Brexit and Construction Contracts

This article is the fourth in a series looking at the impact of Brexit on the construction industry.

In our previous articles in this series we have highlighted summary impacts of the TCA and the withdrawal of the UK from the EU and EEA. As part of these articles we have suggested some practical considerations to be taken into account and, in this article we highlight points to be considered in relation to construction contracts entered into prior to the UK’s withdrawal from the EU and those that have been or will be entered into following the TCA.

Construction Contracts – some things to consider

For the purposes of this article we have taken a broad-brush approach as there are numerous nuances which could apply. As such, and as noted above, we are considering those contracts in existence prior to all announcements, the negotiation period for the TCA and the transition period, together. There will be situations where timing is very important and it will not be so black and white, but we highlight the issues to be considered

to see where, and how, any increased cost as a result of Brexit may be covered (or not).

Existing contracts

There have been numerous commentaries from the industry on areas to look at and routes to potential risk mitigation. The two areas commonly discussed are that of a change in law/legislation or force majeure. For these, and other potential arguments we will use the JCT and NEC contracts (using the JCT D&B 2016 and NEC3 ECC) as the basis as they are the most prevalent in the market (at least domestically).

In relation to the JCT D&B 2016 (used as it includes the widest set of standard terms from the suite), the potential routes of argument could include:

• Divergence from statutory requirements. Whilst the contract requirement may have previously been acceptable, there may be new legislation enacted in relation to the quality of materials or health and safety practices. In these circumstances this clause is unlikely to come to a party's aid as the standard wording places all risk on the contractor.
• Delay in the works due to material supply being prolonged following increase in customs checks. In relation to time (and relief from damages) three of the standard list of Relevant Events are likely to be the focus here for parties in dispute:
  • A Statutory Undertaker carrying out its work – considered to be unlikely to apply as a customs check would not be being carried out in relation to the Works specifically;
  • The exercise of a statutory power, but which directly affects the Works – considered to be a possible route of argument, but would centre around whether it is of a 'direct affect';
  • Force majeure – unlikely, but depends on how the argument is phrased and what the 'event' is that is being relied on. A key point to consider is whether the affected party has done all it could to have avoided or mitigate; were other materials available or could they have been ordered sooner? This argument will very much depend on the facts.
  • For a positive recovery of loss and expense, none of the Relevant Matters under the standard form are likely to apply.
• Increase in the cost of materials or labour. The position under the standard form places the burden firmly on the contractor with the rates and prices already agreed governing the relationship, with the neither the Change or Relevant Matters provisions providing assistance. The potential route to recovery would depend firmly on whether the fluctuations option has been incorporated. In our experience, this is rare but is the first place to look.

For the NEC, specifically under the Engineering and Construction Contract ("ECC") form, the position is largely similar:

• Distinct from the JCT, time and cost is dealt with collectively through the compensation events in the NEC. However, only one of the standard events is comparable 60.1(19), commonly understood to be the equivalent 'force majeure' provision.
• As with the JCT equivalent, this compensation event is untested. The key area of dispute is likely to revolve around the words 'such a small chance of occurring…to have allowed for it'.
• Unlike the JCT the NEC does include two optional clauses which are apposite; X1 and X2.
  • X1 – where goods have increased in price due to inflation, which would require a market increase and not simply specific to a particular material or resource as it is calculated using a market index, the Prices are adjusted to account for the increase. As with the JCT, check if this is included within the contract as the first step. It is rarely selected due to it significantly favouring the contractor; read into that what you will as to how terms are proposed and by who.
  • X2 – a change in law provides potential entitlement to a compensation event. The argument here would focus around if it was the change in law as being the originating event, or a change in market conditions.

New contracts and changes to existing contracts

As a result of the potential difficulties identified above, it is worth considering what can be done to avoid or mitigate some of these.

If using the JCT contract forms, consider including new Relevant Events and Relevant Matters. For example, these could be amended to expressly provide relief or an entitlement to claim should materials be delayed through customs checks or delays at ports, or a delay in labour resource due to immigration checks, or even availability in the market.

Consider selecting the fluctuations provisions and amending these to track not only the increase in taxes and levies, but also the base cost of the goods. An approach would need to be agreed, and simply linking it to an index or market pricing tool may be insufficient, particularly if the material or plant is highly specialised.

For the NEC, an amendment to Option X1 would need to be made for the equivalent fluctuation effect to the base cost for more than taxes etc. For time relief and cost recovery, consider including z clause amendments to introduce new compensation events or, potentially in combination with, new Employer risks (these could also be noted in the contract data).

Conclusion

Whichever contract form is being used,  it is unlikely to be set up to take into account  the cost increases and delays arising from Brexit going forward, and so changes to terms will need to be made if the risk profile is to be altered.

If amendments to the underlying terms are not possible, for whatever reason, it is then a question as to what risks can be built into the price.