Brexit: key issues for construction

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Brexit: key issues for construction

Brexit: key issues for construction

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January 21, 2021

The UK and the EU agreed a trade deal on 24 December 2020 just days away from the end of the Transition Period on 31 December 2020. The Trade and Cooperation Agreement (the TCA) governs significant aspects of the UK/EU trade relationship from 1 January 2021 onwards. You can read more about the TCA here: The UK-EU Trade and Cooperation Agreement: an overview.

While the TCA provided relief for both UK and EU businesses, the changes consequent on the UK's exit from the EU will continue to affect construction businesses in many ways. The following is an outline only of the key issues for construction. To request our more detailed note of the issues or to discuss issues facing your business, please get in touch with one of the key contacts.

Highlights of the Trade and Cooperation Agreement
Brexit's impact on contracting and project delivery
Challenges facing UK construction businesses
Potential supply chain issues
Are construction contracts Brexit-proof?
Dealing with disputes
Immigration and mobility
Procurement processes
Other issues to note (H&S, money laundering and real estate)

Highlights of the Trade and Cooperation Agreement

EU law as at 11pm on 31 December 2020 (with necessary modifications) was absorbed into UK law and, from that date, the UK can make its own laws. New EU law after 1 January 2021 will not apply to the UK.
The UK is no longer part of the EU single market and customs union, or subject to EU policies and international agreements. Free movement of persons, goods, services and capital within the EU has ended.
The TCA establishes four "major pillars of cooperation": free, fair and sustainable trade; connectivity, sustainability and shared opportunities; citizens' security; and a new EU/UK governance framework for a lasting cooperation.
Tariff-free trade in goods is established between the UK and EU in many, but not all, cases. The rules are complex but, in essence, goods are not subject to tariffs or quotas, provided that goods traded from the UK to the EU are of UK origin, and goods from the EU to the UK are of EU origin (the "rule of origin").
Significant non-tariff barriers to trade will remain (and are summarised in our TCA briefing). UK products will have to meet the EU's high regulatory standards.
Additional customs formalities at UK borders were introduced from 1 January 2021. The UK and EU have agreed to recognise each other's programmes for trusted traders (Authorised Economic Operators (AEOs)). While customs processes will be simpler for AEOs, checks will still be needed on all goods traded as part of the UK/EU agreement to cooperate on recovering customs duties and fighting VAT and tax fraud.

The TCA does not cover foreign policy, external security and defence, decisions on equivalences for financial services, or decisions on the adequacy of the UK data protection regime.

Brexit's impact on contracting and project delivery

From 1 January 2021, the UK, as a "third country", assumed responsibility for policies and certain functions that for years have been in the EU's domain. The government has been preparing new systems and processes (for example, on border controls) to manage this fundamental shift in governance and to provide resources to British businesses.

Preparing for these changes and understanding their effect on construction supply chains has been a major challenge for many, particularly in the midst of a global pandemic. The complexity of UK supply chains means that all those involved in construction projects – from clients to contractors and professionals, to suppliers and individual workers – should, if they have not already, review the commercial risks, collaborate with their supply chain, understand the new trade and immigration regimes, train employees and/or prepare for potential disruption.

Government checklists are available for those still grappling with the changes, including: importing goods into the UK; exporting goods from the UK; travelling to the EU; living and working in the EU; staying in the UK if you are an EU citizen; and UK Government Trade Hub launched to support Scottish businesses.

Challenges facing UK construction businesses

The TCA addresses pre-Brexit concerns for the UK construction sector in part, but challenges remain for those businesses relying on cross-border trade with the EU including:

mastering the new customs rules (if importing/exporting goods) and/or (where relying on others to import/export) regular/increased supply chain collaboration to ensure timely compliance with new customs procedures to avoid delay of delivery of goods and materials to site;
monitoring the source of any goods imported/exported to check whether they fall within the new "rules of origin" to ascertain whether tariffs are payable and, if yes, how much (see below);
where tariffs are imposed, managing the consequent project cost increases within the supply chain (potentially requiring contract renegotiation);
the need for regular risk assessments both for the business as a whole and individual projects (current and planned). The detailed risk assessment for each business will vary depending on factors such as the nature and location of the business, where the supply chain operates, the types of projects involved, contracts used and the nationality of employees;
renegotiating contracts to protect corresponding business interests, reflect new rules and deal with potential labour and material shortages, including, for example, responsibility for any project delays consequent on border delays;
monitoring any divergence of UK regulations from EU regulations from 1 January 2021 which might affect the viability of importing/exporting goods between the UK and EU; and
navigating new visa and immigration rules to ensure required labour is secured.

Potential supply chain issues

New border arrangements

The government's Border Operating Model (BOM) (updated 6 January 2021 to reflect the TCA) explains how the GB/EU border now works and the actions needed by traders, hauliers and passengers to implement the new rules. The BOM encourages "all GB businesses not just to ensure their own readiness but also the readiness of EU businesses to whom they export, and throughout their supply chains". If you rely on other businesses in your supply chain to import and export goods essential to your UK construction projects, ensure they too have prepared for cross-border trading.

Be aware that if delays occur as a result of inadequate preparation for the implementation of these rules, businesses are unlikely to be able to establish a force majeure claim if the delayed supply of goods causes delay to construction work.

Tariffs

The UK global tariff (UKGT) tool, Check UK trade tariffs from 1 January 2021, sets out the UK import duty rates applicable to goods imported after 1 January 2021 (unless preferential arrangements exist) and enables businesses to check what tariffs apply. The TCA aims to facilitate trade in goods between the UK and EU and "to maintain liberalised trade in goods under the TCA terms" by establishing zero tariffs or quotas on trade between the UK and the EU, where goods meet the relevant "rules of origin". The rules of origin ensure that only "originating" goods can benefit from the TCA's liberalised market access arrangements, while reflecting UK/EU industry requirements. Traders can self-certify the origin of goods. Detailed rules set out whether a product originates in the UK or EU for the purposes of the TCA.

Regulatory issues

As at 11pm on 31 December 2020, those EU rules relevant to construction's core business (such as health and safety laws) were carried over into UK law. In most cases, save for minor modifications, the substance of those laws will not have changed at the end of the Transition Period (31 December 2020). Longer term, if/when UK law diverges from EU law, businesses will need to keep up to date with the changes and monitor the consequences on UK/EU trade.

Construction products

From 1 January 2021, new guidance for placing construction products on the "GB" market (England, Wales and Scotland, but not Northern Ireland) applies as published by The Ministry of Housing, Communities & Local Government. See Construction Products Regulation in Great Britain (published 1 September 2020). EU law on construction products continues to apply in Northern Ireland. (See guidance on placing goods on the NI market (published 23 November 2020).)

Businesses are advised to prepare for the end of recognition of the CE mark in the UK and affix the new UK marking using a UK-recognised "approved body" by 1 January 2022. However, note that some CE-marked goods may continue to be available in the UK market until 1 January 2022. Frequently asked questions are available in the government guidance here. See also the government guidance on the new UK Conformity Assessment (UKCA) marking: Using the UKCA mark from 1 January 2021 (published 31 December 2020), and placing manufactured goods on the market in Great Britain (published 31 December 2020).

Are construction contracts Brexit-proof?

The legislative and regulatory changes highlighted above mean increased risks of disruption for the construction industry – over and above that already being experienced as a result of the COVID-19 pandemic. Such disruption could throw an uncomfortable spotlight on commercial relationships and contractual frameworks in even the most simple of contracts. For example, project delay caused by insufficient labour on site or materials becoming "stuck" at customs might not necessarily lead to an extension of time entitlement. Issues about who bears responsibility for the resulting costs mean disputes are more likely.

Whether you are in the middle of a project or about to sign up to a new project, a thorough review of the contractual rights and obligations is essential to minimise potential risks. Provisions relating to "change in law", "material adverse change" and "force majeure" are obvious starting points (although bear in mind that most risks arising from both COVID-19 and Brexit mean force majeure claims could be hard to establish). Other parts of contracts likely to need review include provisions relating to interpretation, pricing and payment, and dispute resolution.

Dealing with disputes

Dispute avoidance

Unprecedented changes to the trading environment caused by Brexit and continued economic disruption caused by reasons related to the pandemic mean that the risk of disputes is high. Regular communication with your supply chain and collaboration is essential to avoid disputes. Deal with issues promptly. Enhanced understanding of a dispute's context and ramifications will be needed – as will a willingness to compromise. Seeking advice early can increase the chance of settlement, thereby preserving trading relationships and timely project completion.

You can read more about dispute avoidance and management, as well as government COVID-19 guidance as it relates to construction, here:

Legal issues for construction businesses (January 2021 edition)
Mind your "Ps" and "Cs" to avoid disputes (UK construction focus)
Guidance on future-proofing UK construction contract amendments published amid coronavirus (COVID-19)
Good behaviour: going the extra mile
Contracting authorities – act now to safeguard supplies during the COVID-19 outbreak (United Kingdom)
PPN 04/20: government sets out COVID-19 recovery strategy for contracting authorities (effective from 1 July 2020)
Engage emotional intelligence (How can settlement prospects be improved by the early use of our emotional intelligence/quotient (EQ)?)

Managing insolvency in the supply chain

Stay alert to the possibility of insolvency in the supply chain and take action immediately if you become aware of a supplier in financial difficulty. You can find further guidance on dealing with insolvency here:

Cross-border enforcement issues post-Brexit

Post-Brexit, the UK as a venue for international dispute resolution retains its major advantages (such as the strength and independence of its judiciary, the certainty and commercial focus of English law, the flexibility of the common law system and respect for a commercial bargain). English law will retain its appeal as parties' choice of law.

The TCA leaves some issues relating to the conduct of disputes post-Brexit unresolved: particularly the enforcement of decisions in cross-border disputes. Parties to contracts involving some cross-border elements should review whether their contractual dispute resolution procedures are still appropriate and, where possible, consider the inclusion of an exclusive jurisdiction clause to streamline enforcement procedures should litigation arise.

For a summary of the issues facing those who want to enforce a decision in a cross-border dispute, see the note from our Dispute Resolution team on the UK's position as regards the various international treaties: A renewed focus on exclusive jurisdiction clauses post-Brexit.

Immigration and mobility

The end of freedom of movement and changes to UK immigration law will inevitably increase the costs of hiring non-UK talent. Costs include sponsorship certification, an immigration health surcharge and visa fees. Hiring businesses will need to consider whether they bear these costs or transfer them to individual employees. Employers should familiarise themselves with the following changes:

EU/EEA nationals no longer have freedom of movement to live and work in the UK (from 31 December 2020). The UK immigration system will treat EU/EEA nationals the same as non-EU/EEA nationals;
EU/EEA nationals who were resident in the UK prior to 11pm, 31 December 2020 are able to continue to live and work in the UK providing they apply to the EU Settlement Scheme for pre-settled or settled status. Note: the deadline to apply is 30 June 2021. Early applications are encouraged; and employees who hold pre-settled status need to manage their own status and ensure they qualify, and apply for settled status;
a new immigration system was launched on 1 December 2020 (see Statement of Changes to the Immigration Rules HC813 (26 October 2020));
a new skilled worker visa replaces the previous Tier 2 with a salary threshold of £25,600 (lower if the role on offer is on the Shortage Occupation List). It is extendable indefinitely;
minor changes were made to the Intra-Company Transfer (ICT) rules from 1 December 2020 with more changes ahead. The Migration Advisory Committee is to review the ICT route and is expected to report in October 2021;
some changes have also been made to right-to-work checks; and
the TCA does not change the position with regard to work permits and there are minor changes to what business visitors can do in the UK.

Further changes are expected in 2021 and beyond. For more details on: the new Skilled Worker and ICT visas; the impact on company policies and processes; key considerations for talent acquisition; changes to right-to-work checks and the EU Settlement Scheme, our Immigration team.

Procurement processes

Various regulations were enacted to ensure the smooth transition of EU procurement regulations into UK law from 1 January 2021 including The Public Procurement (Amendment etc.) (EU Exit) Regulations 2020 and Defence and Security Public Contracts (Amendment) (EU Exit) Regulations 2020 (2020 No. 1450). In addition, new processes were introduced including the "find a tender" service (FTS) (see Procurement Policy Note 08/20 – Introduction of Find a Tender) for information on public sector contract opportunities in the UK.

The FTS is a free-to-use service which replaces the role of Tenders Electronic Daily, the Official Journal of the EU (OJEU/TED) for procurements in the UK. The FTS works alongside existing procurement portals such as Contracts Finder, MOD Defence Contracts Online, Public Contracts Scotland, Sell2Wales and eTendersNI. Businesses who want to access public sector contract opportunities in the EU may continue to do so via OJEU/TED. Information about procurements launched by UK contracting authorities before 11pm on 31 December 2020 will be available via OJEU/TED or the existing portals mentioned above.

Future reform of procurement process

More change lies ahead with the government having recently published its plans for a wide-ranging and ambitious review of UK procurement processes: Transforming public procurement (published 15 December 2020 and under consultation until 10 March 2021). The proposals are wide-ranging and ambitious, and follow 12 months of prior stakeholder engagement. They are also intended to ensure continued respect of the UK's commitments under the World Trade Organisation Agreement on Government Procurement, to which the UK is now subject in its own right. Headline proposals include:

changes to the rules on frameworks, including the introduction of an open framework for up to eight years with an initial three-year closed period.
a single set of procurement regulations, rationalising the existing four sets of regulations (public, utilities, concessions, and defence and security);
a choice of three (rather than some seven) procedures: an open procedure, a flexible procedure for negotiation and a limited tendering procedure for situations of crisis or urgency;

Further interesting proposals include:

the introduction of a central debarment list managed by an independent unit created by the government to collate information related to suppliers who fall within mandatory exclusion grounds;
a greater push for transparency and publication of information throughout a procurement procedure (including evaluation reports, albeit subject to existing grounds for withholding or redacting information such as confidentiality and commercial sensitivity); and
the introduction of a tribunal for hearing cases not usually brought to court (such as low value claims or challenges to an ongoing process).

For guidance on procurement issues and processes, please contact David McGowan or Jennifer Robinson.

Other issues to note (H&S, money laundering and real estate)

Health and safety: Most EU health and safety laws absorbed into UK law from 1 January 2021 have remained largely unchanged. Exceptions include in relation to the safe management of chemicals, placing civil explosives on the market, and the manufacture and supply of new work equipment. (See the Health and Safety Executive website here.)

Dealing with criminal activity: EU money laundering laws were modified by secondary legislation as of 1 January 2021 to ensure their smooth operation. Expect no reduction in corporate legal obligations to fight corruption and bribery: in fact, obligations may increase in the longer term.

Real estate issues: The key impact of Brexit on the UK real estate market continues to be commercial rather than legal. See: Brexit: Key issues for Real Estate.