There are actions you can take now to protect your supply chain. This information will help you make sure your contracts are reviewed and amended, now and for the future.
Types of Contracts
SMEs should consider reviewing, and where appropriate, amending key contracts so that they can be more prepared for the impact of Brexit on their supply chains.
Some examples are provided below:
– Re-examine the terms and conditions of contracts to ensure you are protected if your business is no longer commercially viable;
– Understand and choose the appropriate Incoterm (which defines the responsibility for delivery, risk, customs, insurance and VAT);
– Update contracts to allow for non-EU or UK jurisdiction;
– Renegotiate existing contracts to lock in current prices and to include liability provisions for any extra costs that might arise;
– Review contracts as some terms in existing contracts may not be relevant post-Brexit.
Regardless of what approach you take; the first step is talking to your key contracts.
When entering new contracts, plan ahead by building in enough flexibility to accommodate uncertainty, some suggested actions include:
– Avoid long term contracts until the position clearer;
– Consider inserting agreed delivery terms (Incoterms) into all new contracts;
– Include automatic currency-linked price adjustment in the event of large currency movement;
– Define what laws will govern contracts in future;
– Consider adding break clauses or price adjustment clauses when negotiating new contracts.
– Should you wish to secure a new contract there is an internationally recognised approach to help you select the right supplier. The 10C model (by Dr Ray Carter) consists of 10 core criteria that provide a framework and thought process to enable this critical decision to be made more effectively.
Issues, Impact and Actions
For both new and existing contracts, there are major important issues.
We’ve listed these issues along with their impact and what actions you can take now.
Be prepared for currency fluctuations.
Flexible Pricing: Consider allowing prices to be renegotiated as circumstances change during the contract. The first step is to speak to your current or proposed supplier to explore flexible pricing as an option.
Currency: This may involve hedging strategies such as agreeing a fixed currency rate when drawing up a contract to avoid currency fluctuations, the first point of contact is your bank.
Customs declarations, tariffs and licenses and import VAT may lead to additional costs and impose an additional administrative burden. When the official position becomes clear, determine whose responsibility is it to comply with and/or to bear the cost of any customs formalities, import duties or other additional obligations that may be imposed as a result of Brexit. If you’re new to Customs visit our new Bitesize guide, updated for 2020 .
UK businesses may no longer benefit from EU approval schemes or two-way arrangements between the EU and non-EU countries after the transition period (from 1st January 2021). From this date you may be expected to comply with new laws or regulations, mechanism in the contract permitting compensation for such changes.
Check for references to specific EU legislation, if present they may require re-negotiation or amendment (for example do you need to review your labeling, do you transfer data across the border, do you rely on CE marking?). Also, consider including a generic “change in law” clause. The first point of contact is to speak to your supplier, regulatory bodies or a solicitor.
It is currently unclear whether existing EU contractual dispute resolution provisions will be valid after the transition period (from 1st January 2021). Consider the options of giving non-exclusive jurisdictions. The first point of contact is to speak to your supplier and or a solicitor. In both these options, be upfront about your concerns and ideal standing point.
The free movement of people may be impacted after the transition period (from 1st January 2021)., which may make it more expensive to use labour in the UK and could make a contract uneconomic. Restrictions could increase overheads, or affect the ability of businesses to perform contracts. Ensure all non-EEA nationals sign up to the EU Settlement Scheme. If you’re new to the movement of people, for example, the EU Settlement Scheme, visit the UK Government Website for more information or visit our free People information, updated to reflect the latest announcements.
Changes often occur during the period of a contract and are not just specific to the Brexit context. Changes should be more straightforward to deal with when planned. In light of the information provided, your next steps are outlined.
Take each of your existing contracts and review with the issues above to understand how Brexit is likely to affect their viability, if necessary explore and take action with the option of new contracts providing in this information.
You and your supplier can agree to vary the contract to provide that you will sit down and negotiate at a later point as to how the risk will be allocated acting in good faith (acting honestly and fairly without disrupting the benefits either are due to receive under the contract).
This can start with something as simple as picking up the phone, people are usually willing to do more than someone they just know by a corporate account number.
Plan for Exit Strategies
Assess those contracts likely to be most seriously at risk and plan for exit strategies.