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Brexit, contracts and exchange rates

Mills & Reeve

For many businesses, the most instant impact of Brexit has been from fluctuations in the value of pound sterling. Here Jayne Hussey, Mills & Reeve, gives her advice on how businesses can reduce risks associated with currency fluctuations. Mills & Reeve are a member of the GBCC Brexit Advisory Group (click here for more information).

Currency fluctuations - contractual protections are key to ensuring stability and profitability

The main issue facing supply and purchasing arrangements for the foreseeable future is uncertainty.

The Brexit negotiations are underway and while agreements made will undoubtedly have a number of positive and negative consequences, in the short-term businesses are no closer to gaining clarity on its impact on commercial partnerships between suppliers and customers.

At the same time, exchange rate volatility is a growing concern.

Currency fluctuations present a number of supply chain challenges, affecting the prices of goods and services and ultimately customer demand, all of which threaten financial returns and ultimately a business’s enduring success.

However, there a number of ways that business owners can shore up contracts to protect their bottom line and reduce the risks coming from the current uncertainties.

Assess, adapt and spread suppliers

Before contract changes are explored, businesses should look to conduct risk modelling exercises to assess any weaknesses in their supply network. Understanding where they source their materials from, the stability of suppliers, how Brexit might affect them and how reliant the business is on their supply will highlight if the organisation is unduly reliant on a particular supplier or at high risk of a supply chain disruption or an increase in costs.

To spread risk, business owners may wish to consider dual or multi-sourcing strategies. As an example, an automotive seatbelt manufacturer might move to purchase polyester to make products from both an EU and non-EU supplier.

This would allow for shifts and reallocation of orders from one to another should exchange rates drive an increase in cost. Businesses should also ensure that suppliers are able to upscale or downscale production if required.

For those with strong relationships with their suppliers and customers, value can also be found in discussing the burden of costs and tariffs on trade and the potential to ‘share the burden’.

It is important that this understanding is not restricted to verbal agreements and formalised through appropriate terms in the supplier/ customer contract.

This principle is commonly deployed in other sectors such as logistics, where the impact of fluctuating fuel prices is usually factored into the contract to ensure an appropriate level of commercial return can be maintained for both parties.  

In addition, consideration should be given to including break clauses or termination for convenience provisions so that, if trading circumstances mean that the relationship is unviable, the business has the opportunity to exit the relationship.

That said, businesses do need to balance this type of termination provision against the commercial advantage that is often gained from both obtaining and giving long-term commitments to partners. 

In the current market, we are seeing a number of our clients reduce the maximum long term commitment that they will enter into, without the provision of the aforementioned contractual protections.

It seems inevitable that upcoming Brexit negotiations will present a period of protracted uncertainty and this in turn will affect currency exchange rates that many businesses will be influenced by.

For those operating with partners, whether it be suppliers or customers, in international markets, making the right preparations now could prove crucial. Protecting supply and customer margins through the deployment of watertight contracts might provide businesses with the resilience and peace of mind they need to thrive.

Jayne Hussey
Partner at Mills & Reeve