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Brexit: Construction contracts and changes in law

Tim Atwood

The most widely used UK construction contracts contain provisions that deal with changes in the law. How might Brexit affect these?

On 16 March 2017, the UK passed the European Union (Notification of Withdrawal) Act 2017 (‘the 2017 Act’), enabling the government to trigger Article 50 and start the process of leaving the EU.

The coming into force of the 2017 Act constitutes a change in UK law and will no doubt be the first of many Brexit-driven changes – such as the Repeal Bill, which will be used to repeal the European Communities Act 1972 and convert existing EU law to UK law “wherever practical and appropriate”.

The NEC, JCT and FIDIC forms are among the most recognised contracts for construction projects in the UK and they all contain provisions that deal with changes in the law. How will those terms in the JCT D&B 2016, the NEC4 ECC and the FIDIC Yellow Book be affected by Brexit?

Affected terms?

Under JCT and FIDIC, and under NEC4 if secondary option clause X2 is selected, the risk of a change in the law is borne by the employer, potentially entitling the contractor to additional time and/or money (although note that the contract sum may go down, depending on the impact the change may have).

While the governing law under a JCT is usually English law, there is provision for the parties to agree the governing law under FIDIC and NEC4.

“Brexit-driven changes to English law will only apply to projects procured under FIDIC or NEC4 that are based in the UK”

However, a change in law can only trigger relief under these latter forms if it is a change to the law of the country in which the site or works are located – the purpose of this being to protect contractors on international projects from risks associated with working in more volatile jurisdictions.

Therefore, Brexit-driven changes to English law will only apply to projects procured under FIDIC or NEC4, and that are based in the UK.

The provisions will also only apply to changes after a certain date. For JCT and FIDIC this is the base date (which falls before the date of the contract), but under NEC4 it is the contract date, which may leave a contractor exposed to the risk of changes in law between the date of its tender submission and the point at which it enters into the contract.

Causation

The change in law must have an effect on the works in order for it to give rise to an entitlement for time or money.

Under the JCT, the change must “necessitate an alteration or modification to the works”.

“While the 2017 Act may be a change in law, it has not itself made other changes to the wider legal landscape that might impact on a party’s ability to deliver a project on time and on budget”

Under FIDIC, the change must “affect the contractor in the performance of obligations under the contract”.

Under NEC4, the change will be a compensation event, for which the contractor must demonstrate his entitlement to a change in prices or key dates.

So while the 2017 Act may be a change in law, it has not itself made other changes to the wider legal landscape that might impact on a party’s ability to deliver a project on time and on budget.

Time limits

Naturally there are notice requirements under each contract that must be followed to be able to benefit from these provisions.

The contractor has eight weeks to notify a compensation event from becoming aware of the change under the NEC4, and a more onerous 28 days to serve notice from when it became, or should have become aware, under FIDIC.

Loss and expense claims under JCT must be made as soon as the change became, or should have become, reasonably apparent.

Implications

It’s hard to predict what impact Brexit will have on construction projects in future, but we can reasonably expect more changes to be made to UK law following the conclusion of the Brexit process.

As such, we could well see an increase in the operation of these types of clauses during projects.

Not only that but it is commonplace for the terms of these forms to be amended, and it remains to be seen whether the market starts to take a different approach to the negotiation of change in law provisions over the next two years.

Tim Atwood is an associate at CMS

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