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Protecting against currency fluctuation in a post-Brexit world
One of the words most commonly associated with the impact of Brexit on the economy, business, immigration and life in general is ‘uncertainty.’ Nobody really knows or can anticipate the actual impact of the UK’s exit from the European Union.
However, there is an old saying about currency markets: “the only certainty is that the exchange rate will fluctuate” so although currency fluctuations in the build up to the referendum and following the leave vote were not unexpected, the levels of volatility were extreme by todays’ standards.
The impact for suppliers committing to long term contracts is clearly the potential for losses where fixed prices have been agreed with customers, yet the costs of importing the raw materials or other equipment to service these contracts could increase significantly where such costs are being incurred in currencies other than the pound, most notably, US Dollars.
Therefore although most suppliers will try to include an annual price review and adjustment mechanism in their long term contracts rather than committing to fixed prices for the term, these should be scrutinised more carefully and supplier should seek to ensure that they have the ability to vary their prices immediately (rather than having to wait for the annual price review) upon certain ‘trigger’ events, for example, the cost of raw materials increasing by an amount in excess of a certain percentage (for example, 5%) or the value of the pound falling against the value of the dollar or any such other applicable currency by a certain percentage over a consecutive period of time.
So in summary, we’d recommend that you:
- review existing long term contracts and check your rights under them as regards adjusting the prices
- negotiate future contracts to include suitable price adjustment mechanisms.
If you’d like any further advice in relation to price adjustment mechanisms in your commercial contracts or a review of your commercial contracts generally, we’d be happy to assist you.