As the days get longer and the nights shorter, the UK is slowly edging towards its withdrawal from the EU.
Prior to the EU referendum which took place on 23 June 2016, we published an article outlining the possible implications of Brexit on UK construction. At the time, what was significant was how little was known, with ‘uncertainty’ the buzz word. We identified a number of key considerations that businesses should be thinking about including the possible impact of Brexit on regulation, procurement, access to foreign labour, imports and exports, exchange rates and access to finance.
Nearly nine months on from the leave vote and following political resignations and appointments, some speeches, a lot of speculation and headlines, and a court case, this article revisits what more, if anything, we now know about the possible implications of Brexit on UK construction.
A brief recap
On 23 June 2016 more than 30 million people in the UK voted in the referendum and a majority of approximately 52%, voted for the UK to leave the EU.
For the UK to begin the process of leaving the EU, a formal notice must be served in accordance with Article 50 of the Treaty on European Union.
In the early Autumn of 2016, at the annual Conservative Party Conference, the Prime Minister, Theresa May, set out a timetable for invoking Article 50. This provided some clarity: the Article 50 Notice would be served in late March 2017 after which there would follow a two year period in which the UK and the EU would negotiate the withdrawal agreement (with the possibility of an extension, subject to the unanimous approval of all member states). Therefore and assuming no extension, the UK would formally leave the EU in March 2019.
The Government had argued it had the power to invoke Article 50 using the Royal Prerogative (a set of powers that allow the Prime Minister and the Government to make decisions without consulting Parliament). However you will have heard and/or read about the challenge to this position in the courts. In London the High Court concluded that the Government did not have the power to invoke Article 50 and that Parliamentary consent was required. The Government appealed the decision, with the case ‘leapfrogging’ the Court of Appeal and proceeding directly to the Supreme Court. The case was heard in December 2016 and uniquely, before all eleven judges of the Supreme Court. On 24 January 2017, the Supreme Court upheld the High Court’s decision (by a majority of eight to three), confirming that an Act of Parliament was required before the Government could invoke Article 50. The ruling also determined that the Government did not require formal approval from the devolved administrations of Scotland, Wales and Northern Ireland to invoke Article 50.
In response, the Government published the European Union (Notification of Withdrawal) Bill which sought the now necessary consent of Parliament to the invoking of Article 50 and so began an expedited process to pass the Bill through both Houses of Parliament.
On 1 February 2017, MPs in the House of Commons voted by 498 to 114 in favour of the Bill. At the time of writing, the text of the Bill has been agreed by both the House of Commons and the House of Lords, receiving Royal Asset on 16 March. The Bill is therefore now an Act of Parliament, conferring upon the Prime Minister the authority required to invoke Article 50 and begin the process of withdrawal from the EU.
In the search for clarity and greater certainty, the Prime Minister gave a much awaited speech in January 2017 at Lancaster House in which she set out the Government’s “Plan for Britain”. This laid out twelve key objectives that the Government would seek to achieve during the Brexit negotiations. These twelve objectives were detailed further when on 2 February 2017, the Government released its seventy seven page Brexit White Paper which set out its “vision” for an “independent and truly global United Kingdom” post-Brexit. The Government’s stated objectives include:
(i) providing certainty and clarity as the Government approaches Brexit negotiations
(ii) ensuring free trade with European markets; and
(iii) delivering a smooth, orderly exit from the EU
Free trade has always been a key pillar of the EU. Facilitated through the European single market, it has allowed the UK to benefit from the free movement of goods, services, people and capital (otherwise known as the ‘four freedoms’). When the UK voted to leave the EU in June 2016, member states were quick to make clear that any continued access to the single market would require the UK to continue “to accept [these] four freedoms”. Despite this, the Prime Minster has stated she is unwilling to honour the freedoms in their current form. For a sector which relies heavily on European workers and the ability to source goods and services from the European mainland, this has drawn concern and consternation from some within the construction industry. It remains to be seen exactly how the Prime Minister proposes to mitigate the potential impact of the UK’s withdrawal from the single market while also ensuring that its ability to continue to access and trade freely with member states, is not adversely effected.
There are therefore a number of potentially critical obstacles that must be overcome before the construction industry is able to gain further clarity and thus more certainty as to the implications of Brexit.
The Great Repeal Bill
The Government's proposal to introduce a Great Repeal Bill will mean that the impact of Brexit, upon regulation and legislation, is unlikely to be clear-cut.
It is expected that the Great Repeal Bill will be introduced in the Queen's Speech during the next parliamentary session in May 2017 and will be enacted and formally apply on ‘Brexit Day’, this being the day the UK officially leaves the EU on the expiry of the two year period following service of the Article 50 Notice (or any extension thereof).
The expectation is that the Great Repeal Bill will repeal the European Communities Act 1972 and, where practical, incorporate and transpose EU law into domestic legislation. It will contain delegated powers to enable the Government to adapt any laws that originate from the EU so as to take account of what is eventually agreed with the EU under the withdrawal agreement.
The consequences of the Great Repeal Bill are unclear. The effect of the UK’s withdrawal from the EU is unlikely to be immediately transformational in terms of sweeping away large tranches of EU law and regulation. Major swathes of European legislation will, post-Brexit Day, need to be assessed to determine which should remain as part of UK domestic law and which should thereafter be repealed or amended.
Construction contract implications
Brexit is unlikely to have been expressly dealt with in most construction contracts, particularly those entered into prior to the referendum.
We therefore recommend that businesses begin examining their long-term contracts which will be in force on or after Brexit Day, especially those which are ‘significant’ and of a comparatively higher value, which have a European cross boarder element and are integral to the businesses’ success, in order to understand the risks posed by Brexit. Since the referendum, we have been advising clients on:
(i) whether the introduction of tariffs, market volatility and/or exchange rate fluctuations may trigger a price change or termination provision
(ii) whether any delay or interruption in the programme caused by Brexit will trigger a right to an extension of time, force majeure or a right to terminate; and
(iii) whether and how change in law is dealt with
Below we examine some of these issues in greater detail.
Exchange rate fluctuations
Sterling was significantly and rapidly effected by the leave vote and continues to sit well below its pre-Brexit value. It is likely to remain so at least until Article 50 has been invoked and the UK’s Brexit strategy is more clearly defined.
An important consideration is the potential knock-on effect this exchange rate volatility may have on project costs. Ultimately the lower the value of Sterling, the greater the costs of goods, materials and services that are sourced from contractors, sub-contractors and/or other suppliers located abroad, especially where under the relevant contract these have been priced in or pegged to a foreign currency.
Where contracts contain currency fluctuation provisions, businesses should be clear on how the provisions work and whether they need to take any contract management steps to benefit from the provisions.
Where existing contracts do not have currency fluctuation provisions, businesses need to understand their potential exposure and consider what steps they can take: can they ‘hedge’ any future risk through their treasury function?; can they negotiate an amendment to the contract to include an appropriate currency fluctuation provision?; can they bulk buy now at a known cost and store goods and materials which they know will be required in the future? These are some of the questions businesses should be asking during this uncertain period.
Where contracts are not yet agreed, businesses must include an appropriate currency fluctuation provision.
Force majeure/right to terminate
In English law there is no statutory definition as to what constitutes a ‘force majeure event’. It is generally considered to be an event that is beyond the reasonable control of the contracting parties which prevents or otherwise impedes the performance of all or part of a contract. These events are often defined by a non-exhaustive list within a force majeure provision.
It is unlikely that contracts preceding the referendum expressly provided for Brexit and its consequences to be a force majeure event. The general consensus amongst legal commentators, is that it is unlikely that Brexit is a force majeure event absent an express provision.
Looking forward to contracts which are yet to be agreed, if Brexit and its consequences are to be considered force majeure events, these should be explicitly referred to and defined within the non-exhaustive list of force majeure events.
Change in law
A change in law provision is an important provision that should be contained within all construction contracts. Although there is usually an implied term within a contract which requires a contractor to ensure works are completed in accordance with the relevant laws and building regulations, whether the time and cost consequences of a change in such laws and regulations is to be borne by the employer or contractor, largely depends upon the express wording of the relevant change in law provision.
Contracts should therefore be reviewed to determine whether they contain a change in law provision and who bears the time and cost consequences. If so, it will be essential to ensure ‘Law’ is defined so as to either include or exclude (depending on the position of the contracting parties) all relevant legislation and standards that must be complied with, both prior to and following Brexit, such that any changes in law can be appropriately dealt with. If no such provision has been included, then it will be important to consider including an appropriately drafted provision.
Once the Great Repeal Bill is enacted and its impact on EU and UK legislation known, significant changes in law may fall within the ambit of a change in law provision. Again a more detailed examination of the relevant provision will be required in order for an accurate assessment to be made as to its implications. By way of example, laws relating to the import and export of goods and services may result in the imposition of revised import and export duties. Another example is in relation to the possible impact of a change in legislation pertaining to visa requirements for EU nationals. The possible imposition of visa requirements will arguably have knock-on consequences for labour resourcing and the associated costs on a construction project. Accordingly an employer and contractor will need to ensure a change in law provision has been adequately drafted to address the time and cost consequences.
There is still a great deal that is not yet known about Brexit and its implications upon construction and the wider UK economy. Nevertheless, businesses can and should begin taking steps to mitigate the impact of this lack of certainty by undertaking a timely and thorough assessment of its key construction contracts in order to determine if and how they might be effected by the UK’s withdrawal from the EU.