Read the first article on change of law clauses and the second article on price fluctuation clauses.
Recent pronouncements from the government give the strongest indication yet that the UK is heading for a "hard" rather than a "soft" Brexit. Its position is that the UK will withdraw from the EU and the common market and then attempt to negotiate a new trade deal with the EU. Two particular issues arise for the construction industry:
- What import duties will there be on materials from the EU (and elsewhere)?
- What restrictions will there be on EU workers coming to the UK? Put another way, how much will visas cost and how many will be available?
Parties should scrutinise how future contracts deal with these issues.
Import duties
The position varies under different standard forms:
- JCT D&B 2016: The contractor is responsible for paying all rates and taxes and does not get any relief if changes in law make these more expensive. However, relief may be available if the price fluctuation mechanism has been selected.
- FIDIC Yellow Book: The contractor is responsible for paying all taxes and duties but will get relief if changes in law result in increases.
- NEC3 ECC Option A: Import duties will be deemed to be included in the contract price. Unless Option X2 is selected (allowing compensation events for changes in law) the contractor will not be entitled to extra money if they increase.
Increases in import duties will depend on the exit deal the government is able to negotiate. That will not be clear for a number of years. Optimists predict that commercial prudence will persuade EU member states to agree a free trade deal. If this happens then import duties, at least on EU materials, should not change much. If the pessimists are right then all bets are off.
So who is best placed to carry the risk of import duties increasing significantly? It is unlikely that either party is any better placed to quantify the risk. The employer may therefore prefer to assume the risk and allocate a contingency in its project budget rather than pay high risk premiums to a contractor which may result in a "windfall" if import duties remain unchanged.
Labour
The position varies under different standard forms:
- JCT D&B 2016: It is implied that the contractor is responsible for providing all labour. There is no relief if changes in law make that more expensive unless the parties have chosen to use the price fluctuation mechanism – see previous article.
- FIDIC Yellow Book: The contractor is responsible for recruiting all labour and dealing with immigration issues. It is implied that costs of doing so are included in contract price but there will be relief if changes in law result in cost increases.
- NEC3 ECC Option A: It is implied that the contractor is responsible for providing labour. There is no relief if changes in law make that more expensive unless Option X2 has been selected.
Some studies indicate that migrant labour accounts for up to 54% of the workforce on London construction projects. The percentage is much lower across the country but is still significant. Skills shortages are already cited as a brake on the industry's expansion so migrant labour restrictions are likely to exacerbate that, at least in the short to medium term. So, will there be a ban on foreign workers or a more pragmatic visa system (with the associated admin and costs)? Again, it is unlikely that either party is any better placed than the other to quantify this risk so a contingency in the budget may be the most sensible approach.
These issues are unpredictable. The industry will not have clarity until exit negotiations are concluded. In the meantime the best that parties can do is proceed pragmatically with projects that will straddle a likely exit date. It is also important that the industry contributes to reviews of the likely impact on the sector, such as that currently being compiled by Lord Stunell, to make sure its concerns are heard by those who will be sitting at the EU negotiating table.
This article was written by Norris Riley.