In negotiations now? Here's how one organization is tackling the emerging risks. Though we can’t know how the Brexit story will unfold, this approach will give you flexibility to navigate uncertain waters.
In this article Paul Carter Hemlin looks at the areas most impacted, and contracting risks that need to be considered, aimed at protecting contracts in the short-medium term, while keeping longer-term options open until a post-Brexit “steady state” is established.
Volatility, uncertainty, complexity, ambiguity
The immediate aftermath of Brexit was dramatic, with currency fluctuations, political turmoil, and unknown implications for global trade at that stage that were felt worldwide. What was playing out in front of us effectively had all the impact of a Force Majeure event.
Britain has yet to trigger Article 50, a small section of the Treaty of Lisbon1 which details what happens when a member leaves, and the subsequent exit from the EU can take up to two years. It is not possible to predict what deals Britain will then be able to negotiate with the EU and its global trading partners.
For contracting, the one thing Brexit should teach us is that building provisions into our agreements that deal with the volatility, uncertainty complexity and ambiguity (VUCA) that inevitably follow a Force Majeure event is the best way to go for all partners if we’re looking to withstand shocks of this kind of scale in future.
So … eliminate all problems that can be managed
I am currently negotiating and drafting a large 10-year outsourcing contract, and Brexit will affect it at some point during its lifecycle. Our client called an emergency meeting to discuss the Brexit effect. With much conjecture, few facts, and without the benefit of a crystal ball, it was impossible to predict. However we analyzed every aspect of the deal including personnel, service locations, economics, supply-chain and liability, and made amendments to various sections of the contract, to future-proof (…or Brexit-proof) the agreement as best we could.
This gave me the idea of drafting this article. Over the last 20 years I have witnessed what appeared to be the smallest risk derail a major project on more than one occasion. If we act now to Brexit-proof our contracts as far as possible, it should hopefully help to eliminate problems that can realistically be managed. For the contract management profession, taking this kind of proactive approach could be a real opportunity to stand out as a business leader.
Review all your contracts: key areas to look out for
Clearly Brexit will affect international contracts and offshoring, such as large IT outsourcing agreements, but if you rely on free movement of people, goods, services and/or capital to sell services/products to your customers or within your supply chain, Brexit will affect your business. With this in mind therefore you should therefore review all your contracts. What follows is an overview of the areas that are most likely to be impacted.
Foreign exchange rates
Exchange rates have always been a risk - though not always negative in terms of competitiveness of exports. However the degree of risk has increased significantly following the referendum.
A UK-based client we have just advised does not work overseas, however some of their materials and plant suppliers are from non-EU countries. A solution to this could be to seek payment from their customers in more than one currency.
Suppliers need to advise their customers on how their solution is being delivered and the impact on price; a customer may agree to share a risk (that may never arise) in order to secure a lower price at the time of contract.
One of Contract Management Direct’s largest clients is based in Australia, where over the last four years the Australian dollar to pound sterling exchange rate has been a roller-coaster ride. As neither party is seeking to gain from this situation, we have agreed to review the exchange rate every quarter and amend it where necessary for the following quarter. Over a long-term contract we both believed this was the fairest way to manage this risk, and it has eliminated one party feeling they have lost out. I would recommend having this kind of open discussion with your trading partners sooner rather than later if your existing contract could be impacted.
The cost of money
Sterling has already plummeted to lows we have not witnessed for a generation, and this will make any importing into the UK much more expensive, though the flip side of this is that UK exports will become more competitive. Equipment ranging from IT servers to construction plant will cost more and the cost of borrowing is likely to become more expensive with the UK’s recently lowered credit rating post the referendum.
When we help our larger clients take large complex deals through governance, typically their biggest concern on their risk registers is data protection (DP). DP breaches can lead to instant termination of a contract, unlimited liability and significant reputational damage. DP clauses have grown in length and severity over the last three years, and this trend shows no sign of diminishing. Where applicable, contracts in the UK and Europe will already contain clauses relating to the processing of personal data outside the European Economic Area (EEA). These may be the EU model clauses, where restrictions are in place, various permissions are required and will usually necessitate the anonymizing of personal details.
Post-Brexit international contracts where such data is to be processed in the UK will need to ensure compliance with provisions for the UK being outside the EU, though the EU’s General Data Protection Regulation (GDPR) which will apply to all businesses operating in Europe, will apply to many UK businesses who have presence in Europe irrespective of Brexit. The UK’s DP act is in line with Europe and will remain in place for the next couple of years.
While the existing model clauses may be applicable, the cost impact of this has to be recognized and those doing such deals now need to decide on how to manage this in the longer-term in their contracts.
For organizations in the US that rely on the EU-US Privacy Shield (the replacement for the Safe Harbor agreement), this will not extend to data sharing with the UK post-Brexit. A new set of principles will need to be agreed.
For a UK-based business that will become a data importer based outside the EEA, this must be recognized as an onerous task. This importer has, in addition, to agree to limit processing to the specification in the contract. The data importer must also adopt appropriate levels of security, identify all staff who require training in data protection matters, and notify the data exporter of those laws which allow the authorities in the importer's country to access the exporter's personal data. Failure to comply with these provisions will permit the data exporter to terminate the contract with the importer. The price of doing this in the UK will surely rise due to the additional burdens that will apply.
Utilizing an international workforce will not be as straightforward as it is today. The time and cost of procuring work permits and visas could be prohibitive. This could become a double-whammy, where projects may not be able to deploy the most appropriate personnel, and staff may choose to work elsewhere if their career options suddenly become restricted.
From about mid-2017, key personnel will be an important area to consider within your new contracts. For example, if a contract is based in the UK and there is a key person from France named in the contract, suppliers need to be wary of whether that resource will be eligible to work in that role post-Brexit.
Companies will no longer be able to claim back VAT on expense purchases from various countries, and the post-Brexit impact on the cost of travel insurance and medical treatment for UK-based companies working in EU countries also remains to be seen.
A debate is currently ongoing with regard to whether Brexit could be grounds to terminate a contract as a Materially Adverse Change or a Force Majeure Event, due to being an external factor outside of both parties’ control. Clearly the definition in your contracts will dictate what a Force Majeure Event is, but this is certainly worth considering when you draft a new contract, though it’s likely this will boil down to the specific area of such an event that might affect your business, and what you would want to happen if this particular change arose. Remember, if our contracts are silent on any one point it will end up causing a dispute.
Use of contractors
In addition to putting guardrails in your contracts, you may also want to consider whether your business uses the services of specialist contractors as a result of the potential added administrative challenges of Brexit. Issues such as eligibility and work permits could require greater client input, reducing the benefit of employing a resource that is ready to work and that does not need much supervision.
Non-compete clauses may need to be amended as some may contain territorial provision relating to exclusive rights in the EU.
Many other areas will also be affected
Depending on the nature of your business, there are likely to be many other areas that you will need to consider, for example:
- How much the legal system is likely to change
- Cross border litigation
- European trademarks protection
- Tax/transfer pricing changes
- Transfer of employees
- IP rights/protection.
Nothing to stop us agreeing changes now
There’s a saying contract managers use regularly, roughly along the lines of vague in means vague out. We all know that lack of clarity in contracts leads to disputes and value leakage.
In existing contracts that will continue post-Brexit it will depend on what your agreement says about what you need to do and what grounds you have for change.
However, there is nothing to stop you and your trading partner from agreeing now to review the impacts of Brexit from time to time, as neither party should expect to profit or lose out because of this risk. If you can agree this principle now, and have regular dialogue with each other, it will not only help you manage the unknown Brexit risks, but will also be good for your long-term relationship.
Flexibility and governance will be key
In summary, we must not forget that the UK remains a fundamentally strong economy that is recognized across the world. While it may not be business as usual, we have to recognize that Brexit will bring the need for some significant changes.
A major problem for the contracting community is that no one knows what the impacts and their extent will be. However, if we can create a collaborative, environment with our trading partners, build flexibility and regular governance into our contracts and try to address Brexit-related issues as soon as they appear on our radar, that will go a long way to helping us navigate the greatest challenge we have faced for a very long time – and any other challenges there may be in its wake as the political environment that impacts our contracts continues to change.
Check out the latest IACCM thinking in two leading Ask The Expert special edition webinars on the impacts of Brexit -
Dealing with uncertainty – lessons from Brexit. Editorial comment, from Tim Cummins CEO, IACCM
After the initial excitement, the world has rapidly adjusted to the uncertainties created by Brexit (the UK decision to leave the European Union). Apart from some shifts in exchange rates, initial market turbulence soon steadied and many are left wondering what all the fuss was about.
In two special webinars, linked in the article above, IACCM provided its members with insights to the potential commercial and contractual impacts. Some were disappointed by our conclusion that this was not in fact a cataclysmic event and little instant advice could be given on the revised terms and conditions needed to deal with the Brexit impact.
The reality is that we still don't know - and won't for some time - precisely what a post-Brexit world will look like. This is simply another example of the increasing uncertainties created by an interdependent global economy - and it is general uncertainty rather than specific events that needs to be addressed in our contracts.
About the Author
Paul Carter Hemlin is CEO and Founder of UK-based consultancy Contract Management Direct, which operates in over 15 countries. Founder of international consultancy Contract Management Direct in 2006, Paul has 20+ years commercial contract management experience in the private and public sectors, across several markets, advising global buy and sell side clients on three continents with contracts up to £3bn.
Paul specializes in the negotiation and subsequent management of major IT services and Business Process Outsourcing contracts. He is author of 40+ articles published (Supply Management, Computer Weekly, Contracting Excellence, IT Now, Sourcing Innovation, Management Today & CPO Agenda) and contributing author to the IACCM’s bestselling book Contract and Commercial Management - The Operational Guide (2011).
Paul is also a regular International speaker and trainer on Commercial Contract Management, and former guest lecturer at Manchester University School of Business.
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