Compensation events and Brexit

[edit] Introduction

During the UK’s departure from the EU, when will changes in UK law trigger a compensation event under NEC3 Engineering and Construction Contract (ECC) secondary option clause X2?

Option X2 states:

'A change in the law of the country in which the site is located is a compensation event if it occurs after the contract date. The project manager may notify the contractor of a compensation event for a change in the law and instruct him to submit quotations. If the effect of a compensation event which is a change in the law is to reduce the total defined cost, the prices are reduced.'

The first point to note is that the change must be to a law in which the site is located, so this restricts it to projects in the UK subject to English law. Secondly, the change must occur after the contract date to trigger a compensation event.

Option X2 provides for the project manager to notify the contractor but equally the contractor could notify the project manager in the usual way under core clause 61.3.

[edit] Impact of EU law changes

On 16 March 2017, the EU (Notification of Withdrawal) Act 2017 received royal assent, enabling the UK government to trigger Article 50 of The Lisbon Treaty of 2007 and begin the process of leaving the EU. There has therefore already been a change in the law within the meaning of ECC option X2.

However, the 2017 Act has made no changes to, for example, immigration laws, tax regimes, or business regulations that might have a clear impact on a contractor's costs for delivering a project.

Without a law being passed directly affecting, say, the availability of European labour, or the cost of importing materials, it would be hard to argue that any costs have been directly increased by the 2017 Act.

Nevertheless, more Brexit-related changes in law are likely once the terms of Britain's exit from the EU have been agreed (or not), not least being what is currently referred to as the 'Great Repeal Bill', a white paper published on 30 March 2017.

When passed, this would be used to repeal the European Communities Act 1972 and convert existing EU law to UK law 'wherever practical and appropriate' – with further changes to be made along the way using secondary powers. This seems to be the point at which there will be some meaningful changes in the law as far as construction project costs go – and no doubt some use of ECC option X2.

[edit] Time bar

It is worth remembering the eight week time bar in ECC clause 61.3, after which a contractor is not entitled to time or money if it has not notified a compensation event. Any credible option X2 claims relating to the 2017 Act would therefore need to have been made by 11 May 2017.

If such an application is made prudent project managers can always proceed under clause 61.6 if they feel that the effects of the compensation event are too uncertain to forecast, basing their assessment on assumptions about the event and issuing a correction at a later date if those assumptions were wrong.

Alternatively, contractors may decide to wait for further Brexit-related legislation before exercising option X2 – assuming of course it forms part of their contract.

With substantial changes in the legal landscape looming, employers may prefer not to include it in future contracts. Conversely, there could be a strong push from contractors to ensure that it is included. Parties might amend option X2 to add more certainty or to mitigate its effects on price, or go a step further and include Brexit-specific allowances or exclusions.

What is clear is that compensation event claims based on option X2 (which remains unchanged in the new NEC4 suite) in one form or another are likely to become more common as a result of the unpredictable run up to leaving the EU.

This article was originally published here by ICE on 13 July 2017. It was written by Tim Atwood and Karen Clarke, CMS.

--The Institution of Civil Engineers

[edit] Related articles on Designing Buildings Wiki

• Articles by ICE on Designing Buildings Wiki.
• Brexit.
• Compensation event.
• NEC contract change management systems.
• NEC3.
• NEC4.
• Overcoming the challenges of Brexit.
• Post-Brexit vision for construction.
• The commercial implications of Brexit.