He said, “If you’re gonna play the game, boy
You gotta learn to play it right.” (The Gambler, Kenny Rogers)
The day before the Brexit referendum I placed a (small!) bet on a ‘Remain’ outcome; not my finest moment, but I wasn’t alone in thinking, “it will never happen”. Since then it has occurred to me that my thought process might later become helpful in a work context – specifically, I wonder what my decision to bet might mean in the context of compensation events under NEC3/NEC4 construction contracts.
It is widely recognised that the UK construction market relies to a significant extent on the ability of workers to travel to the UK from other EU states, and there is justified concern within the construction market that Brexit will lead to labour resourcing problems; indeed, there are already reports that it is becoming more difficult to recruit EU workers in certain skill sectors.
In March 2017, the Royal Institute of Chartered Surveyors estimated that 8% of the UK’s construction workforce is made up of EU nationals (this rises to a whopping 25% in London). So, what happens under construction contracts if large numbers of EU nationals are no longer permitted to work in the UK? How do we deal with critical delay and/or increased contractor costs caused directly by the lack of availability of EU national construction workers?
Let’s imagine a scenario in which an NEC3 construction contract was entered into on 22 June 2016 (the day before the Brexit referendum) and planned completion of the job is delayed by an issue that can be linked directly to Brexit (e.g. the contractor simply cannot get enough skilled workers to do the job on time, and the contractor can provide evidence that this is a result of Brexit). Is this a valid compensation event?
Clause 60.1(19) of the NEC3 Engineering and Construction Contract (April 2013) provides that a compensation event will occur where an event stops the Contractor completing the works, or stops the Contractor completing the works by the date shown on the accepted programme provided that the event is one that:
- Neither party could prevent;
- An experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it; and
- Is not one of the other compensation events stated in the contract the following event is a “compensation event”.
Obviously, it will not be possible to successfully sustain an argument that an employer or contractor could have prevented Brexit (although I wonder will someone with a good imagination try to run this case on a government contract!), and it is clear that “the Brexit Effect” itself is not a recognised compensation event under the standard NEC3. It is therefore possible to imagine a debate about whether a ‘Leave’ result in the Brexit referendum is an event that “an experienced contractor would have judged on the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it”. How on earth are we going to deal with that debate?
On the morning of 23 June 2016, the bookmakers all had ‘Remain’ odds at somewhere around 1/10, and ‘Leave’ odds were at 6/1. At 10pm on 23 June 2016, YouGov released a poll (after all the votes had been cast) predicting a 52% Remain result. Bearing that in mind, if you’re an experienced contractor entering into a contract on 22 June 2016, is it reasonable to expect that you would have factored a ‘Leave’ result into your contract allowances? Did you know more than the bookies? Than YouGov? If so, why didn’t you tell me?!
At this point we simply don’t know how a Court would deal with this exact issue. I can’t imagine that any court will take too much notice of Paddy Power’s risk assessment, but as with Brexit generally it is the uncertainty itself that is not ideal. Maybe we can learn from Boy George who tweeted the morning after the Brexit referendum:
“There’s no use crying over spilt milk. We’ll just ave to mek the best of it!”
Indeed, Boy George. We’ll just ‘ave to. Now is the time to look at your new construction contracts and consider including specific Brexit Effect-related drafting so that if things go wrong due to the effects of Brexit at least your contracts will clearly set out how those issues should be dealt with. Otherwise, I’m willing to try to recoup my losses by betting £5 that it will cost you in the long-run.
For any queries in relation to this article or for further advice on including “Brexit Drafting” in your construction contracts, please contact Adrian Kerr, Director and Head of Construction at Mills Selig