When it comes to Brexit planning, strong relationships with suppliers and customers are just as vital as your contracts with them, says Amanda Coale.
More and more clients are focusing on contractual risk as the danger of a no-deal Brexit looms. Contract review programmes are a critical part of that readiness effort. However, they are not the whole story.
Entering a contract is, in its simplest expression, the codification of a relationship. And it is the strength of that underlying relationship which should be most important to all parties. Companies shouldn’t only ask themselves, “are my contracts enforceable after Brexit?” but also, “can my relationship with that supplier, customer or partner realistically endure beyond Brexit?”.
This is a crucial question to ask yourself today because of the potential severity of Brexit. It might shake things up to such an extent that the relationship is no longer commercially attractive to one side, meaning they will try to exit the contract.
And how might they do that? In contrast to some legal opinion, I do not believe this will happen through the use of force majeure clauses. These largely excuse non-performance due to unforeseen events. Nor will breaches of service levels be the primary route, since parties are often limited to recovering small financial penalties or service credits.
Instead, the party that’s trying to exit will more likely rely on their contractual right to terminate, by refusing to renew contracts, using ‘engineered’ breaches (which then trigger rights to terminate) or (for the more brazen or desperate) simply refusing to perform.
This is where the real contractual risk lies because holding an unwilling partner to a contract is almost impossible. Similarly, managing a broken down relationship takes considerable senior management time and energy, not to mention costly legal fees.
What to do now
One of the most important steps is to reinforce your key commercial relationships. You might do that by negotiating new or revised commercial arrangements that share the risk and reward more fairly. Or you may decide to put in place contingency arrangements with other parties.
And where you don’t currently have a contract at all – for example in the food retail sector – where much of what it bought is not done under a formal contract – you might decide to put one in.
How we can help
KPMG can help you examine these underlying relationships thanks to the combination of our deep supply chain consulting expertise and a Legal Services team with considerable experience in drafting, amending and negotiating contracts and handling disputes within sensitive commercial relationships.
See a full range of our Brexit-related legal services here