exits—can you do so easily if the impact of Brexit is particularly horrible?; and pricing mechanisms, which are potentially impacted by currency volatility.
Maybe you’ll have just one or two items; maybe you’ll have a whole sampler. Whatever your experience, when it comes to managing risk and uncertainty in-house counsel shines, making them pivotal to businesses successful identification and implementation of changes regarding Brexit regulations, trade tariffs, and the like.
The following three steps detail how Legal teams can use contracts and contract management to prepare for Brexit.
Step 1. Perform an audit.
If you have a large number of contracts, commercial contracts especially, particularly with entities within the EU, performing an audit of your contracts is key to understanding the effects that Brexit will have on your rights and obligations under these agreements. Not to mention an audit can help you save money in the long run by reducing risk and improving processes and controls. Planning correctly and addressing key areas for concern (here are 5) not only helps guarantee a more successful contract audit, but it’ll speed up the overall audit process.
Step 2. Assess and create a strategy
Once you’re clear on your current contract situation, you’ll need to decide what to do going forward. The following points will not only serve you during the audit, but will also help you negotiate new contracts post Brexit.
- Increased trade barriers
- Trade barriers (especially between the Uk and EU) will likely increase, creating a trickle effect of increased costs when trading in Europe. What will the commercial impact be? Do you need to revisit any of these agreements? When negotiating future agreements consider these costs when assessing which prices should include or exclude new taxes, duties, or similar items which might come about after Brexit takes effect.
- Monitoring currency fluctuations
- With the UK exit of the EU, a certain uncertainty will be currency fluctuations which could have a significant effect on your existing commercial agreements. Businesses may want to more closely monitor the value of the pound, and when negotiating new agreements consider how to allocate the risk of future changes in currency rates, especially where the pound is considered.
- Grounds for termination
- Do you have grounds to terminate an existing contract? It will depend on the specific facts and particular terms. You could seek termination on material adverse change or force majeure clauses as grounds, which will likely come down to interpretation (more about that and contract clarity in this fun post). Or possibly, you could argue that a contract has become thwarted as a result of Brexit. Again, that would depend on the specifics of a particular case.
- Solving disputes
- Brexit may affect disputes over contracts between a party based in the UK and a party in another EU Member State, or where the subject matter of the contract has some connection to a Member State. EU regulations impact on the choice of forum, recognition, and enforcement of judgments, service of legal process and the choice of governing law of contracts. Britain’s participation in these arrangements is likely to be affected by Brexit.
- Existing disputes with UK/EU elements are unlikely to be affected in the short to medium term as existing EU laws will continue to apply. In the longer term however, Brexit may affect claims based on EU laws and impact the rules of service of legal process and the rights of enforcement of judgments between the UK and other EU Member States.
- Going forward, for new contracts, there may be changes regarding governing law and dispute resolution mechanisms. Some parties are opting for arbitration clauses on the basis that enforcement is through the New York Convention of 1958 rather than EU regulations. There may also be edits to the drafting of new contracts due to potential new terms of trade, i.e., to confirm which party will be responsible for the payment of any additional duties or tariffs.
- Employment implications
- The rights of individuals to continue to live and work in the UK following Brexit are unclear, and the end to the free movement of EU nationals to the UK, given as an objective in negotiations by the Prime Minister, may also make it more difficult for US companies with operations throughout the EU to relocate employees from other EU Member States to the UK and vice versa. Meaning, US companies with nationals from other EU Member States working in the UK need to consider alternative options.
- Performing an audit (see step 1) of your workforce will help you identify individuals who may be affected, including those who may be able to apply for citizenship or permanent residence and to target communications to employees who may be most affected. Plans for recruitment and secondment or contract staff may also be impacted.
Step 3. Implement and guarantee compliance
President Trump has promised the rapid conclusion of a trade agreement with the UK to help the UK Government make Brexit a “great success.” He told The Times, “We’re going to work very hard to get it done quickly and done properly. Good for both sides.” However, the terms of any deal still need to be negotiated. And any negotiation is likely to require action and some change management on your part, especially where contracts and contract management is concerned.
New processes, rules, and regulations regarding Brexit compliance may affect your entire organization or just specific departments. Either way, you’ll need to have processes in place to quickly communicate any changes and update all necessary departments to make sure everyone is on the same page and all appropriate clauses, terms, etc. are on each contract.
Contract management solutions do just that. Instead of creating massive spreadsheets, calling individual vendors to track down contracts, and digging through hundreds, if not hundreds of thousands of documents, cloud-based contract management solutions bring every contract online where it can be quickly searched, edited, and shared with all the right people. There’s no better time than the present to bring your contract management into the 21st century.