The construction industry is particularly vulnerable to market conditions, and, unsurprisingly, the result of the Referendum has prompted much concern and speculation about its impact. This is likely to continue for a substantial period of time as the government negotiates its way through the unchartered territory of Article 50 of the Lisbon Treaty and into Britain's post-EU future.
For most, it was not only the result of the Referendum that was a shock but the fact that there appeared to be no Plan B. Panicking or taking drastic action is not the way forward but it is the time to start thinking positively about how to keep the industry moving and how to surmount the challenges thrown up by Brexit, for example, in relation to labour, skills and procurement. As Suzannah Nichol writes in Construction News, these concerns are perennial and certainly existed before Brexit but now there may be an opportunity to actively start looking at innovative and smarter ways of addressing long-standing issues in the industry.
From a legal perspective, the current political situation does not require immediate action: the UK remains a Member State and is governed by EU rules until the exit process is complete. However, in time, Brexit will require parties to think carefully about the risks attached to Britain's departure. Some of the areas that we expect clients to focus on include:
- 'Material adverse change', 'change of law', 'hardship' and 'force majeure' clauses – all of these contractual provisions are designed to protect parties from changes beyond their control affecting their ability or willingness to perform the contract. It is unlikely in our view that either the 'Leave' vote or actual Brexit would, in and of itself, constitute an event giving rise to their operation (although it will depend on the drafting). This might change if, for example, a rapid reduction in labour caused by repatriation to Europe, withdrawal of loan facilities or extreme currency volatility prevented or compromised performance. Accordingly, these are provisions that parties may at least wish to consider in the coming months.
- Governing law and jurisdiction – at present all EU Member States apply the same set of rules to determine the governing law of an agreement and generally courts will recognise and give effect to the parties' express choice of law, irrespective of whether the contracting parties are located in a Member State. EU legislation is also in place to determine which court has jurisdiction and to provide for the reciprocal recognition of judgments across the EU. In a post-Brexit context there is possible uncertainty about both jurisdiction and enforcement, which could, for example, lead to arbitration being used more commonly as the means of resolving disputes. In the medium to long term, however, it is likely that Britain will negotiate reciprocal arrangements to mitigate this uncertainty.
- Employment issues – in the construction industry this is obviously a massive concern. A contraction in the supply of skilled and unskilled labour will likely impact both the cost and deliverability of projects and negotiating parties will need to factor both of these consequences into their agreements. In terms of long term predictions, it is very difficult to foresee exactly what arrangement the government will reach with the EU over freedom of movement but it is hoped that they will act quickly on this and that something a long way short of a mass exodus of Mainland Europeans will be achievable. A potential upside is that a relaxation of labour laws for employees already here may actually be of benefit.
Another potential positive is that foreign investors may continue to find the UK an attractive prospect as currency volatility - the decline of sterling against both the euro and the dollar – together with a slackening in prices, offers the opportunity to invest now and see gains if the market recovers. According to Mark Cleverly, Arcadis' UK head of commercial development, his clients are already reporting a bounce in enquiries in the luxury property market, which could boost British construction as well as Treasury receipts from stamp duty. In our view, however, the overwhelming sentiment is likely to be one of caution.
Meanwhile, whilst the need for ongoing infrastructure investment will inevitably remain, in an industry built on confidence, uncertainty may very well result in delayed or cancelled projects. Political stability and, in due course, commitment and clarity in relation to infrastructure projects such as Crossrail 2, HS2 and the expansion of Heathrow or Gatwick, is absolutely essential. However, the ongoing need for improved infrastructure may encourage the government to stimulate and support the economy through inward investment. Greater access to state funding as a result of a relaxation of state aid rules may also help.
