As the likelihood of a 'no deal' Brexit increases, its imperative that construction companies start thinking about whether their contracts are fit for purpose says Nigel Blundell, partner at Pinsent Masons.
The cost of imported materials will rise where World Trade Organisations tariffs and quotas apply. Additionally, customs checks and regulatory requirements could also lead to delays or non-availability of goods and materials. If the contract is silent on risk allocation, it will be the contractor who must cover these additional costs, or they may be hit with delay damages.
It's true that different standard form contracts provide contractors with protections - but the extent of protection varies significantly depending on the width of the relevant clause.
It has been some time since the industry has had to deal with the impact of major and sudden changes to price. Responsibility for bearing any tariff increases imposed by a no deal scenario can be addressed if incorporated into the contract but the drafting and practical operation of both fluctuation schedules and inflation adjustment mechanisms will require detailed consideration.
Most contracts contain a 'force majeure' clause, which kicks in when certain unforeseen events occur and prevent one of the parties for performing its obligations under the contract. But, to be excused by a force majeure clause, companies must be able to show that they would have been able to perform obligations in the usual manner had that event not happened.
Should the UK exit the EU without a formal withdrawal agreement in place, the applicability of force majeure clauses to this scenario may well be tested by the courts. However, success will all depend on the wording of the clause.
The basic issue with force majeure is that Brexit is unlikely to make performance of the works impossible. Rather, it will become more difficult. To be successful, the party seeking to rely on the clause will need to demonstrate there was no alternative way of delivering its obligations.
"The biggest issue will be for contracts which have been awarded when a no deal Brexit was a lower possibility."
Nigel Blundell, Pinsent Masons partner.
Generally, in the construction sector 'more difficult' means more time needed to perform and therefore more cost. Companies will not be able to rely on a force majeure clause simply because the costs of performance are increased. In a low margin business which penalises delay, not allocating risks appropriately can lead to contracts rapidly becoming unprofitable.
The biggest issue will be for contracts which have been awarded when a no deal Brexit was a lower possibility. Existing contracts should be checked for potential exposure to additional costs or penalties for unexpected delays. Companies must review supply chains in order to assess the extent of exposure to EU imports after the end of March, and consider whether any suppliers are themselves in a vulnerable position.
Once the potential risks have been fully understood, companies can then look at ways to address them. For example, could alternative, UK suppliers be sourced? Should companies consider discussing with the client whether to bring forward the expenditure of key items so they are not caught at Dover or Calais? Should negotiations be re-started around contractual provisions, for example delay damages with contractors?
If companies are negotiating new contracts now, they may wish to consider specific contractual provisions dealing with Brexit-related risks. The key is to assess the potential risks and create mechanisms which avoid a completely fixed price contract so that the cost and time implications can be assessed as they occur.
Whilst the outcome of the UK's negotiations with the EU remains unclear, it may not be realistic to cover every potential eventuality but there are existing contractual mechanisms which can provide more flexibility on time and cost.
Nigel Blundell is a partner at the law firm Pinsent Masons.