Practical Law

With the much-anticipated draft withdrawal agreement being revealed last week, I thought it was an opportune time to reflect on the impact of Brexit on the construction industry, and in particular, what effect it is having on parties entering into construction contracts in the current market.

Key risks

As we draw ever closer to the Big Day (scheduled for 29 March 2019), major contractors with supply chains and workers from outside the UK appear to be increasingly reluctant to take the risk of post-Brexit changes, and in particular increased costs arising from changes to:

• Tariffs and import and customs duties.
• Exchange rates.
• Regulations and restrictions affecting the movement of goods, services and people.

Some contractors for major construction projects are beginning to insist on additional payment for such matters. These are issues which affect not only them, but also their supply chain. Whether this is acceptable to developers is, of course, a commercial decision in the context of their project. But I am yet to see a major contractor insist on, or a developer agree to, grant additional time for this type of issue. To date, in my experience, contractors have generally taken comfort from the fact that the works are due to finish ahead of Brexit taking place, and because most contracts already contain a comprehensive list of events for which the contractor is entitled to an extension of time.

Existing contract provisions

Some ways in which construction contracts may already (indirectly) address the issues described above are:

• Change in law clauses, which allow the contractor to claim additional costs and/or time if there is a change in law after a specified date (in JCT parlance, the “Base Date”) which necessitates a change to the works. Many developer clients will wish to qualify this to include only changes that an experienced contractor could not reasonably have foreseen at the Base Date. Whilst Brexit itself has been on the horizon since at least 2015 and a certainty since the referendum in June 2016, it remains highly arguable whether all its consequences were reasonably foreseeable.

For example, under clause 2.15.2.1 of the JCT Design and Build Contract, 2016 Edition, there may be an adjustment (up or down) to the Contract Sum and the contractor may be entitled to additional time where a change in the “Statutory Requirements” after the Base Date necessitates a change to the Employer’s Requirements (ERs). However, not all statutory changes will necessitate a change to the ERs, so this clause may not protect the contractor against the risk that the works simply become more expensive to construct as a result of a Brexit-driven change in law.

The parties must also bear in mind any contractual time limits within which a claim must be made. NEC4, for example, has a relatively onerous timeframe (within 8 weeks of becoming aware that an event has happened). Even under JCT, notice of a loss and expense claim must be given as soon as the change became (or should have become) apparent, although case law (Merton v Leach) suggests that this provision will not generally be treated as a condition precedent, at least in its unamended form.

• Force majeure clauses, which allow the contractor to claim additional time for delays caused by unforeseeable events outside the parties’ control. Again, it’s unlikely that Brexit and its potential consequences could be described as “unforeseeable”. It is unlikely that such a clause would assist the parties unless it has been drafted with a Brexit event specifically in mind.
• Provisions dealing with fluctuations, including in relation to taxation, inflation and/or exchange rates. In the last 12 months, and with Brexit Day fast approaching, parties have increasingly turned their minds to this issue.

If circumstances under the contract post-Brexit really become untenable, frustration at common law – releasing the parties from further performance of the contract – may be a consideration. However, it is likely to be a last resort, with the bar set high by the courts. A contract will not normally be treated as frustrated merely because, due to an unforeseen change in circumstances, it has become more difficult or expensive for one party to perform its obligations. Do the consequences of Brexit fundamentally affect the nature of the contract and the parties’ rights and obligations, such that it would be unjust to hold them to it? This avenue is fraught with risk, and getting it wrong (repudiation) could be even more expensive.

“Brexit clauses”

If the parties agree to include a specific “Brexit clause“, they should (as ever) ensure that the wording reflects their commercial deal. Some key points to consider are:

• What is the “trigger” event? This should be clearly defined, so that the contractor’s entitlement to claim additional costs and/or time is not open-ended.
• What is the “trigger” date? Again, clarity is key when defining the starting-point for the contractor’s right to make claims and recover payment. In many cases this will this be “Brexit Day” when the UK leaves the European Union, but it is possible that some consequences may not become apparent or take effect until some time after Brexit has occurred.
• Does the contractor have to satisfy conditions precedent? Developers will no doubt be keen to ensure that their contractors are incentivised to mitigate the consequences of the event, and will be reluctant to grant additional time or costs if the event is one which an experienced contractor could reasonably have foreseen or taken steps to mitigate.
• What are the consequences when the Brexit clause is triggered? Should either party be entitled to cut short or terminate the contract? Is a process of negotiation viable? Allocating – or perhaps sharing – responsibility for additional costs and time and for meeting certain obligations, such as procuring new permits, will need to be addressed.
• Should there be any limitations on the additional costs (such as a capped sum) or time (a maximum period) that the contractor is entitled to claim? Developers should consider this in the context of their project budget and programme constraints, as well as the funding arrangements for the project.

Before and after the “Deal”

For parties entering into construction contracts in the current market, it is still difficult to say what the real impact of Brexit will be. What is interesting is whether it will be one of time, cost or both, as the two generally go hand in hand. Or indeed whether there will be any genuine, significant impact at all – bearing in mind that “standard” fluctuation and change in law clauses in construction contracts may address at least some of the primary impacts.

Agreeing express Brexit provisions now will give both parties greater certainty. Construction contracts may be impacted by availability of labour and changes to tariffs, exchange rates and UK/EU trade regulations post-Brexit. Parties entering into future contracts will need to agree commercially which of them is best placed to manage and bear these risks in the context of their specific project, and to ensure the contract terms reflect their own Brexit deal.