Construction post-Brexit: five things you need to knowDecember 2020
Since leaving the EU on 31 January 2020, the UK’s relationship with the EU has been governed by the Withdrawal Agreement. This has allowed the UK to continue on the same terms it had with the EU prior to departure during a so-called ‘transition period’.
This transition period – and the UK’s relationship with the EU – will come to an end on 31 December 2020. At this stage, the prospect of the UK exiting with no deal seems likely. If so, the UK will be subject to a whole new tariff regime and will begin trading on World Trade Organisation (WTO) terms. Even if a deal is agreed, it seems clear that any terms are likely to make trading with EU countries more restrictive than they are now. In either scenario, there will be huge implications for the construction industry. In this note, we highlight five key Brexit considerations and consider what practical steps consultants and contractors can take to limit costs and disruption when the transition period finishes at the end of this year.
1. Supply chains
As members of the EU Single Market, UK businesses have to date been able to move goods and materials between EU countries without charges, taxes, quotas or tariffs. Should we leave the EU without a deal, WTO terms will impose tariffs on UK non-agricultural goods, machinery and construction raw materials. The extent of such tariffs (and thus the price of goods going forwards) is still unknown.
Contractors should, where possible, regularly check those materials they regularly import to the UK to ensure awareness of any tariff changes and factor such additional expense into project end costs. This uncertainty inevitably causes difficulties when tendering for future projects and impacts on competiveness in the tendering process.
Contractors should also note that some products will be subject to restrictions on product origin, e.g. contractors importing timber next year will have “to show imports from the EU and European Economic Area (EEA) have been legally harvested”. Such checking of product origin will not apply to all imported goods, but contractors would be aware that in some cases these checks will be necessary and accordingly extra time should be factored in to complete them.
Border checks on goods entering the UK are likely to add delays to the supply chain, as product origins are checked and relevant duties applied. This is likely to have significant impact on ‘just-in-time’ procurement, which will in turn slow down progression on projects and add further to costs.
As is often the case, effective communication within the supply chain is key. Understand how others in the supply chain anticipate the changes and consider implementing new processes or revising old to procure goods and materials needed for construction projects.
The potential shortage of workers available to the construction industry as a result of new immigration rules has been much publicised. EU citizens already living or working in the UK prior to 1 January 2021 can remain until 30 June 2021 if they have applied to remain in the UK under the EU Settlement Scheme. They will be given either settled (if they have lived in the UK for a five-year period) or pre-settled (if less than five years’ continuous residence on the date they apply) status. Contractors should encourage existing EU workers to apply to remain in the UK if they have not already done so.
After 31 December 2020 anyone wishing to come to work in the UK will be subject to a points based application system. This is designed to attract ‘skilled workers’ with skill level thresholds of RQF 3-5 (A-level or equivalent). This will include architects, engineers and quantity surveyors, and also skilled trades such as bricklayers or carpenters, but excludes a number of roles such as general labourers and some plant operators.
An applicant will also need to produce evidence of a job offer at the required skill level that meets a new minimum salary threshold of £25,600 (or the going rate for the role). There are obvious implications of this in the construction world, where the majority of the labour force (certainly outside of London) do not attract salaries of this high a level.
Even if the criteria can be met, the costs of getting requisite approval to bring workers to the UK may be prohibitive. Employers sponsoring workers under the points based system must pay £1000 per skilled worker for the first 12 months, with an additional fee of £500 for each subsequent six-month period.
With no temporary work route available for low skilled workers, there are concerns that these changes will hammer the industry’s capacity of delivery on key projects as the domestic workforce will simply not be able to fill the resultant gap.
3. Quality standards
Currently the quality of construction goods, materials and products are controlled by EU regulations, specifically the CE mark. CE marked products will be allowed in the UK market until 1 January 2022, which avoids any short term uncertainty. In the longer term, the government plans to create the UKCA to replace the current CE mark. It is to be hoped that the UKCA will closely align to the CE so as to ensure goods could pass the equivalent CE standard without any need to carry out further testing. Without any mutual recognition of standards, the industry will have to repeatedly test products for different markets adding significant cost and delays. Harmonisation is key – whether this can be achieved remains to be seen.
4. Dispute Resolution
In cases with a European dimension, Brexit will impact the law applicable to disputes and also issues of jurisdiction and enforcement. It should be noted, however, that current rules will continue to apply to any contracts agreed, or harmful events occurring, prior to the end of the transition period later this year. In some cases, it may therefore be sensible for businesses who are party to an ongoing pre-action dispute to issue proceedings before the end of the transition period, so that they can benefit from the ongoing application of existing rules on jurisdiction. Legal advice should be sought on this.
The UK had planned to accede to the Lugano Convention 2007, the preferred regime for government questions of jurisdiction and the enforcement of judgments with EU countries after the end of the transition period. It is now clear, however, that there is insufficient time for the UK to complete the application process to join the Lugano Convention for membership to be effective from 1 January 2021. This means that the default position will be that jurisdiction and enforcement will be determined by common law and The Hague Convention 2005. The Hague Convention requires the court designated in an exclusive jurisdiction clause to hear the case and prevents courts of other contracting states hearing parallel proceedings. It will also provide some level of protection as regards enforcement, as it generally requires any judgment granted by the court specified in an exclusive jurisdiction clause to be recognised and enforced in other member states. As a result, parties may wish to consider the inclusion of exclusive jurisdiction clauses in their contracts.
Legal advice should be obtained as regards dispute resolution clauses in new contracts with European entities or concerning European projects. Local law advice may be needed on issues such as how easy it would be to enforce a UK judgment in another country where the other party’s assets are located. This is also the case as regards any yet un-enforced judgments that contractors may have against parties in EU member states.
Those who have concerns about enforcement post Brexit may wish to consider contractual arbitration clauses. Enforceability of arbitral awards under the New York Convention is unaffected by Brexit. This therefore represents a relatively low-risk option.
The position remains uncertain. Developments in this area should be closely monitored and legal advice sought where there are concerns.
5. Public Procurement
Public procurement will, ultimately, be heavily influenced by any future trade agreement between the EU and the UK. In the now likely event of a ‘No Deal Brexit’ the WTO’s Government Procurement Agreement (GPA) will be the default regime. The GPA commits WTO members to open up their public procurement markets to contactors from other member countries. The UK is currently a GPA member by virtue of its membership of the EU, but will continue as a member post Brexit following steps taken by the government to negotiate its individual membership. As a result, UK businesses will still be able to compete for public contracts across the EU although on a more limited basis than before. Outside of the EU, membership of the GPA means that UK businesses will also still be able to tender for public contracts in other GPA member countries, such as the USA, Canada, Japan and South Korea. The GPA contains strict rules on how procurements must be carried out.
After the transition period, contracting authorities will no longer be obliged to publish notices in the Official Journal of the European Union (OJEU). Rather, a new UK e-notification system, ‘Find a Tender’ will be used. Any requirements to publish notices on other platforms such as Contracts Finder, MOD Defence Contracts Online will remain unaffected.
Any contract award procedures begun during the transition period will still be subject to EU law, even after the end of the year. EU law will also continue to apply to the award of call-off contracts from framework agreements established before the end of the transition period or following a procedure which started before the end of the transition period. So it could still apply to call-off contracts for a number of years yet.
In future, however, changes to the procurement rules are likely. We are crystal ball gazing to some extent, but anticipate changes to the rules so as to make them simpler, reducing procedure and making tendering a less prescriptive process than is currently the case. It is possible that some of the rules on contract modifications and transparency of evaluation could be relaxed. We also envisage a departure from EU remedy rules, for example removing automatic suspension and ineffectiveness.
What should you be doing now?
At this stage, it is important that you review and take advice on existing contractual provisions. In most standard form JCT or NEC contracts the contractor takes the risk (in terms of both time and cost) for the supply of goods, materials and the availability of labour. In the absence of an express Brexit clause it is unlikely that the contract will allow for extensions of time or reimbursement of loss and expense due to issues arising from Brexit.
Contractors should consider the possible impact of Brexit related events on rights and obligations under the contract and, also, on timing and performance. Is there, for example, a right to terminate if materials are not supplied by a specified date? Is the contractor exposed to a claim for damages or losses resulting from such delay? Some contracts may now appear unworkable or unprofitable in light of the implications of Brexit, in which case contractors may wish to approach employers now in an effort to renegotiate terms.
When new contracts are negotiated, contractors should be sure to minimise risks associated with UK’s departure from the EU. This may include, for example, allowing extensions of time if a No Deal Brexit causes delays in the delivery of goods and materials, or pre-emptively extending a period for completion so as to avoid liability for any delay. Contractors may wish to negotiate provisions to be reimbursed for Brexit tariffs and duties or, failing that, add caveats to the tendered price to allow for recovery of any such costs. Advice should be taken on the inclusion of a Brexit or No Deal Brexit clause, which can specify events which would trigger a review/changes in the contract terms.
As a general point, simply be aware of and be pro-active about the risks. Allow contingencies for both time and cost where possible. Collaboration and communication with both the employer and the supply chain is key. Reliance on Force Majeure should be a last resort, used only when all other routes of communication and negotiation to reach a commercial solution have been exhausted.
It is inevitable that the construction industry will encounter problems from the now likely No-Deal Brexit at the end of the current period of transition. It is important to think ahead, identify and manage the risks. A full audit of existing contracts with any connection to UK/EU trade (noting that different issues will arise depending on the form of contract used) is advisable and close liaison with employers and others in the supply chain to find appropriate solutions to issues arising. New contracts should be drafted with care so as to minimise risk and the inclusion of a Brexit or No Deal Brexit clause should be considered. Clearly our exit from the EU gives rise to more issues than the five we have mentioned but hopefully this short checklist of key points will be a helpful reminder of some of the issues ahead for the construction industry.Download PDF