The Brexit vote was a major shock to the construction industry. The long term effects will largely depend on what exit deal the government is able to negotiate with the EU. In the meantime things still need to be built so minds turn to whether construction contracts should be drafted and negotiated differently because of Brexit.
In this first of a series of articles we look at some of the clauses that may need to be approached differently.
Change of law clauses
It may seem obvious that leaving the EU would have a sudden and dramatic impact on our laws, but closer analysis suggests otherwise. The UK remains a member of the EU and European laws that applied to us on 23 June 2016 still apply now. They will continue to apply until we leave the EU, which will be 2019 at the earliest. Therefore, when considering changes of law clauses for works that will complete before any likely leave date the issues to think about are no different than before the Brexit vote.
More complex are those contracts that will straddle a likely exit date. Will exit result in changes of relevant law? Again, gut instinct would suggest that major changes will happen quickly, but this is unlikely. Very little construction law derives from the EU. The most obvious example is the CDM Regulations. It is highly unlikely that these will change soon after exit because:
- they are generally well understood and do their job
- it is highly unlikely that they will be scrapped and not replaced
- legislating on a replacement will be a low priority of any government grappling with EU withdrawal.
Of course, construction is indirectly affected by many other laws which could change following EU withdrawal. Examples include the procurement regulations. However, current expectations are that few of these are likely to be subject to radical change in the months (or even years) following exit for the reasons described above.
So what laws are likely to change quickly on exit? The two areas that could have the biggest impact on construction are the introduction of import duties and restrictions on the free movement of workers. Both will depend on the nature of the exit deal the government is able to negotiate. The EU has made it clear that free movement of people is a likely condition of free trade but that is unpalatable to many on the pro-exit side of the debate. Some fetter on both free trade and free movement is therefore likely.
So which party should carry the risk of changes in law which affect delivery of the works? Options to consider include:
- Adopt the position proposed by standard forms – For example, under JCT and FIDIC the risk is the employer's. NEC3 (absent option X2) places the risk on the contractor.
- Consider who is best placed to assess and provide for the risk. Is it the contractor who has better visibility on how import duties and a smaller labour pool would affect price and delivery? Or might the employer prefer to carry the risk and put in place a contingency rather than incur a risk premium in the contractor's price?
- Introduce a foreseeability test so that, for example, the contractor only gets relief in respect of changes in law that are unforeseeable.
- Split the risk. For example, the contractor accepts the risk of changes in law except for those directly due to Brexit (or, more narrowly, increases in import duties and restrictions on labour).
There are no easy answers but a better understanding of what laws are likely to change and when should help the parties to reach a solution appropriate to their project.