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Brexit and cross-border construction related disputes

With Article 50 now triggered and the UK’s march to Brexit under way, what will be the legislative impact for construction?

Brexit will have far-reaching implications for UK construction, be that in relation to available skills and labour, single market access for UK contractors and consultants, sources of funding for infrastructure projects, and managing cross-border European Union disputes.

There are thus a number of Brexit-related risks in cross-border disputes – but there are ways to mitigate them.

Although the law remains unchanged in the short term, domestic legislation needs to reflect the content of the agreement negotiated with the EU and in this regard there is no certainty regarding the deal’s final form.

Adjudication, one of the most widely-used dispute resolution processes in UK construction, is domestic legislation, so will not be impacted by Brexit.

However, there are procedural areas of civil and commercial litigation which might be, due to numerous EU laws regulating and providing reciprocal arrangements where disputes feature cross-border elements.

Implications for cross-border EU disputes

These laws determine issues such as which law applies to a cross-border dispute, which EU state court has jurisdiction to hear the dispute, and the procedure for recognising and enforcing a judgment.

The Recast Brussels Regulation, for example, applies to most civil and commercial litigation, providing a streamlined solution for determining jurisdiction and the enforcement of judgments across EU states. It currently has direct effect in the UK, but will not post-Brexit.

This raises the risk of parallel proceedings (proceedings arising out of the same matter commenced in the courts of more than one EU state) and a more onerous (and costly) procedure for recognising and enforcing judgments.

The UK may, like European Free Trade Association member states accede to the 2007 Lugano Convention (similar to the Recast Brussels Regulation but it governs such issues between EU and EFTA states).

The UK is unlikely to become an EFTA member state as Theresa May has rejected anything that leaves the UK “half-in, half-out”.

Alternative routes

The Hague Convention on Choice of Court Agreements is an alternative: an intergovernmental agreement promoting international trade and investment by offering greater certainty for parties involved in business-to-business contracts and international litigation, through the creation of rules on jurisdiction, and the recognition and enforcement of judgments in civil and commercial matters.

Another example is in the Rome I (contractual obligations) and Rome II (non-contractual obligations arising in civil and commercial matters) Regulations, which determine the laws governing a dispute.

The UK may continue applying these rules post-Brexit, helping provide certainty on the applicable law in a cross-border dispute.

International arbitration might be the top choice for dispute resolution, as it will remain largely unaffected by legislative changes since it is regulated via the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Its 157 contracting states mean it may be easier post-Brexit to enforce an arbitral award in an EU member state than an English court judgment.

Preparing for Brexit

Despite uncertainties and potential myriad legal issues, parties in the construction industry can take several steps to identify and mitigate potential Brexit-related risks.

Firstly, parties should continue monitoring Brexit developments closely to ascertain sector-specific impacts.

The government has pledged to provide clarity throughout the Brexit negotiations so policy positions and indications on potential changes to domestic legislation can be tracked.

Secondly, parties on live projects due for completion post-Brexit negotiations should undertake due diligence of their contracts and commercial relationships to identify areas of uncertainty.

For instance, where a party to a contract is from an EU state, parties should consider how their dispute will be resolved, focusing on issues including applicable law, service of documents and the recognition and enforcement of judgments.

If not already addressed in the contract, a short deed of amendment could be drafted to cover off Brexit-related issues.

Thirdly, for parties in the procurement stage, contract provisions will need to cater for potential Brexit-related issues, including availability of alternative financing, changes in material prices result from the implementation of tariffs or customs fees, labour restrictions, currency fluctuations, the applicability of European technical standards and approaches to dispute resolution.

For example, choosing arbitration may aid enforcement of any subsequent award as it will be enforced under the New York Convention so will not require any specific EU legislation.

As the UK embarks on complex Brexit negotiations, the construction industry needs maximum legal certainty and support.

Those involved in resolving cross-border EU disputes need to proactively plan to ensure Brexit-related risks are identified, managed and mitigated.

Joseph Otoo is a senior associate in the construction and engineering group of Mayer Brown International

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