Out-Law Analysis | 07 Nov 2018 | 3:29 pm | 3 min. read
The cost of imported materials will increase in the event of a no deal scenario in which World Trade Organisation (WTO) tariffs and quotas apply, while customs checks and regulatory requirements could 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 who may be hit with delay damages.
Different standard form contracts provide contractors with protections but the extent of protection varies significantly depending on the width of the relevant clause. For example, under the NEC contract, there is a wide change of law clause which if incorporated into the contract is probably sufficient to provide protection to a client. In the 2016 JCT suite, the change in law provisions tend to be drafted so that they only apply to legislative changes which have an impact on the physical design and construction of the works.
Responsibility for bearing any tariff increases imposed by the no deal scenario can be addressed through the JCT fluctuation schedule which, if incorporated into the contract, may allow the contractor to recover increased levies, taxes or costs which are imposed. Some of the NEC suite of contracts provide for price adjustments for inflation through a secondary option clause (X1). The drafting and practical operation of both fluctuation schedules and inflation adjustment mechanisms will require detailed consideration: it has been some time since the industry has had to deal with the impact of major and sudden changes to prices.
Most contracts contain a 'force majeure' clause, which kicks in where certain unforeseen events occur and prevent one of the parties from performing its obligations under the contract. To be excused by a force majeure clause, you must be able to show that you would have been able to perform your 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 depend on the wording of the clause, and there are a range of different approaches adopted in contract drafting.
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. Generally, in the construction sector, "more difficult" means more time needed to perform and therefore more cost. You 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. Review your supply chains in order to assess the extent of your exposure to EU imports after the end of March, and consider whether any of your suppliers are themselves in a vulnerable position.
Once you have fully understood the potential risks, you can look into ways to address them. For example, might you be able to line up an alternative, UK-based supplier? Consider discussing with the client whether to bring forward the expenditure of key items so they are not caught at Dover or Calais. Attempt to renegotiate certain contractual provisions, for example delay damages with the client.
If you are negotiating a new contract now, you 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 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. This will mean a client does not automatically overpay if a worst case scenario does not occur.