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Fear of the unknown

July 21, 2016

At times of uncertainty, the role of contracts in both protecting and delivering value becomes even more evident.

That is one clear result of Brexit, the unexpected decision by the UK to leave the European Union (EU). Law firms in particular have been quick to issue thoughts and guidance on the possible consequences for future trade and existing relationships. IACCM members have been anxiously seeking guidance on ‘which terms are impacted?’

Digging beneath the surface, the answer is itself mostly uncertain because there are many possibilities regarding what may happen. Volatile markets could move favorably or unfavorably; new trade treaties or revised regulatory environments may or may not emerge. And in reality, Brexit is just one example of a world where growing interdependence makes disruption and uncertainty both frequent and normal. In other words, good contracting now demands focus on how unexpected change and unpredictable events will be handled.

Many of the clauses that are impacted by volatile conditions are not new. Obvious examples are Force Majeure, payment and price adjustment terms, clauses relating to new or revised regulation, taxes or tariffs, rights of termination or renegotiation. But sophisticated negotiators are recognizing the growing importance of better structured governance provisions, bringing greater definition to the ‘rules’ under which the relationship will operate. David Frydlinger touches on this in his recent blog and IACCM highlighted similar points in a webinar that it ran just days after the Brexit vote.

Trading relationships – just like daily life – can never be free from risk. While some events are predictable, many are not. The longer the term of the contract, the more uncertain it becomes. Our best approach to dealing with that uncertainty is not to try to anticipate each possible eventuality, but rather to agree mutually acceptable procedures through which they will be discussed and equitably resolved.

 

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