By:
William Bandon Managing Director, Hubashisan Solutions
Christopher Thackray Managing Director, Periculum Associates
Holly Verbil Regulatory, Risk & Strategy Leader, Periculum Associates
Update: A vow to vote…
Since our last briefing (on operating from a position of strength in a no-deal Brexit), there have been two announcements that may ultimately have an impact on companies’ Brexit planning.
The first announcement was the promise by UK Prime Minister Theresa May to not delay the vote to exit, and to set a series of votes in mid-March on specific conditions for the UK’s exit from the EU, in a concession to several MPs who have expressed concern over a no-deal Brexit scenario.
The second was a tentative agreement struck between the UK Government and the EU that would allow EU citizens currently in the UK to continue living there undisturbed after the UK exits the union. Although clearly a significant milestone in the Brexit talks, like all other UK-EU tentative agreements Parliament hasn’t yet approved it, so the question of what will happen to EU citizens still technically lingers.
Of the four outcomes outlined in our first briefing on Brexit (“Getting your arms around Brexit”), three of those possible options are now actually scheduled to go to formal Parliamentary votes on consecutive dates. On 12th March (or possibly before), Parliament will vote on the UK Government’s proposed EU Withdrawal Agreement after the Government attempts to negotiate changes to the backstop arrangements with the EU. If the proposed agreement is defeated, then on 13th March, Parliament will vote up-or-down on a no-deal Brexit. If Parliament doesn’t pass a no-deal Brexit, the Government will propose – for a vote on 14th March – what is understood to be a tactical short-term (i.e., a few months) extension of the Brexit date from 29th March.
In short, because both major UK political parties – Conservative and Labour – are each fractured around the details of each strategy, these divisions mean continued widespread instability, and an ever-shortening timeline for the Government (and for affected companies in the UK and worldwide) to craft solutions to the looming political risk to those companies.
Contractual risks regardless of scenario
No matter which scenario plays out, the continuing (and changing) political risk after Brexit is ample cause for a company to review and inventory – in risk-specific granular detail, on a contract-by-contract basis – each of its contractual risks and potential liabilities arising from those risks for its material contracts.
In this regard, a contract’s materiality should be judged on a spectrum which factors in the following, among others:
the company’s spend on (or revenue from) that contract;
if a supplier agreement, whether the supplier provides the company with a critical functionality or product, particularly for an enterprise shared service;
if a customer-facing agreement, whether the product or service the company offers is core to the company’s business; and
the size of the company’s potential damages exposure / liability for additional cost or expense if there is a performance failure. (Note: we use “performance failure” instead of “breach” since exposure can arise even if a party’s failure to perform is not a breach under the contract terms.)
Companies should approach each document to be reviewed presuming a no-deal Brexit. This will give the company the fullest scope of what risks it could face on the Brexit date. The earlier a company commences this review, particularly for its higher priority agreements, the better chance it will be able to take steps to contain or mitigate the risks presented.
Your contract review should include the following at minimum:
For each outbound (customer-facing) contract, identifying each of your company’s commitments to that customer and whether such performance commitment is (a) dependent on an upstream commitment from a company supplier, subcontractor to that supplier, or other third party, and (b) a firm commitment to that customer regardless of any such dependency;
For each supplier contract, a similar dependency analysis and whether your company is required to continue using (and paying) your supplier regardless of that supplier’s failure of performance;
Whether the contract has a force majeure clause or other built-in exit, performance forgiveness or tolling provisions (with a specific focus on whether force majeure is defined to include acts of Government such as Brexit);
Whether the pricing or the cost in the contract is particularly sensitive to currency or exchange fluctuations;
Whether any contraction of your company’s lines of credit after Brexit puts the company’s contract performance at risk;
The nature of the specific liability exposure – i.e., damages, specific performance, or termination of the agreement; and
If there are express or implicit presumptions or definitions upon which the contract is based which would no longer be true at Brexit (for example, a scope of a software’s permitted license defined as “use within the European Union”).
The relentless March of time
As time ticks on to 29th March, available remedies and mitigating actions will begin to evaporate like table-for-two reservations for Valentine’s Day dinner. Although after 15th March there should be greater clarity on the ultimate outcome of Brexit, it still leaves less than two weeks to Brexit if no extension is approved. The necessary time – and the qualified resources – required to conduct and complete such analyses and begin to implement mitigatory steps could be scarce and delay your company’s responsiveness to the unfolding events of Brexit. Being prepared for as many material adverse eventualities as can be identified, as early as possible, could be the difference between a company’s financial survival versus financial ruin, or new customers versus lost customers, or a resilient reputation versus a damaged reputation.
A no-deal Brexit is forecast to create financial and operational contagion. Knowing the performance and liability risks within your contracts is the essential first step to quarantining (or even inoculating) your company’s exposure to the contagion should a no-deal Brexit materialize.
If you need assistance determining the impact of a no-deal Brexit and where to begin building contingency plans, let's talk.
Written in conjunction with:
