Brexit Challenges and Opportunities for Construction

Emlyn Hudson is a partner and national head of construction at Gateley Legal.  He deals with a full range of complex construction and surety work. In this feature, he takes a look at the challenges and opportunities the UK construction industry may face when it leaves the EU.

A construction project depends on a number of parties coming together to deliver the finished result.  Without doubt, Brexit will put additional pressure on these parties and any slippage on time, cost or quality could give rise to potential disputes.  There is also concern that Brexit could stretch companies’ cash flow to breaking point, in what is already a challenging market. It is therefore important to be proactive in assessing the implications that Brexit could have on a particular project and what contractual safeguards can be used to mitigate these effects.

Most standard form contracts have a change of law mechanism within them.  JCT Design and Build 2016 entitles the Contractor to a Change for any variation to Statutory Requirements after the Base Date that necessitates an alteration or modification to the Works. NEC4 ECC has the optional secondary clause X2 which allows the Contractor to claim a compensation event for a change in law.  In respect of any claim, there is always an obligation on the Contractor to notify these changes in accordance with the contract, and most importantly to mitigate their loss.  As such, it is important for Contractors to be proactive in managing these risks upfront and doing what they can to work around these changes.

Fluctuation provisions may also assist a Contractor in making a claim for additional monies. JCT Design and Build 2016 contains options for fluctuations, that apply if selected in the Contract Data.  If these provisions are included, this may allow the Contractor to recover increased levies, taxes or costs that are imposed.  NEC ECC allows price adjustments for inflation through the optional secondary clause X1.

The difficulty with these existing contractual mechanisms is that they do not fully address all of the risks that may potentially arise from Brexit (and are not always agreed to by the Employer).  A lot of the effects of Brexit are indirect, such as a shortage of labour and the potential for this to give rise to delay and additional labour costs.  This would not necessarily be caught by a change of law provision.  Similarly, Brexit may lead to the lack of availability of key products and delay at border checks, which would not be covered by a fluctuation provision.

Due to the potentially widescale implications of Brexit, it is common for Contractors to seek a “Brexit clause”, to address their specific concerns.  There is no standard wording in relation to this in the marketplace.  Much depends on the particular risks within the project, its commercial implications and also the bargaining powers of each party.  The difficulty with Brexit is that the practical implications are still uncertain and neither party wants to take the risk of something that they cannot control or predict.

As such, a range of possible approaches have emerged in negotiations. Some parties may agree to an extension of time for Brexit-related delays; or there could be a trigger event that could give rise to a right for either party to renegotiate key terms.  If the project is dependent on tight timescales or a specific product, there may even be a right to terminate arising from specific events.  This is important, as it is considered that the common law rights of frustration and force majeure will not be available for events directly arising from Brexit.  All these matters are likely to be hotly debated in negotiation and will not always be possible to agree upon.

It is prudent for Contractors to consider what other options are available to them in addition to their negotiation of key legal terms. Contractors should consider factoring additional time to their programmes and including any charges, taxes, quotas and tariffs in their tenders and pricings.  This requires careful due diligence from Contractors when scoping their work on projects. Also, Contractors are probably better placed in contractual negotiations if they can expressly identify upfront what their key risks are.  This allows them to be discussed and addressed in a more measured way within negotiations, before they arise in practice.  It is also more important than ever for Contractors to proactively manage changes, so that they do not escalate into disputes.  The parties are well advised to establish key points of contact to resolve or take action on issues rather than allow them to build up.

There are challenging times ahead and the uncertainties arising from Brexit will no doubt continue until new processes have been established and working practices have adapted.  The resilience of the UK construction market is yet again being tested but has shown its capability to adapt in the past and no doubt will continue to do so.

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