Construction

Brexit, the Draft Withdrawal Agreement, and the Construction Industry: Three Areas for Concern

Construction is a vital part of the UK economy.

The latest estimate is that new work alone accounts for about two thirds of the construction industry. Repair and maintenance account for another third1. Last year, the value of new work reached more than £1.09 billion – the highest level since records began. The value of public work increased 8.1%, and private work by 10.5%2. Construction accounted for 6% of gross domestic product, influencing inflation, employment, and GDP itself3.

Construction is an industry that allows the UK to compete on the international stage, raise living standards, and guard against environmental catastrophes. The UK has an ambitious plan to address all three through upgrading infrastructure over the next three decades4, including: 1) half of all power to be renewable5; 2) £42 billion of stable, long-term transport funding for regional cities6; and 3) ensuring resilience to extreme drought and flooding7.

As the flesh which clothes the dry bones of Brexit takes shape, so as to determine the future relationship with the European Union, what are the main areas for concern for the construction industry? There are at least three. What law will govern construction contracts? How will disputes over such contracts be resolved? What will the market of materials, workers, and opportunities offer?

Law

Contract, tortious, and statutory duties

“Construction law” is convenient shorthand for the law of contract and tort that applies to construction contracts. One leading practitioners’ text starts by setting out ‘certain basic principles of law8 ’, including the law of contract9, liability in tort10, and statutory liabilities11. English and Welsh contract law has organically grown out of the decisions of its courts over hundreds of years12:

‘It is these court decisions, without the benefit of any express statutory authority, which form the basis for the contract law upon which the enforcement of construction disputes rely.’

Tort law has also spawned from court decisions13:

‘An overarching set of principles for negligence was set out by the House of Lords in Donoghue v Stevenson in 1931, which were applicable to most of the activities of ordinary life, commercial and non-commercial. Negligence is the tort most frequently relevant to building operations.’

Statutory liabilities of concern for building and engineering contracts arise by virtue of: 1) the Consumer Protection Act 1987; 2) the Unfair Contract Terms Act 1977, and Unfair Terms in Consumer Contracts Regulations 1999; 3) the Defective Premises Act 1972; 4) the Latent Damage Act 1986; and 5) the Contracts (Rights of Third Parties) Act 199914. Having surveyed the main sources of construction law – contract, tort, and statutory – it is unsurprising that one commentator has sensibly concluded that15:

‘There is much that leaving the EU will not change. Much of construction law rests on the common law principles which cover contract and duties outside contract. Those principles have remained in effect during the UK’s membership of the EU and will remain in effect afterwards. Construction law is not an area where the courts are commonly required to pay considerable regard to the effect of EU law … and, generally, one cannot identify major decisions which turned on the decisive impact of decisions of the European Court of Justice.’

Procurement

One leading practitioners’ text correctly identifies (with emphasis added) that16:

‘The award of construction contracts will, in many cases, be subject to both the rules governing public procurement and competition law. These are two domains in which there has been significant intervention at a European level and domestic law has developed rapidly to keep in line with Directives and the jurisprudence of the Court of Justice.’

There is domestic public procurement legislation that does not transpose one or more Directives of the European Union. For example, Part Four of the Public Contracts Regulations 2015. Chapter Seven: to improve the visibility of procurement generally, by requiring publication of contract opportunities and awards, and to restrain the use of unnecessary, extensive pre-qualification questions. Chapter Eight: to improve access to, amongst others, small and medium-sized enterprises. And Chapter Nine: introducing a general 30-day payment obligation for public contracts.

There is also domestic legislation that does transpose one or more European Union Directives17:

‘The award of contracts by public authorities in the EU is generally subject to the Treaty Principles. Above certain threshold financial values, contracts for works, supplies or services must be awarded in compliance with detailed procedural rules set out in EU Directives. The procurement Directives are implemented in England, Wales and Northern Ireland by Regulations made by the UK government, and in Scotland by Regulations made by the Scottish government.’

Will the UK decide to continue to abide by European Union public procurement law, which is subject to the principles in the Treaty on the Functioning of the European Union (“TFEU”)? For example: prohibiting discrimination on grounds of nationality (Article 18); restrictions on movement of goods (Article 34); and establishing freedom to provide services in another member state (Article 56). Will UK courts be obliged, permitted or even prohibited from taking account of the jurisprudence of the European Court of Justice, interpreting these principles?

Competition

Chapters I (agreements) and II (abuse of dominant position) of the Competition Act 1998 are closely related to European Union rules applying to undertakings (Articles 101 and 102 of the TFEU). Under the sub-heading ‘Interpretation and governing principles’, that Act provides (with emphasis added) as follows:

’60. ‘Principles to be applied in determining questions

(1) The purpose of this section is to ensure that so far as is possible (having regard to any relevant differences between the provisions concerned), questions arising under this Part in relation to competition within the United Kingdom are dealt with in a manner which is consistent with the treatment of corresponding questions arising in Community law in relation to competition within the Community.

(2) At any time when the court determines a question arising under this Part, it must act (so far as is compatible with the provisions of this Part and whether or not it would otherwise be required to do so) with a view to securing that there is no inconsistency between—
(a) the principles applied, and decision reached, by the court in determining that question; and
(b) the principles laid down by the Treaty and the European Court, and any relevant decision of that Court, as applicable at that time in determining any corresponding question arising in Community law.

(3) The court must, in addition, have regard to any relevant decision or statement of the Commission. …’

The same questions – set out above in the context of procurement – arise in the context of competition. Will the current obligation to have regard to the principles in the TFEU, jurisprudence of the European Court of Justice, and Commission when interpreting competition law survive the next decade?

Dispute resolution

London is an international dispute resolution centre. There are many reasons that can sensibly be argued to have assisted: political stability, rule of law, and an independent, impartial, professional judiciary, that hears adversarial argument in open, public courts, before publishing judgments that are freely available to scrutinise online. Brexit will not necessarily impact on these attractions to English and Welsh law to governing a construction agreement, and the courts thereof to resolve any dispute arising from such an agreement. Leaving the European Union will, nevertheless, have an impact because choice of law and jurisdiction are regulated by three Regulations of the European Union (“the three Regulations”): Rome I18; Rome II19; and Recast Brussels20.

Transition

Title VI of the ‘Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Agency, as endorsed by leaders at a special meeting of the European Council on 25 November 2018’ (“the Draft Withdrawal Agreement”) is titled ‘Judicial cooperation in civil and commercial matters’. It has four Articles: 66, 67, 68, and 6921. The effect is that, in respect of contracts concluded before the end of the transition period:

1. Rome I and Rome II on applicable law in contractual, and non-contractual matters will continue to apply in the UK; and
2. The UK and member states of the European Union will continue to apply Recast Brussels on jurisdiction, recognition and enforcement of judicial decisions.

Part Four provides for the transition period. In particular, Article 126 sets out that this period starts from the date of entry into force of the Draft Withdrawal Agreement, and ends on 31 December 2020. So, if the Draft Withdrawl Agreement is approved by Parliament, very little will change until January 2021.

It is interesting, however, that there is no reference to judicial cooperation in civil and commercial matters in the ‘Outline of the political declaration setting out the framework for the future relationship between the European Union and the United Kingdom of Great Britain and Northern Ireland, as agreed at negotiators’ level on 14 November 2018’. This leads to the next question …

What comes next?

What, then, happens after the transition period? It has been cogently argued that the three Regulations will cease to apply. This is because Article 288 of the TFEU provides for the direct application and binding force of EU regulations: ‘This means that, subject to any agreed [additional] transitional arrangements, the Recast Regulation will no longer be part of English law as of that moment22.’ When the TFEU ceases to apply, so does the binding force of the three Regulations, unless otherwise agreed. The legal reality of a “hard” Brexit has been carefully summarised in these terms23:

‘As a consequence, choice of law and jurisdiction will no longer be subject to the same regime in the UK and the rest of the EU once Brexit becomes effective. This will make it harder for parties to predict which law will apply to international disputes and which court will be competent to hear a case. The worst thing, however, is that parties cannot trust anymore that choice of law and choice of forum clauses will be equally enforced in the UK and the remaining Member States. Since different regimes will apply, the enforceability of such clauses will essentially depend on where a lawsuit will eventually be brought.’

Alternative, “soft” Brexit scenarios include: 1) agreement to continue applying the three Regulations; 2) negotiation of a new treaty with the European Union; and 3) unilateral application of the three Regulations24.

Three scenarios

The first scenario – adopting the status quo – can safely be dismissed. It would require the UK to continue applying the jurisprudence of the European Court of Justice to at least some extent. The UK Government has set out that ‘taking back control of our laws’ is one of six objectives25. To that end26:

‘EU law in the UK will end, as will the jurisdiction of the Court of Justice of the European Union (CJEU).

The laws that we live by will once again be passed by our elected representatives in Belfast, Cardiff, Edinburgh and London – who are fully accountable to the people of the UK. UK courts will no longer refer cases to the CJEU, with our Supreme Court truly supreme.’

The second scenario – negotiation of a new treaty – has at least three problems. It will take years to negotiate. This objective is likely to be of less political importance than ‘taking back control’ of ‘our borders’ and ‘our money’, or ‘protecting’ ‘our economy’ ‘our security’ and ‘our United Kingdom27’. The UK and the European Union would have to agree a method of resolving disputes, other than the European Court of Justice. For these reasons, it is far from clear that the UK will achieve, or even choose this option.

It has fairly been argued that the third scenario – unilateral application of the three Regulations – ‘does not work for jurisdiction (and, I may add, it does not work at all for recognition and enforcement of judgements)’. This is because the Recast Brussels Regulation ‘is a measure of international civil procedure and, therefore, rests on the principle of reciprocity28.’ In relation to choice of law, again, unless UK courts follow the jurisprudence of the European Court of Justice, ‘the third option will remain incomplete and only create the illusion of uniformity in the long run29.’

If the above analysis is correct – and I think that it is – scenario one is an option in theory alone. Scenario two has a fatal flaw: lack of political appetite. Scenario three does not work for jurisdiction, or choice of law. It remains far from clear, then, how construction disputes will be resolved in the coming decades.

Market

Materials

One commentator has fairly argued that: ‘Sourcing of materials is unlikely to be the major issue of contention or change post-Brexit30.’ This has recent support insofar as the construction industry’s vulnerability to tariffs and customs, taking into account its share of exports to the European Union, and share of intermediate imports from the European Union has been determined to be low. Increased customs checks would have a greater disruptive effect on sectors, such as cars and transport goods, which have highly integrated, cross-border, just-in-time supply chains, with components crossing the UK-EU border multiple times in the course of production31. What about the workers that actually utilise these materials?

Workers

Between 2014-16, ten percent of workers involved in the construction of buildings were nationals of a member state of the European Union. So were six percent of the workers involved in civil engineering, and six percent of those in specialised construction activities32. In 2011, those born outside of the UK accounted for 44% of the construction workforce in London. Of those, over half were born in the European Union33. It can fairly be argued, then, that: ‘The construction industry, with its reliance on EU labour, is particularly vulnerable to Brexit and any changes to free movement34.’ Especially London. The Bank of England considers that construction is one of the five sectors that are most reliant on labour from the European Union35.

The construction industry, therefore, is one sector that is heavily reliant on workers from the European Union, and therefore immigration policy in general. It will be somewhat of a relief, then, that Part Two of the Draft Withdrawal Agreement provides for ‘Citizens’ rights’, including rights of entry and exit, rights of workers and self-employed persons, and recognition of professional qualifications. What happens, however, in January 2021? The answer appears to be the end of free movement of workers from and to the European Union, new regulations, and distinction between the brightest and the best, and everyone else36:

‘Free movement will end, with our own Parliament deciding our domestic immigration policy in the national interest.

New controls will be put in place as part of a fairer immigration system, which focuses on a person’s skills, not where they come from.

The brightest and best will continue to be welcomed, serving the interests of the whole of the UK and reflecting the needs of businesses and communities.’

The future would be worse, however, where there was no transition, and no deal. The construction industry is most vulnerable to Brexit without a deal1.’

Opportunities

What if a UK construction company wishes to work in a member state of the European Union? There are three public procurement Directives that make up the rules that govern procurement by public authorities and utilities inside the European Union: 1) the Public Contracts Directive 201438; 2) the Concessions Contracts Directive 201439; and 3) the Utilities Directive 201440. Title VIII of the Draft Withdrawal Agreement provides for ‘Ongoing Public Procurement and Similar Procedures’. But will there be such provision after the transition period? Without non-discriminatory, transparent public procurement, public services will become less efficient, more expensive, and cease to reflect value for money.

Conclusions

The Draft Withdrawal Agreement may have bought the UK Government breathing space before these three areas of concern for the construction industry have to be finally resolved. If Members of Parliament do not support the Draft Withdrawal Agreement, however, there may be another referendum on the UK’s membership of the European Union. The UK may then decide that it has changed its mind, and it does not wish not to leave the European Union after all.

Whatever the outcome of the weeks, months, and years ahead, we can be certain that the construction industry is a potential guarantor that its citizens can compete on the international stage, take advantage of greater living standards, and guard against environmental catastrophe. For these reasons, then, certainty of the law that governs construction contracts, confidence in the mechanism for resolving disputes arising from them, and access to the market that fuels and provides opportunities for the construction industry should be high priorities.

1. Office for National Statistics, Construction output in Great Britain: September 2018 (9 November 2018) 3.

2. Office for National Statistics, Construction statistics: Number 19, 2018 edition (22 August 2018) 4 (“Construction statistics”).

3. Construction statistics 13.

4. National Infrastructure Commission, National Infrastructure Assessment (July 2018) (“National Infrastructure Assessment”).

5. National Infrastructure Assessment 31-50.

6. National Infrastructure Assessment 67-82.

7. National Infrastructure Assessment 83-98.

8. Nicholas Dennys & Robert Clay, Hudson’s Building and Engineering Contracts (13th edn, Sweet & Maxwell, 2015) 4 (“Hudson’s Building and Engineering Contracts”).

9. Hudson’s Building and Engineering Contracts 4-123.

10. Hudson’s Building and Engineering Contracts 123-97.

11. Hudson’s Building and Engineering Contracts 197-219.

12. Cyril Chern, The Law of Construction Disputes (2nd edn, Informa Law, 2016) 1.

13. Hudson’s Building and Engineering Contracts 124.

14. Hudson’s Building and Engineering Contracts 197.

15. John Denis-Smith, ‘Construction’ in Helen Tse (ed), Doing Business After Brexit: A Practical Guide to the Legal Changes (Bloomsbury Professional, 2017) 106 (“Doing Business After Brexit”).

16. Richard Wilmot-Smith, Wilmot-Smith on Construction Contracts (3rd edn, OUP, 2014) 435.

17. Stephen Furst & Sir Vivian Ramsey, Keating on Construction Contracts (Sweet & Maxwell, London, 2016) 455-6.

18. Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations.

19. Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations.

20. Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.

21. Department for Exiting the European Union.

22. Sara Masters & Belinda McRae, ‘What Does Brexit Mean for the Brussels Regime?’ (2016) 33 Journal of International Arbitration 483, 485.

23. Giesela Rühl, ‘The Effect of Brexit on the Resolution of International Disputes: Choice of Law and Jurisdiction in Civil and Commercial Matters’ in John Armour & Horst Eidenmüller, Negotiating Brexit (Hart Publishing, Oxford, 2017) 62 (“Negotiating Brexit”).

24. Negotiating Brexit 63-6.

25. HM Government, EU Exit: Taking back control of our borders, money, and laws while protecting our economy, security and Union (28 November 2018) 24 (“EU Exit: Taking back control”).

26. Taking back control 8.

27. EU Exit: Taking back control 24.

28. Negotiating Brexit 64.

29. Negotiating Brexit 65.

30. Doing Business After Brexit 110.

31. Bank of England, EU withdrawal scenarios and monetary and financial stability: A Response to the House of Commons Treasury Committee (28 November 2018) 28 (“EU withdrawal scenarios”).

32. Office for National Statistics, Migrant labour force within the UK’s construction industry (23 August 2018) 4 (“Migrant labour force”).

33. Migrant labour force 10.

34. Jessica Pattinson, ‘Impact of Brexit on the construction workforce’ (2018) 29(6) Construction Law 27, 27.

35. EU withdrawal scenarios 28.

36. EU Exit: Taking back control 5.

37. EU withdrawal scenarios 28.

38. Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC.

39. Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts.

40. Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC.

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