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Reviewing contracts and commercial relationships in light of Brexit and COVID-19

Mark Gough Negotiation Strategy Group Leader, PwC United Kingdom Jun 02, 2020

Mark Gough, commercial negotiations expert, offers some ‘no regret’ recommendations for preparing for the end of the Brexit transition period.

Over the last few years, many of the organisations I work with have told me they’ve been preparing for Brexit in the context of new contracts or negotiations they’re entering into now. But often, businesses find their most critical relationships were born before the EU Referendum was even on the horizon. The risks or additional costs associated with the Brexit process, and with the future trading environment, will not have been predicted or planned for. For this reason, it’s important that businesses reexamine their existing relationships, or seek to establish new ones.

Brexit represents an upheaval for many commercial relationships. As organisations get deeper into their preparations for Brexit, some of the commercial negotiations they are having are becoming increasingly complicated. Add to that the challenge of responding to the impacts of coronavirus (COVID-19), and it’s no surprise that for many businesses, these conversations have stalled.

In my role, I support clients through the planning, preparation and execution of complex negotiations. In the year since I first made my ‘no regrets’ recommendations, many of the changes and disruptions associated with both Brexit and now COVID-19 have been systemic, impacting huge numbers of organisations at once. Today’s risk landscape looks very different to last year’s—but my two recommendations remain more relevant than ever.

Analyse your existing contracts

My first recommendation involves identifying contracts with key suppliers and customers where there are potential financial and operational impacts on your business. While supply chains are the obvious place to start, there are almost certainly other third parties with whom you have a critical interdependence. It is unsurprising that many organisations are thinking about how their freight and logistics arrangements may be impacted by future border arrangements, but the range of contracts affected is potentially very broad.

All contracts have the potential to contain clauses—relating to people, delivery of goods and services, business infrastructure, pricing, supply chain and data—that rely on the established legal framework provided by the EU. Major contracts (including those for outsourcing, supply of goods and services, support and maintenance contracts, and other long-term investments or financing arrangements) are unlikely to include commercial levers and mechanisms that will deal with the specific issues that arise from a future relationship between the UK and the EU. Contracts may include references to a particular currency or detailed pricing mechanisms. The impact of Brexit on external factors, such as currency, could result in significant increases in cost and render contracts uneconomical.

Companies that are ahead of the pack in terms of these reviews have identified contracts as diverse as IT development agreements, intellectual property licenses and joint ventures as being problematic.

Analysing your existing contracts will highlight both challenges and opportunities. Some of these are a matter of a simple re-contracting process, but others can be more complex. Certain contracts may even present an opportunity for both sides to revisit the fundamental terms of the relationship. Either way, what we’ve learned from the preparation process so far is that this exercise has taken more time than many have expected.

Engage with key third parties

To put yourself in the best position for a potential future negotiation of a key relationship, or simply to preserve continuity, it’s important to proactively and regularly discuss how Brexit will affect your most important partners, and understand the steps they are taking to prepare.

Planning these discussions means thinking carefully about the future of these relationships. Some of these business relationships may become uneconomical, or have new factors to consider (for example, who will bear the risk of any customs delays). Performing an analysis of the economics and dynamics of your relationships beforehand will help you anticipate the challenges and conversations ahead. This will give you valuable time to put together the right team, fully understand the variables at play, and carry out the necessary preparation you need to gain an advantage when renegotiating terms.

When it comes to dealing with change, knowledge is a very valuable resource. At a minimum, we suggest scoping how your partners think Brexit and a new trading relationship with the EU will affect their own business models. It’s important to do this early on, when there isn’t already a negotiation process in place.

Your banks, insurers, facility managers, regulators, joint ventures or sales alliance partners can all have a critical impact on your business, especially where they are also adjusting to their own Brexit related challenges. When it comes to negotiations, there’s one secret to success, and that’s preparation, preparation, preparation. Right now, as we continue to navigate the impacts of COVID-19, it might seem like it’s not the time to open these conversations. But it’s essential that you do. After all, it’s not only the readiness of your organisation that will matter on day one—theirs will, too.

To read more about how businesses can adapt their contractual relationships during this time please click here.

Mark Gough

Mark Gough

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Mark Gough

Mark Gough

Negotiation Strategy Group Leader, PwC United Kingdom

Tel: +44 (0)7841 563494

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