Brexit factors to consider in new construction contracts

  • Insight

04 April 2017

With Article 50 now triggered, for those who work in the construction industry, long-term planning is now necessary.  Our laws will change and given the long lead times of construction procurement it is important that consideration is given now on the potential impact of Brexit in relation to the way we contract.

While so much surrounding Brexit remains unclear, what we do know is that the Construction sector will be directly impacted by restrictions on free movement of labour, increased currency fluctuation and import duties.

For contractors that have agreed to undertake works for a lump sum, it is ultimately for the contractor to address any shortage of labour risk or for an increase in the cost of materials. A substantial proportion of materials used on UK construction projects come from Continental Europe. However, if a contractor contracts on the basis of a lump sum tender then the reverse position is that if the exchange rates moves in the contractor’s favour the employer picks up no benefit from such changes.

Fluctuation provisions in standard form contracts often deal with changes in taxation or changes in labour and transport. Such clauses are typically struck through as employers require a fixed lump sum price and contractors may now place additional focus on these clauses. It should not be forgotten that VAT harmonisation in the EU is the foundation of our VAT system and VAT will necessarily have to be overhauled.

If a construction contract has provision for force majeure, the lack of availability of staff or issues in relation to the import of key materials are unlikely to satisfy any test of force majeure under a construction contract. Such issues would ordinarily be at the contractor’s risk.  Force majeure provisions will ordinarily turn on the specific provisions of the contract and employers will want to ensure that any shortage of labour is expressly excluded as being a force majeure event.

A separate but related point is in relation to change of law risk. Depending upon the length of the programme for the works, in most circumstances the employer would insist on the contractor assuming this risk. Both parties will now, I suspect, spend considerably more time weighing up the implications of this clause.  It may be that a compromise is struck where a foreseeability test is introduced to the change of law, meaning the parties ultimately share a degree of risk on that point.  Another approach may be an express exclusion relating to the implications of Brexit.

Although the new treaties will cease to apply to the UK on the formal exit date, a number of key EU laws have already been implemented into primary UK law.  For example, the CDM Regulations being the key Health and Safety legislation relating to construction originate from EU law but have now been introduced by way of primary UK legislation.  As such, they will continue to apply following Brexit.

Construction contracts often make reference to various European Standards and Codes. A little bit more attention should now be paid to the wording of those clauses, particularly where the works will continue through a possible Brexit date.
In relation to obligations to maintain professional indemnity insurance, the clause would often require that the party is insured with an insurer carrying out business within the European Union and an obvious amendment would be for UK projects to ensure that such insurer is directly carrying out business within the UK.

We have not yet seen dedicated Brexit clauses but we suspect they will start to emerge. They are likely to arise in contracts where one of the parties believes that Brexit could substantially impact on their ability to perform the contract. The supply of materials is a good example. For any Brexit clause to operate the parties would need to consider very carefully what the potential implications would be.  If it is an obligation to reconsider the commercial terms then that degree of uncertainty sitting within the contract may simply not be acceptable to the other party.  The parties will need to think very carefully about who would bear the responsibilities in cost if the contract does not address Brexit risk.

We are living in a time of substantial uncertainty and force majeure clauses in contracts are intended to address this.  However, given the potential impact on construction contracts of applications for time and corresponding loss and expense it may be that the industry would benefit from force majeure clauses that further define how Brexit and its range of possible outcomes may be addressed.