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Post-referendum uncertainty: How will Brexit affect concluded contracts?

The uncertainty around the industry following the EU referendum may lead to a rise in disputes – with different contract forms presenting different scenarios.

The only certainty about the UK’s vote to withdraw from the European Union seems to be that it hasn’t happened yet.

As I write, the UK remains a member state subject to the jurisdiction of the Court of Justice and none of the many domestic regulations with European roots have yet been repealed. Equally, anyone keeping even half an eye on the news or markets has to conclude that something has happened already.

For those of us concerned with construction and engineering contracts, the fundamental issue is which party has assumed responsibility for those risks already having an effect and those that may emerge during the next few months.

Different contract forms

Life is relatively simple in relation to actual legislative changes because here we are on familiar ground – changes in law.

Under unamended JCT contracts, changes in relevant law following the base date are generally at the employer’s risk in terms of time. Typically, the employer will also carry any additional costs via the change mechanism.

NEC3 takes the opposite tack and leaves that risk with the contractor unless X2 is selected, in which case the position is reversed and the employer again finds itself responsible.

“Force majeure has an imprecise meaning and will be construed so as to avoid overlap with other relevant events”

The ACA Project Partnering Contract (PPC) takes a more sophisticated approach by linking responsibility to reasonable foreseeability, similar to the approach taken by NEC3 to ground conditions.

Foreseeability in this context does of course raise its own uncertainties: when did the outcome of the referendum become foreseeable as anything other than a remote possibility?

The fate of individual sets of regulations may be still less predictable.

Force majeure

Historically, changes in law clauses have not tended to catch the attention of parties negotiating new contracts and that is reflected in relatively limited drafting in the standard forms, at least outside Standardisation of PFI Contracts (SoPC).

It is probably fair to assume that those provisions will be more closely scrutinised over the next few years and ‘Brexit risk’ may be specifically addressed. In the meantime, discussions around concluded contracts are focusing on ‘force majeure’ and on price certainty generally.

“These issues are perhaps likely to have the greatest impact on long-term contracts for asset management, maintenance and capital improvement”

Assuming that we do not yet have to consider riots, industrial action, civil commotion and the like (much less ‘acts of foreign enemies’), force majeure does seem at first glance to have potential, at least under JCT contracts.

A note of caution there is that force majeure has an imprecise meaning and will be construed so as to avoid overlap with other relevant events.

Another potential argument, although one which perhaps seems a little far-fetched, is that the JCT provisions do not necessarily require formal changes in law and that, accordingly, the exercise of statutory power involved in calling the referendum may be sufficient to trigger the contractor’s entitlement.

A further hurdle would be the requirement for a ‘direct effect’ on the works.

Impact on contractors

Of course, ‘force majeure’ is precisely the type of lawyerly concept which NEC3 tends to avoid. The ‘Prevention’ drafting at clause 19 (and as a compensation event), appears, however, to be intended to cover some of the same ground.

Although those provisions are often deleted, under an un-amended NEC3 contract there must be an argument that delays ultimately caused by the result of the referendum (for example, delays in securing supplies or subcontracts outside the UK) are not covered by any other compensation event.

These issues are perhaps likely to have the greatest impact on long-term contracts for asset management, maintenance and capital improvement. Such contracts typically span several years and so could easily run from well before the referendum to a date well beyond the conclusion of Brexit arrangements.

In addition, the widely used standard form contracts (JCT Measured Term, NEC3 Term Service and ACA Term Partnering Contract) generally deal with risk in understandably brief terms. Both JCT and TPC provide the contractor with entitlement for all intervening causes which are beyond its reasonable control, the contractor being required to exercise best endeavours to avoid delay.

That final point may be the only conclusion we can reach at this stage.

All these standard form contracts impose significant obligations on contractors to avoid and to reduce delay whatever the cause.

Given that ‘Brexit risk’ is genuinely beyond any reasonable control (even for the government), sophisticated clients may be best served by focusing on those provisions, on robust risk management processes, on pricing strategy and on early engagement with their contractors – rather than by seeking to ‘dump’ risk at tender stage.

Peter Kitson is a partner specialising in non-contentious construction law at Russell-Cooke

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