How to Future-Proof Your Trade Agreements

Contract Strategies for African Businesses in Uncertain Times

The shifting tides of global politics are creating treacherous currents in the waters of international trade, demanding a new level of resilience and foresight in how commercial contracts are prepared.  The ripple effects of geopolitical tensions require a proactive approach to mitigating sudden and unforeseen policy shifts and volatility.

For businesses actively engaged in the global market, such as those operating in dynamic regional economies like Kenya, these external forces present significant and evolving risks. The ability to not only react to market fluctuations but to insulate commercial agreements from their disruptive impacts is becoming a critical determinant of long-term sustainability and growth. This heightened global instability calls for a strategic approach to contractual arrangements, by embedding safeguards and preventive mechanisms developed to weather the unique challenges faced by businesses in this vulnerable economic environment.

Context

Over the past few years, global market volatility has been occasioned by an unprecedented array of events, ranging from the highly polarising effects of the COVID-19 pandemic and its lingering economic consequences, to the escalating geopolitical tensions evidenced by regional conflicts, shifting international alliances and policy redirection. These events have created a climate for uncertainty for businesses operating across borders.

For dynamic economies like Kenya that heavily rely on international trade, this translates into challenges such as significant fluctuations in foreign exchange rates, and turbulent variability in commodity prices, that directly impact the cost of doing business and profitability. This has been exacerbated by disruption in global supply chains that have led to shortages of essential goods and raw materials, hindering local production and fuelling the ever rising inflation. This unpredictability has also resulted in a knock-on effect on foreign investment, an otherwise critical driver of economic growth and job creation in Kenya’s developing economy.

Traditional and static contracts, designed for periods of relative stability, magnify the precarious business climate and are proving woefully inadequate. Relying on fixed terms and rigid obligations leaves businesses acutely vulnerable to unforeseen disruptions and market upheavals. Therefore, businesses must proactively embrace flexibility and adaptability in developing contracts that are dynamic in response to changing circumstances, rather than becoming brittle frameworks guaranteed to crumble under pressure. Embedding mechanisms that anticipate turbulence and volatility would protect revenue while striving to ensure the longevity of international trade relationships.

Key Economic Risks and Contractual Safeguards

For businesses struggling with the complexities of modern commerce and international trade in our contemporary landscape of heightened global volatility, certain economic risks stand out as particularly pertinent to the integrity of commercial contracts, including currency volatility, supply chain vulnerabilities, inflationary pressures, policy changes, and overall economic recession:

1. Currency Volatility – The inherent volatility of global politics and economics often manifests sharply in fluctuating foreign exchange rates. A sudden depreciation of the Kenyan Shilling against major trading currencies like the US Dollar, Euro or Chinese Yuan can drastically increase the cost of imported goods, raw materials, and machinery, squeezing profit margins for businesses reliant on these inputs. Conversely, while a strengthening Shilling might seem beneficial for importers, it can reduce the value of export earnings when converted back to local currency, impacting the competitiveness of Kenyan exporters in international markets. These unpredictable swings necessitate contractual mechanisms that can account for and mitigate the impact of such currency fluctuations.

To obviate these risks, contracts can cover for currency fluctuations by allowing price adjustments based on agreed exchange rate benchmarks or indices, or otherwise stipulate payment in a stable currency that supports the interests of all parties involved. 

• Supply Chain Disruptions –Recent global events, from pandemics to geopolitical tensions and trade disputes, have starkly illustrated the fragility of global supply chains. Disruptions in these chains can lead to critical shortages of essential goods, components, and raw materials, severely hindering local production and potentially risking breach of contract arising out of an inability to fulfill obligations. The increased costs associated with sourcing alternative supplies or dealing with prolonged delays can also erode profitability.  

To obviate these risks, contracts can cover for supply chain vulnerabilities by incorporating flexible delivery schedules that account for potential delays attributable to force majeure events or other extraneous circumstances, or by including provisions for alternative sourcing or substitute performance where feasible and agreed upon.

• Inflation – The global resurgence of inflation, coupled with volatile commodity prices, presents a significant risk to the stability of commercial agreements. Rising inflation increases the cost of operations, from energy and transportation to labour and materials. In long-term contracts with fixed pricing, this can render the agreement untenable for suppliers. Similarly, turbulent variability in commodity prices, a key factor for many Kenyan industries (both as inputs and exports), can make pricing agreements highly unstable.

To obviate these risks, contracts can cover for inflationary pressures by allowing for periodic price adjustments based on mutually agreed and clearly defined inflation indices or relevant commodity price benchmarks, ensuring that the economic realities are reflected over the contract’s duration.

• Policy Shifts – Changes in laws, regulations, international trade policies and strategic priorities, often driven by political shifts, can have immediate and profound economic consequences for commercial contracts. The imposition of sudden tariffs, alteration of trade agreements, or changes in import/export regulations can drastically alter the cost structure of international trade, impacting the profitability and even viability of existing contracts.

To obviate these risks, contracts can cover for policy disruptions by introducing change in law, change in tax or material adverse change (MAC) clauses (prior to closing) that address potential significant governmental or regulatory shifts, and enable renegotiation, suspension, or even termination, while striving for equitable outcomes.

• Economic Downturns – Recessions in key trading partner countries can significantly impact demand for Kenyan exports. If major markets experience reduced consumer spending or business activity, exporters may face decreased orders, leading to financial strain and potential breach of contract. Economic hardship faced by domestic buyers can lead to payment delays or default.

To obviate these risks, contracts should incorporate robust force majeure clauses that clearly outline events constituting unforeseen circumstances excusing performance, potentially including widespread economic crises under specific, narrowly defined conditions, with a focus on fostering continued collaboration where possible.

Conclusion

Ultimately, the effectiveness of contractual safeguards hinges on a fundamental shift towards proactive and adaptive thinking. This requires embracing economic adaptivity through flexible mechanisms that respond to market shifts, embracing legal agility in crafting agreements that anticipate disruption, cultivating cooperative resilience through open communication and collaborative problem-solving, and exercising strategic foresight to embed protective measures from the outset.