How Brexit Affects Contract Alignment
- February 29, 2024
- 15 min read
- Sirion
Introduction
What a year 2020 was, right? A pandemic swept across the world, most of us adapted to a new way of working without leaving the safety of our homes, scientists worked around the clock to deliver a vaccine in record time, and, last but not the least, the United Kingdom (UK) and the European Union (EU) finally agreed to part ways.
We now find ourselves bracing the fallout of the post-Brexit deal.
After the 2016 referendum and four years of intense debates and negotiations, the EU and the UK finally managed to avert a no-deal Brexit scenario by signing the EU-UK Trade and Cooperation Agreement on 24th December 2020. The agreement was ratified by the UK Parliament on 30th December 2020 and was “provisionally” applied by the EU from 31st December 2020.
The deal contains new rules for how the UK and EU will live, work, and trade together.
When the UK was still part of the EU, companies were able to freely buy and sell goods across EU borders without paying taxes. There were no limits on the volume of things that were traded. However, all of that and more is changing dramatically. The fallout of Brexit is going to affect everything from foreign investment, M&A and immigration laws to taxation and banking rates. Both parties are still deciding on regulations related to data sharing and financial services.
How the Deal Affects Commercial Relationships
As it currently stands, some businesses may not incur additional taxes at the border yet, but there is new paperwork, and the cause for delays is a serious concern. To start with, businesses on either side of the British border, whether they are importing or exporting goods and services, will need to manage differences in custom procedures. Tariffs are likely to be applicable on those goods that do not meet the rules of origin requirements.
Trade between UK businesses and businesses that are based in any third country with whom the EU has a free trade agreement or other preferential trade relationship are going to be impacted unless and until the UK and the non-EU country in question agree to continue such arrangements. There are 40 such arrangements covering 70 countries. While some countries have agreed to roll these arrangements over post-Brexit, many of the arrangements are still being negotiated.
Based on these implications, it is safe to assume that businesses in the UK and the EU that trade with each other will need to revisit, review, and renegotiate (or amend) contracts which govern their commercial relationship. Most current contracts do not contain adequate provisions to deal with the current post-Brexit scenario. When these contracts were originally drafted, the language reflected that the UK is a member of the EU, and is not required to pay tariffs, submit to customs checks, and comply with EU-specific regulatory requirements. Although some of the effects will be mitigated by the UK-EU Brexit deal, there will still be friction at the border because the UK and the EU are not seeking to negotiate a continuation of the Customs Union.
How Do We Keep Contracts Aligned to the New Deal?
To stay ahead of disruptions triggered by the Brexit deal, enterprises will have to begin by reviewing all existing contracts in their portfolio. The goal will be to identify: a) contracts with counterparties based in the EU or UK, b) provisions with exposure to financial and regulatory changes associated with Brexit, and c) outsourcing deals that may be impacted by movement restrictions placed on employees.
This is a significant task because the average business has thousands of agreements in place at any given time. There will not be enough time to drive the review process manually without compromising quality. Contracts containing provisions affected by the Brexit deal cannot just be amended with new provisions. Some contracts might contain fallback language that may be inadequate because there are aspects of the deal that are still being negotiated. To put it simply, businesses will need to create different sets of contract remediation logic for the type of contract/deal that are likely to be affected. In addition, every stakeholder involved needs to be notified of potential changes as part of the transition.
At this stage, enterprises will find themselves left with two choices: increase OPEX to scale up the internal legal team or outsource to specialist firms; or embrace technology to automate the contract remediation process.
At Sirion, we realized that for companies affected by the Brexit deal, updating their contracts was going to be time-consuming and tedious if businesses continued to rely on legacy tools and manual processes. Keeping this in mind, we have recalibrated our AI-led document extraction solution with a wide spectrum of ‘out-of-the-box’ document intelligence and analytics capabilities designed to make the transition to new post-Brexit terms and enabling compliance with new requirements as seamless as possible.
Our platform starts by pulling data from contracts stored across the enterprise’s IT landscape by integrating with file servers, ERPs, CRMs, document management systems, and more. The AI-led extraction engine ‘reads’ these contracts and stores them in an access-controlled centralized contract repository. All passive elements of a contract are converted into measurable and actionable objects, which can then be tracked across their lifecycle. All extracted information can then be cascaded downstream for legal analytics and review. It will allow you to gain a clearer picture of risk exposure associated with the new Brexit terms as well as existing fallback positions (if any) and identify deviations and obligations that need to be complied with. In addition, Sirion’s authoring and change management module will enable you to quickly amend affected contracts and manage the process through configurable approval workflows for rapid closure.
Additional Resources
14 Contract Negotiation Strategies and Techniques
GDPR Contract Review: How to Read the Fine Print
