The Determine
A Corcentric Company.
December 13, 2016

Chaos, uncertainty, dysfunction: Brexit and contract management.

Chaos, uncertainty, dysfunction: Brexit and contract management.

Whatever your preference, Hard or Soft Brexit, the UK will be triggering Article 50 by April Fool’s Day next year. Thereafter, the UK will be leaving the European Union within two years.

This should be accomplished by March 2019. But hard to say, since the UK government is not saying much. Depending on which media outlet you subscribe to (and believe), this is the worst/best/unknown thing that has ever happened to the country in the nearly 60-year existence of the European Union.

There is a lot of conjecture, unlimited opinions, and very few facts. Except this one: Once triggered, Article 50 (which establishes the right to leave the EU in the Treaty of Lisbon) provides two years to negotiate an exit deal. Then that deal has to be approved by a qualified majority of EU member states. Of course, that can be vetoed by the European Parliament. What happens then? Who knows?

Because, and here’s the thing: it’s never been done. No member state has ever left the EU, and the rules for doing so are fairly abbreviated.

For companies inside and outside the UK, this lack of clarity is more than just frustrating, it’s destabilizing. Nowhere is this more apparent than in contracts. What happens in terms of: ISO standards and requirements, Financial Standards & Compliance, European Court of Human Rights (typically used as the highest level of appeal in Europe), European Union Competition Law. What impact will these changes have on IP agreements, employment and sponsorship documents?

An interesting article on this subject can be found here in the Harvard Law School Forum on Corporate Governance and Financial Regulation. The article, “The Legal Consequences of Brexit,” outlines many areas of uncertainty, including:

  • M&A activity and the associated share sales will be be subjected to uncertainty until the relationship with the EU is further defined
  • Contractual disputes and governing law will remain a grey area post-Brexit
  • Competition laws will need to be reviewed and new ones applied specifically for the UK
  • Much of the UK’s financial services regulation is based on European directives; post-Brexit, should the UK keep aligned with Europe or take a higher risk approach and develop one that bridges the US and EU?
  • Diminished UK influence on EU financial services issues post-Brexit. Larger institutions will want to contribute to negotiations, but what would be the optimal outcome for their organization?
  • Tax enforcement and handling extensive double tax treaties

These are just some of the uncertainties raised, and understanding how these impact each individual business is even more complicated.

From a negotiating stance I totally understand why the UK government is not letting the cat out of the bag, and I don’t expect them to change that position any time soon. So organizations have to prepare for all eventualities and push themselves to be contractually “fit” for whatever changes come.

However, with that being said, I rarely see organizations thinking in these terms, which leaves them woefully underprepared (or unprepared) for these changes. As an example, I often see legacy contracts that are – at best – stored in a document storage without any visibility at the clause level. How will these organizations be able to change legacy contract language to meet new regulations when there is no visibility into the risks?

Maybe one solution would be to create a real owner of the “Brexit” problem in a similar way we approached the Y2K problem in the late 90’s. Sounds good doesn’t it? But here is the next issue: the UK government already has a shortage of talent to help spearhead the negotiations with the EU, and I suspect that many of these are lawyers. That leaves a shortage of talent even before we start reviewing the changes at an organizational level.

Shame I’m not a lawyer, the next few years are going to be lucrative! Here’s the good news: we are 16 years on from Y2K and solutions have evolved to the extent that such complex problems are easier to resolve. There are now credible alternative options available that should be considered when trying to protect your organization from these uncertainties.

I recommend the first step is to designate clear ownership with a cross department mandate and figure out all the relevant stakeholders. By giving everyone a collaborative voice and a venue to participate, you can then develop a solid plan and establish internal confidence. That way you can be sure you’re ready for whatever changes may come.

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