The impact of Brexit

Many companies within the construction industry have sought to future-proof themselves against Brexit.

The impact of Brexit on the Construction Industry

Whilst the implications of Brexit are uncertain, the UK is now within the last six month countdown.

It is clear that employers and contractors are dependent on the European Union (“EU”) for skilled/non-skilled workers and materials. In the event of a hard Brexit, weaker currency and the loss of a tariff-access to the single market could lead to a shortage of both. Brexit could well influence regulatory and compliance burdens which could cause delays in supply chains. Sequentially, this will affect cash flow within the industry.

Within the construction industry, some businesses are stockpiling the materials which are likely to be affected by the effect of a no deal Brexit and are also considering their existing contractual arrangements.

Liabilities under existing contracts

Many companies within the construction industry have sought to future-proof themselves against Brexit.

One method has been to include material adverse change clauses in some construction contracts to try and utilise existing contractual tools. Material adverse change clauses can refer to a very specific provision, such as a change in the law or price fluctuation, to bring a contract to an end or to trigger a renegotiation. If a construction contract already contains such a clause then the party, who intends to rely upon it, would need to consider whether Brexit is a sufficient trigger event for the purposes of that clause. As the referendum took place on 23 June 2016, contracting parties’ may well have predetermined the consequences of Brexit and drafted material adverse change clauses intended for that event.  

Brexit is a difficult term to define. It technically occurs once the UK is formally no longer a member of the EU. This is intended to take place on 29 March 2019. However, the exact post-Brexit effect is not yet known. Therefore, contracting parties’ may have struggled to anticipate the potential effect on their construction contracts, and subsequently to adequately define the threshold for a material adverse change clause.

Most standard form contracts include a ‘change of law’ provision to manage statutory updates. In March 2019, there may be immediate measures which are introduced or removed by Brexit. Within construction law, there is a train of thought that Brexit will only cause minimal changes, such as the CDM Regulations which were EU introduced. However, a change of law provision should assist parties whose contracts straddle the exit date in the event of any legal amendments. Standard form contracts assign the risks relating to legal changes to different parties. For example, under FIDIC the employer accepts this risk whereas the NEC3 form assigns this risk to the contractor. A change of law provision triggers relief (under FIDIC) if there is a change of law in the country in which the site or works are located. The intention of such a clause is to protect contractors when working in potentially unstable jurisdictions.

It should be recognised that these clauses have restrictions which could limit their ability to assist parties’ post-Brexit. Ordinarily, the change in law must affect the works in order to trigger the contractual provisions and give rise to an entitlement for money or time. Therefore, whilst Brexit may constitute a change in the law, it is not yet known what other changes may transform the legal landscape. Most change of law provisions also include notice requirements that provide a short timescale in which to benefit from these clauses. A change of law clause is unlikely to assist a party if a party in the UK is unable to provide a particular service or obtain certain materials from the EU. The UK is already suffering from a labour and materials shortage. This is likely to worsen if mutually beneficial trading for goods and services cannot be agreed in the Brexit deal. The uncertainty of the final deal is negatively affecting the price of materials i.e. importing goods has become more expensive. Brexit may cause an inflationary effect on these costs.

When a party cannot perform a contract, without the fault of either party, then they can seek to rely on the law of frustration. This may be relevant but the principle is narrowly construed. The inconvenience or financial hardship caused by a change in law will not be sufficient enough to rely on this legal argument. In a similar fashion, the circumstances would need to be sufficiently extreme enough for a party to seek to rely on a force majeure clause. Force majeure clauses operate so as to excuse performance of a particular contractual obligation if a certain event occurs beyond a party’s control. The effect is therefore more limited than frustration. The success of relying on either principle will depend on the construction of the relevant clause and the circumstances surrounding Brexit, and effect on the contract.

Although fixed-price contracts are preferred by employers, they cause difficulties for contractors who want to claim costs on top of the contract sum. However, following the referendum these contracts have grown in popularity and contractual triggers are based on inflation, the stock exchange or price increases.

Whilst little of construction law derives from our EU membership, certain legislation (such as the Construction (Design and Management) Regulations) does emanate from it. We do not anticipate that such legislation would be revoked post-Brexit; however the government is likely to consider Brexit’s effect as part of the proposed Construction Act amendments.

The majority of construction contracts will expressly state the party’s choice of law to govern the contract i.e. the law of England and Wales. Following Brexit, it is likely that the courts will continue to uphold these clauses. However, parties’ with contracts which will continue into the post-Brexit period should review any references to the EU and whether that reference includes the UK after Brexit. For example, the EU could be used to define the territorial scope of a restriction or provider of goods or services.

In the event of financial hardship, where the construction contract becomes unprofitable due to post-Brexit tariffs or the loss of freedom for the movement of goods, the parties’ would need to rely on express provisions to provide any relief. A construction contract will not be frustrated simply due to financial hardship, and would only apply if Brexit fundamentally altered contractual obligations.  

Contact us at brexit.group@weightmans.com with any queries or contact the author, Chris Doran.

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