The impact of Brexit on commercial contracts Part 3: the practical viewpoint
In The impact of Brexit on commercial contracts Part 2: what contractual protection to consider we looked at how businesses might use their contracts to protect themselves against the effects of the uncertainty created by various aspects of Brexit. However, although contractual protections are clearly important, one lesson that many businesses have learned in the wake of the Coronavirus pandemic is that risk mitigation is as much a practical exercise as a legal one.
Know your customers / suppliers
It continues to be critical for businesses to carry out adequate due diligence into their customers and suppliers to ensure that they are stable, established businesses, and to structure their contracts and procedures to minimise credit exposure and risk. It will, post-Brexit, be more expensive and cumbersome to pursue claims against counter-parties based in the EU. This is important, not only at the start of a business relationship, but in the light of the new restrictions on suppliers’ ability to terminate contracts once their customers enter insolvency (see Managing contract performance in the new normal – moratoriums, insolvency provisions and responsible contracting), will be something that businesses should monitor on an ongoing basis, to ensure that they can anticipate and head off problems whilst they are able to do so.
Plan around potential problems
Some of the significant impacts of Brexit uncertainty are likely to be in relation to either more expensive, or delayed, supply of goods that are being moved across borders (albeit somewhat mitigated by the removal of tariffs). Businesses should examine their supply chains to see whether they can mitigate these issues by, for example, dual-sourcing key goods, so that there is an available alternative if one line of supply is interrupted, or if key suppliers go insolvent. On a broader scale, is there scope to restructure business arrangements so that goods do not need to cross borders, for example can manufacturing in a European territory be mirrored in the UK for a UK customer base?
Actively manage relationships
The principles of good contract management will be particularly important in the light of an uncertain business environment. This includes, for example, monitoring performance carefully to ensure that key performance indicators are being met, and, where suppliers are failing in their obligations, raising those failures and ensuring that rights to liquidated damages or service credits are being exercised. It is also important to make sure that any regular scheduled review meetings are still being held (albeit probably in a virtual format) and that information flows and lines of communication are being kept open.
Engage early when things go wrong
Where contracts start to go wrong, early intervention and engagement will continue to be critical, to enable businesses to both mitigate the risk and maintain business relationships for the longer term. Businesses will often be better served by discussing and negotiating a mutually beneficial outcome, and ensuring that any agreement reached is properly and clearly documented, rather than by threatening court-based enforcement of the written contract without first at least exploring whether a consensual commercial resolution might be reached.
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The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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