Brexit and construction contracts: how will your change in law clause respond?

United Kingdom

On 16 March 2017 the European Union (Notification of Withdrawal) Act 2017 (the ‘2017 Act’) received royal assent, enabling the UK government to trigger Article 50 of the Treaty on European Union and begin the process of leaving the EU.

By its nature the passing of the 2017 Act constitutes a change in UK law and will no doubt be the first of many Brexit driven changes as we are told by the government that the Repeal Bill will be used to repeal the European Communities Act 1972 and convert existing EU law to UK law ‘wherever practical and appropriate’ – with further changes to be made along the way using secondary powers.

We consider below the operation of change in law provisions in the most commonly used forms of construction contract in the UK – the NEC, JCT and FIDIC forms – and how they might be applied in this context.

Change of law provisions

The table below gives a brief summary of the change of law provisions of each of these three major forms.

 

JCT D&B 2016

FIDIC Yellow Book

NEC4 ECC

Operative clause

2.15.2.1

13.7

Option X2

Country to which change in law must apply

England

Country in which the Site  (or most of it)  is located, where the Permanent Works are to be executed

Country in which the Site is located

Date of change in law

After the Base Date – agreed between parties

After the Base Date – 28 days prior to the latest date for submission of the Tender

After the Contract Date – date when the contract came into existence

Contractor’s entitlement

Adjustment to Contract Sum, as well as extension of time / loss and expense

Extension of time for any delay suffered, and payment of any additional Cost incurred

Change in the Prices, Completion Date or a Key Date

Notice requirements

Change valued in payment application; Delay - when reasonably apparent; Loss and expense – as soon as it has become, or should have become, reasonably apparent

As soon as practicable and in any event not later than 28 days from the date the Contractor became or should have become aware of the event

Within 8 weeks of becoming aware of the event


Under the JCT and FIDIC forms considered above, and under NEC4 if secondary option clause X2 is selected, the risk of a change in the law sits with the employer, potentially entitling the contractor to an addition to the contract sum, an extension of time, and/or a claim for loss and expense. Although note that changes to the contract sum may go up or down, depending on the impact the change may have.

JCT contracts enjoy principally domestic usage and the governing law is usually the law of England. In the FIDIC and NEC4 forms, the parties can agree the law which governs the contract. However, a change in law can only trigger relief if it is a change to the law of the country in which the site or works are located. As these contracts are frequently used for international projects the main purpose of these provisions is to protect contractors from the risks of working in more volatile jurisdictions. As far as Brexit driven changes to English law go, the clauses will only bite for projects that are based in the UK, but not to international projects governed by English law.

The effective date

Each of these forms provides a date before which any changes in law will not apply. For the JCT and FIDIC this is the Base Date, which is a fixed point in the tender process for FIDIC, but which is agreed between the parties to a JCT contract. The effective date in NEC4 is the date on which the contract came into existence thus potentially exposing a contractor to changes of law which occur after the submission of its tender but prior to execution of the contract.

Cause and effect

Naturally the change in law must be shown to have an effect on the works in order for it to give rise to an entitlement under the terms of the contract. Under the JCT, the change must “necessitate an alteration or modification to the Works”. 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 whilst the 2017 Act does constitute a change in law, it has itself not made changes to, for example, immigration laws, tax regimes, or business regulations that might have an impact on a contractor’s costs for delivering a project.

Conclusion

As mentioned above, whilst the 2017 Act may not have yet triggered entitlements under these change of law clauses, we can reasonably expect more relevant changes to be made following the conclusion of the Brexit process, and we may see some increased activity in the deployment of these clauses. Parties will need to stay focused on the notice provisions in their contracts when the time comes if they wish to use them.Compensation events under the NEC4 must be notified within 8 weeks of the contractor becoming aware of the event, and the timeframe is even more onerous under FIDIC giving the contractor a maximum of 28 days from when it became, or should have become, aware of the event. The JCT position is less onerous but still requires notice of Loss and Expense claims as soon as the change became, or should have become, reasonably apparent.

Users will be aware that it is commonplace for the terms of these standard forms to be amended, and it remains to be seen how the market deals with and adapts these change in law provisions over the next two years.