The UK’s decision to leave the EU could lead to the postponement or cancellation of major schemes. What implications will this have for the contracting parties?
There is a pressing question around what effect Brexit will have on large-scale infrastructure projects in the UK.
With concern about the future of projects such as a new runway in the South-east, Hinkley Point C and the second phase of High Speed 2, what can be done to protect investors and contractors from the risks – or fairly allocate the rewards – that Brexit might bring?
Risk and reward
For projects with contracts already executed, the risk and reward structure will continue to be allocated according to existing terms and conditions.
The availability of labour (particularly skilled trades from within the European Union), the cost of plant and materials and changes to English law (such as repeal or amendment of the European Communities Act 1972) are likely to be affected as a consequence of Brexit, but these are the sort of contingencies that many contracts already provide for.
How contracting parties absorb the impact of the Brexit process as it evolves will depend upon the wording of clauses dealing with fluctuations, changes in law and rights of termination.
“Frustration and force majeure clauses are likely to be under particular scrutiny”
There is likely to be particular focus on those clauses which entitle claims to be made for extra time and money.
Frustration and force majeure clauses are likely to be under particular scrutiny. Of course, whether either type of clause is operative in the face of Brexit will depend on the terms used and the way the courts have reacted to such clauses.
For example, some claims that changes in law have frustrated a contract have succeeded. But as a general rule, matters such as inconvenience, hardship and financial loss which fall within the risks allocated by the contract will not have that effect.
Ahead of the referendum, some commercial property contracts provided an opt-out provision which could be activated in the event of a vote for Brexit.
Following the referendum, there has been a spate of commercial property deals either suspended or cancelled.
It is likely that opt-out provisions such as those deployed in property deals will continue to feature in contract negotiations, as parties look to hedge or contain the risks of political and economic uncertainty.
The low cost of borrowing, a flexible labour market and relatively high employment are amongst the features that have traditionally made the UK attractive to investors, and some large-scale projects that are still in the negotiation phase appear undaunted by the prospect of Brexit.
“It is likely that opt-out provisions such as those deployed in property deals will continue to feature in contract negotiations, as parties look to hedge or contain the risks of political and economic uncertainty”
EDF, largely state-owned and with debts of around €37bn, recently restated its confidence in the Hinkley Point C project and announced that the Brexit vote will have no impact on the decision whether to go ahead.
Part of the current deal is a guaranteed price for electricity over a 35-year period. Although there might be some uncertainty as to whether the new government might seek to renegotiate those terms, progress has certainly not stalled.
Funding and procurement
In its capacity as an EU member state and shareholder of the European Investment Bank, the UK has access to funding for a number of major infrastructure projects.
Existing loans are not thought to be affected by Brexit, but the future of those UK projects with funding decisions from the EIB still in the pipeline is not clear.
Ultimately, the UK’s access to funding from the EIB is going to depend on the outcome of negotiations once (or perhaps if) Article 50 negotiations for withdrawal commence.
Public authorities and the Crown are currently bound to comply with EU procurement rules, designed to uphold the EU principle of freedom of services.
“Existing loans are not thought to be affected by Brexit, but the future of those UK projects with funding decisions from the EIB still in the pipeline is not clear”
Sanctions for breaches include damages, a declaration that the contract is ineffective, and consequential orders for restitution and compensation. These rules will continue in force at least until the 1972 act is amended or repealed.
Section 17 of the Local Government Act 1988 currently imposes some limits on the procurement functions of local authorities, but public procurement post-Brexit is likely to be the subject of review and revision.
There may be uncertainty about the effect of Brexit, but lawyers and clients are adept at drafting and negotiating contracts to manage uncertainty, whatever its cause.
Those skills will continue to be in demand as we move into a new era.
Frances Pigott is a barrister at Atkin Chambers