After the Deal: Three Key Takeaways from the Trade and Co-Operation Agreement

Introduction

In the weeks leading up to Christmas 2020, a year of unprecedented challenges for the Construction Industry was threatening to end in crisis. With the ‘Transition Period’ coming to an end, the prospect of a ‘No Deal’ Brexit (in addition to the impact of new COVID-19 variants on travel and trade) contributed to scenes of gridlock at major UK ports. Disruption left construction workers running short of everything from roof tiles to timber, with delays and costs surging.

So it was with a heavy sigh of relief that the Construction Industry welcomed the Trade and Co-Operation Agreement (TCA) when it was announced on Christmas Eve. By providing for the continuing absence of tariffs, this eleventh-hour trade deal has assuaged fears of major disruption in the short-term, and has been welcomed by leaders across the construction industry. However, given the sector’s reliance on cross-border supply chains, EU workers and international cooperation, Brexit still presents major structural and legal change for both Employers and Contractors in the Construction Industry.

In this article, we look at three key takeaways from the TCA from a Construction perspective – concluding that, although a short-term crisis may have been avoided, Brexit still presents some major long-term challenges to small and large stakeholders across the industry.

1. No Tariffs – but is divergence looming?

According to the Construction Leadership Council, close to 25% of materials, products and components used by construction businesses are sourced from abroad, and the overnight imposition of tariffs associated with a ‘No-Deal’ Brexit could have wrought unparalleled damage within the sector, including the potential for a wave of disputes between contractors and employers about who should bear these spiraling unforeseen costs. By avoiding these crisis scenarios, the TCA has significantly eased pressures on the construction industry in the short-term.

However, despite the initial relief of tariff-free access, the long-term repercussions of the Brexit deal for construction supply chains are far less certain. Although regulatory standards across the industry are currently harmonised with those in the EU after decades of membership, the TCA does not provide for the mutual recognition of products and standards which has facilitated frictionless trade for decades.

For example, whilst the UK was a Member State, the EU Construction Products Regulation 305/2011 included obligations for products to carry the “CE” mark – a common quality and safety mark for products which allows them to be marketed and sold freely throughout the EU. Now that the UK has left the EU single market, there is no single “CE” mark used across both the UK and the EU. The UK has instead introduced the United Kingdom Conformity Assessed mark (UKCA mark), which came into effect on 1 January 2021. To allow businesses time to adjust to the new requirements, they can continue to use the CE marking until 1 January 2022 in most cases.  However, regulatory divergence via the new UKCA mark may lead to inconsistency and complications in the future for construction businesses who use EU suppliers.

2. Workforce Shortage Fears Remain

The construction industry has benefitted enormously from the free movement of workers inside the EU. As a result, fears that Brexit will create staffing challenges at every level have frequently been expressed by industry leaders since 2016’s leave vote.

Now the transition period has come to an end, EU workers wishing to join the UK construction industry will have to apply through the UK’s points-based application system. To gain enough points, applicants will have to possess a job offer in a ‘skilled role’ which meets a minimum-salary threshold. This should be straightforward for highly skilled and well-paid architects and engineers. However, because there is a mutual recognition of professional qualifications within the EU which now no longer applies to the UK, construction professionals should check as to whether they will now have to apply for renewed recognition of EU based qualifications.

At the other end of the labour market, the risk of the problems left unaddressed by the TCA is even starker.  By targeting higher paid ‘skilled-workers’ and excluding those doing manual work for lower wages, the new immigration system may create structural workforce shortages which drive up costs. Projects based in London, where the EU workforce is proportionally higher than the rest of the country, are especially vulnerable to these impacts and will face significant new sponsorship costs when hiring migrant workers.

For employers seeking to ensure that they don’t bear the cost of their contractor’s staffing delays, amendments to the JCT suite could allow them to exclude labour shortages from being considered Relevant Events, meaning that contractors will not be afforded additional time if visa issues lead to staffing shortages. Such amendments are becoming more common to protect the Employer’s position and ensure contractors are responsible for their own risks when hiring from the EU.

3. Cross-Border Disputes

With the Transition Period over, UK-based employers using contractors or designers in the EU should certainly be considering their dispute resolution provisions.

Whilst the TCA makes no provision for those involved in cross-border disputes with a UK/EU element, it is hoped that the UK will soon accede to The Lugano Convention (which it applied to accede to in April 2020 as a party in its own right) which would provide for the reciprocal enforcement of judgements on a similar basis to EU membership. For now, The Hague Convention, which continues to apply to the UK, provides a worldwide framework of rules in relation to exclusive jurisdiction clauses within contracts and the enforcement of judgements on their basis. However, there is a question on which the EU’s and UK’s positions differ: when did the convention “enter force” in the UK? Was it when the UK acceded as a party in its own right (i.e. from 1 January 2021) or when the EU acceded on 1 October 2015? This is inextricably linked to the question of whether the convention only applies to exclusive choice of court agreements concluded after the UK’s independent accession, or whether it continues to apply to exclusive choice of court agreements concluded after the EU’s accession. The issue is likely to provoke litigation in the future.

For businesses in the construction sector, where high-stakes disagreements so often lead to high value disputes, all this uncertainty creates significant new risks in the event of dispute. In this environment, employers who use EU based contractors or designers should be certain to draft clear dispute resolution and governing law clauses which leave no ambiguity as to what law governs the contract. Similarly, employers should seek advice regarding exclusive jurisdiction clauses to avoid the risk of parallel proceedings, and may wish to consider the use of side letters to re-confirm the jurisdiction positions of agreements signed prior to January 2021 which include a UK/EU element.

Conclusion

There is no doubt that the effects of Brexit will present major challenges to the construction industry for years to come, as employers and contractors alike accustom themselves to the various alterations. Although the TCA has alleviated many of the worries present towards the end of last year, there are still several long-term unknowns, such as potential inconsistency caused by the UKCA mark; the mutual (or not) recognition of professional qualifications; and the governance of cross-border disputes. All of this presents significant changes to the mechanics of the construction industry which professionals will have to learn to navigate as it becomes the new normal.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email enquiries@sharpepritchard.co.uk

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