Brexit: Apocalypse now or just bad weather?

The fog of uncertainty which began to intensify in the lead up to the 23rd June referendum date will be with us for some time now the decision has been made to accept what the people have voted for as the trigger to leave the EU.
We are going to be living with a lengthy time of uncertainty.

There has been, inevitably, a good deal of crystal ball gazing (maybe head torches could be the answer in an attempt to see through the fog?). We have seen what is at this stage, the knee jerk reaction of the markets affecting share prices immediately after the decision and are witnessing the impact on the value of sterling. The pundits have forecast increased labour costs when the restrictions in free movement of labour bites and increased material costs for the UK, and investment funds are being suspended.

It may feel like apocalypse now but positivity in the wake of all this has to be the name of the game and we could be well served in remembering the Scouts’ motto: “Be prepared.”
We are still in the EU and for at least another two years, the EU trade agreements and procurement rules will continue to have effect and free movement of people and labour won’t be affected; although inevitably some have questioned and are nervous about whether they are welcome.

We have a housing shortage that is not going to disappear anytime soon so this is the time for our government to support investment both in housing and infrastructure; think about releasing public sector land and relaxing the planning regulations to encourage and facilitate the right sort of development and encourage investment.

It is inevitable that there will have to be changes in the construction industry to accommodate the UK’s new economic and political landscape. Some of these may include extra scrutiny of current contracts by employers and contractors who may be looking for “wriggle room” if, following the fallout from Brexit, they are now faced with a slowdown of progress on site, forced to renegotiate or even extricate themselves from pre-Brexit contractual arrangements.
Parties to existing contracts will be concerned about ways in which they can limit their exposure. The principles of force majeure - where a party may be entitled to suspend or end its obligations to perform a contract due to reasons it cannot control are starting to be discussed, albeit a little prematurely .

Major change clauses such as those commonly found in funding agreements and other commercial contracts could become fashionable in construction contracts

The JCT Design and Build 2011 does not have a definition of force majeure, although it is stated to be a “relevant event” for the purpose of entitling a contractor to an extension of time. It is important to consider this issue, although the outcome of any claim to rely on force majeure is highly fact dependent. It is not possible to predict at the moment whether Brexit could amount to a force majeure event, or which party could potentially benefit from such a clause. That would depend on the wording used in the contract and the circumstances in each case.

Looking forward, as the formalisation of the UK’s break with the EU approaches, target cost contracts could become more popular and contract drafters will be reaching for their red pens to include / limit price adjustment mechanisms which previously may have been incorporated with a relatively light touch.

There may be a new focus on change of law provisions. Major change clauses such as those commonly found in funding agreements and other commercial contracts could become fashionable in construction contracts. It is almost certain that fluctuation clauses will be given a great deal more attention than before and questions may be asked about the effect on fairly market standard clauses. For example, how will an obligation to proceed regularly and diligently with works be construed if labour is in short supply?

There is talk of the evolution of a brand new “Brexit clause”, looking to, for those who have not already got this covered, allocate risk for the termination or renegotiation of uneconomic contracts; or to change the previously accepted contractual position . What would such a clause look like? It could, amongst other things, anticipate and provide for time and /or money for certain events (like a normal EOT/variation provision); it may allow for short periods of suspension, or contain bespoke wording to suit any changes which may become necessary as the terms of Brexit become apparent.

It all remains to be seen. For one thing, there may not be room for such flexibility in public sector contracts in the medium term as the EU public procurement rules will still apply and no authority will be in the position to be able to renegotiate a previously publically procured contract without having to start the whole process off again.

The Scouts’ motto is a pretty sensible one and - as far as this is possible (given the vastly different scenarios which can play out in the construction industry) - the carefully thought through drafting of construction contracts will be crucial.

Stephanie Canham is head of construction at law firm Trowers & Hamlins