A guide for CEOs and other senior leaders of construction and energy companies.

This guide focuses on what construction and companies need to do now to protect their business and bottom line from the impact of Brexit and Covid. It will show you how Brexit and Covid create problems for your contracts and supply chain, the common misconceptions in relation to Covid and Brexit related risks that you need to be aware of, and the five essential steps you need to take now to protect your business and its bottom line from the impact of Brexit and Covid related product shortages.

You Should Read This Guide If:

  • You are a CEO or other senior leader of a construction or energy SME with overall responsibility for commercial strategy or project delivery.
  • Brexit or Covid are creating logistical and financial challenges in the form of product shortages or increased prices which are impacting upon your bottom line.
  • You are finding it difficult to price work, or it has become more expensive or time-consuming for you to complete projects that you are already committed to.

By The End Of This Guide You Will Know:

  • How Brexit and Covid will most likely impact your contracts and supply chain.
  • Common misconceptions to stop you making mistakes as your business navigates the post Brexit and Covid era.
  • What you need to do now to protect your contracts and supply chain, and ultimately, your bottom line, from the adverse effects of Brexit and Covid.

How Brexit and Covid create problems for your contracts and supply chain

We are now in the first year of the new post-Brexit era and second year of the global pandemic and the position remains that businesses are still grappling with the fallout from both (particularly in the shadow of the Indian variant which poses a threat to the route out of lockdown and the wider economic recovery). Despite this, economists are predicting double digit growth for UK construction activity but that growth will only come to fruition if the industry can contain the main threats to the supply chain that are posed by the Brexit/Covid era we find ourselves in.

These threats will manifest in two ways: cost and time.

(i) Cost

There are new import and export licences, and new customs, excise, and VAT procedures that have been brought in by Brexit. These new Brexit arrangements have been exacerbated by severe product shortages at a time when demand for products is booming due to construction output now being above pre-Covid levels.

This will all have an adverse effect on your ability to tender for projects profitably, and the underlying commercial bargain may be altered such that your contracts may become more expensive to perform, or even loss making.

(ii) Time

The import of goods and materials to the UK will take longer because more time will be needed for border checks which require the nature, value, and origin of each product to be verified, and the applicable duties paid. Current product shortages will also result in much longer lead times and sourcing delays will arise when changes to the route to market are required to mitigate against product shortages or product scarcity.

As a result, it will be more difficult to accurately schedule work, the progression of projects may be hindered, and milestone payments may be delayed. All this will have an impact on your cashflow. If you have LADs in place, they may be levied, or at the very least you could be left with a dissatisfied client, which may affect your ability to win future work.

Beware the common misconceptions

(i) It will be okay to do nothing

If you do not address Brexit and Covid related issues and risk within your contracts, you will be obliged to perform your contractual obligations in full, as if Brexit and Covid had never occurred. This is the case even if the contract has become commercially unattractive, unprofitable, or loss-making. If you cannot perform your contractual obligations, you may find yourself facing an expensive legal claim for breach of contract to which you will have no arguable defence.

It is important to note that the risks posed by Brexit and Covid are not always direct. Even if you think your business and its contracts are robust enough to withstand the challenges posed by Brexit and Covid, the ability of those in your supply chain to perform their contracts may be hindered. You therefore need to ensure your own business is protected from any failures on the part of your suppliers.

(ii) I can rely on force majeure

The consensus amongst the legal community is that force majeure is very unlikely to provide an exit route out of a contract that is more difficult or expensive to perform, or loss-making due to Brexit or Covid.

Force majeure is usually limited to obligations that are rendered 'impossible' to perform, either in the practical sense or the legal sense. It is very unlikely that Brexit or Covid would fit into the 'impossible' category. This is because whilst Brexit and Covid do make contracts more difficult or expensive to perform, it does not usually make them impossible to perform.

(iii) The change in law clause will protect me against Brexit related risks

Change in law mechanisms are often included in contracts and they usually capture changes in legislation; however, they will not cover Brexit. The reason for this is because Brexit results in changes to the way in which the work will be carried out (either logistically, or in terms of time or cost), as opposed to a change to the completed works themselves. Change of law clauses cover the latter.

(iv) The standard forms and/or bespoke contracts will cover Brexit and Covid

The commercial impact of Brexit and Covid will not be provided for in most bespoke contracts, or the standard forms. This is contrary to the common belief held by many in the construction and energy industries that Brexit and Covid are events that would gain relief in the form of an extension of time, or the recovery of loss or expense.

The position under the JCT and NEC standard forms is that it is the contractor who assumes the cost and time risk of the supply of goods and materials, and the availability of labour.

(a) JCT Relevant Events for obtaining extensions of time

The potentially Relevant Events for obtaining extensions of time appear at Clause 2.26. The only Relevant Event that might apply would be force majeure under Clause 2.26.14 but for the reasons given at paragraph (ii) above, it is very unlikely that Brexit or Covid would be covered by force majeure.

You will therefore need bespoke contract amendments if you want to obtain an extension of time due to Brexit and Covid related risks.

(b) JCT Relevant Matters for loss and expense

Similarly, Relevant Matters that permit the recovery of loss and expense under Clause 4.21 of the JCT Design and Build 2016 would probably not entitle the Contractor to recover loss and expense. Whilst a change in Statutory Requirements may constitute a Change which could constitute a Relevant Matter under Clause 4.21.1, a situation in which the Contractor has to pay a higher price for materials, for example, would not be directly applicable to Brexit or Covid. This is because they are indirect costs, as opposed to direct costs, and indirect costs are not recoverable.

Again, you will need bespoke Brexit amendments to cover loss and expense arising from Brexit and Covid.

(c) NEC Compensation Events for time and cost

Compensation Events entitle the Contractor to an extension of time and recovery of loss and expense. However, they mostly arise in the event of a default by the Employer or other contractor. Brexit and Covid would only constitute a Compensation Event under Clause 60.1(19) if the prospect of risks relating to them were so unlikely that no reasonable Contractor would have allowed for it which is something that would be almost impossible to establish in practice given Brexit and Covid related risks have been with us for some time now.

Therefore, as for the JCT suite, you will need to make bespoke amendments to the NEC form to cover loss and expense arising from Brexit and Covid.

What you need to do to mitigate the impact of Brexit and Covid

Unfortunately, there is no-one-size-fits-all approach to these issues.

The only way to get on top of it is to sit down and consider your own particular circumstances based on factors such as the nature of your projects and your supply chain. To robustly protect your business from the adverse impact of Brexit and Covid, you should do the following:

STEP 1:

Conduct a risk assessment of your existing contracts and identify and assess in terms of priority the key risks Brexit and Covid presents to your business

The starting point is to ensure you have a thorough understanding of all the commercial implications of Brexit and Covid for your business, and the only way to do this is to look at your contracts. Understanding how your contracts expose you to Brexit and Covid in terms of cost and time not only within your own business, but in the contracting arrangements you have in place with your suppliers, is key. This analysis will reveal the main risks to which your business is exposed both directly and indirectly in terms of cost and time.
STEP 2:

Put in place the correct commercial and legal measures to protect against the risks you identify

Contracts are all about the allocation of risk and all Covid and Brexit related risks can be minimised or neutralised by good drafting. Your contracts need to provide sufficient protection against Brexit and Covid by being very clear about the implications of each as they might affect your project(s). You may need, for example, expert help on additional provisions which neutralise or decrease Brexit or Covid related increased costs, and special provisions to take account of any delays. Brexit and Covid provide a brand-new business landscape that has never been encountered before, and they have not been factored into contracts or contracting arrangements, so bespoke provision is essential.
STEP 3:

Consider if it would be prudent from a commercial and legal perspective to exit, vary, or negotiate difficult or unprofitable contracts to enable you to de-risk

As you work your way through Steps 1 and 2 above, you might reach the view that some contracts are too difficult or unprofitable to merit continuing. If that is true of some of the contracts in your business, then you need to find a safe way to renegotiate, vary, or exit them immediately in order to protect your bottom line. It is always dangerous to try and vary or terminate contracts yourself, as if you make a mistake, you may expose yourself to an expensive legal claim for wrongful termination. If you are in the process of re-negotiating problematic contracts, a good lawyer will be able to line up the strongest possible argument for you to terminate the contract on a without prejudice basis to place you in the best negotiating position.
STEP 4:

Future-proof your ongoing negotiations and contracts so they cater for Covid and Brexit related risks, and minimise, or eliminate those risks, particularly in so far as they affect cost and time

Every business will be affected by Brexit and Covid differently, so it is important to agree clear terms about who bears which risk and draft contract terms to cover those risks that most impact your business. This is the case regardless of whether you operate under bespoke contract terms and conditions, or the standard forms.

Once you have identified the key risks posed by Brexit and Covid to your business at Step 1 above, it will be possible for you to future-proof contracts that are currently being negotiated to take account of Brexit and Covid related risks and minimise or eliminate those risks. It is particularly important to take advice on cost and time issues as these are the areas that will be affected most by the new border checks, customs, excise, VAT procedures and the current product shortage.
STEP 5:

Focus on, and protect, your business' bottom line

As you go through Steps 1-4 above, commercial risk and your bottom line should be your key priorities and focus. The starting point for this is the commercial risk assessment at Step 1, followed by Steps 2-4 which will protect your bottom line.


What you need to do now

Brexit and Covid have a significant impact on the commercial and economic effect of your contractual arrangements, and you will be largely bound by the words of your contracts: this is the case even if your business is left with a bad bargain or is suffering financial hardship.

Putting in hand the above 5 Steps now will guarantee the resilience of your business and enable you to act in such a way that as soon as issues arise (however difficult they might at first appear), you can respond quickly and decisively, particularly on new deals. If these steps are not implemented, or are delayed, the result will invariably be increased management time and cost.

The Author: Lisa Kingston, Managing Director, In-House Law

I help CEOs and other senior leaders of construction and energy SMEs to protect their contracts, supply chain and crucially their bottom line from the adverse effects of Brexit and Covid. I show them how to mitigate the impact of Brexit and Covid using a risk-based formula that is specific to Brexit and Covid threats, help them neutralise the key risks that threaten their business, and put in place preventative measures to stop those key risks occurring right now, and in the future.

After 16 years working as a senior lawyer in some of the leading names in construction and energy law firms and a further 4 years as a senior consultant lawyer to construction and energy companies in-house, I understand that many professionals do not like the charge by the hour approach that is adopted by most law firms, which puts them off getting the advice they need. I also understand that they do not like the fact that, often, their work is done by junior lawyers with not enough input from partners. It is not always this way. All In-House Law fees are fixed, the lawyers are partner level, and most work is carried out remotely which results in fees that no traditional law firm can get close to matching.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.