Brexit round-up (construction focus)

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It's been five months since the UK voted to leave the EU. Whichever way you look at the vote's after-effects, whether in economic, political, legal or constitutional terms, we are entrenched in a period of uncertainty – a state that, in the short term at least, appears to have been exacerbated by the election of Donald Trump as the USA's next President. The pound remains unstable and, despite reports of improvement in the economy overall and Philip Hammond's Autumn Statement announcement's of investment in housing and infrastructure, construction figures are down, investment is erratic and public finances are going to be under pressure for some time to come.

Some progress has been made: we now have a new Prime Minister and a new Cabinet, who have avowed "Brexit means Brexit". We also have Theresa May's continued confirmation that Article 50 will be served by the end of March 2017 in spite of the High Court's decision in Miller v. Secretary of State for Exiting the EU (Miller) that the government must seek Parliament's approval before serving Article 50 notice. The government is appealing this decision to the Supreme Court (on which, see below) and we will have to wait and see whether the Prime Minister's proposed Article 50 timing survives the Supreme Court's decision.

We are also none the wiser about what approach the government will take in the Brexit negotiations with its EU partners. There appears to be plenty of activity behind the scenes with snippets of information being released almost daily, but we remain in the dark on a number of major issues. For example: what will the UK's negotiating position be in relation to the mammoth task of extricating ourselves from the EU and establishing new trading relationships with our European partners? Will the government opt for (or be able to negotiate) the so-called soft – or hard – Brexit? What will the Supreme Court decide on the constitutional argument that the government must seek Parliamentary approval before serving Article 50 notice? And what effect will Donald Trump's election as President of the USA have on the Brexit negotiations?

Read on for our selection of Brexit-related news items that have a bearing on construction and infrastructure businesses.

If you want to discuss any particular issues relating to Brexit, please contact your usual lawyer or one of the partners listed on the right.

Hard or soft Brexit? (and do we have a choice?)

There is much talk of whether the government will opt to negotiate for a "hard" or a "soft" Brexit. But what does that mean?

A hard Brexit would give precedence to tighter controls over immigration but would most likely mean giving up access to Europe's single market. It could involve the imposition of trading tariffs and future trading with the EU being based on the World Trade Organisation model and rules. This is the "clean break" option that investors and currency traders most fear: concerns about a hard Brexit have contributed to the dramatic fall in the value of sterling. Current government talk appears to be favouring a hard Brexit approach.

On the other hand, a soft Brexit would mean the UK remaining a member of the single market in some form or other in return for the UK paying into EU budgets and allowing a measure of free movement of goods, services, capital and people.

Discussion of the two types of Brexit does rather assume that the UK will have a choice about which of the two options to adopt. In reality, the type of Brexit will depend on the outcome of our negotiations with the EU.

The BBC's economics editor, Kamal Ahmed, provides a more full explanation here or see The Independent's explanation here.

Brexit – an update on government action

  • Who's who in the cabinet: it's been a while since Theresa May announced her new Cabinet. For those who need a reminder of those dealing with the Brexit negotiations, see the gov.co page listing the Cabinet as well as Building's useful round-up of Construction's new ministers (for those with subscriptions).
  • The government continues to defend challenges to Parliament's right to serve Article 50 notice:
    • The government is defending various legal challenges that have been made in connection with whether Theresa May's government has power to serve Article 50 notice without first seeking approval from Parliament.
    • The action brought by Gina Miller and others against the Secretary of State for Exiting the European Union took place at a three-day hearing in October. Following submissions from the challengers and the government, the High Court decided that Parliament's approval is needed before the government can serve Article 50 notice. You can read the judgment here and our commentary on that decision here: Triggering Brexit – how far can Parliament dictate terms to ministers? Implications and context of the UK High Court's judgment.
    • Reactions to this decision, particularly in some of the UK press and by members of both Parliament and the public, have caused further ructions throughout the UK. Given the constitutional significance of the case, it is no surprise that the government has applied for and been granted leave to appeal the decision and that the Supreme Court has provided an early hearing of that appeal in less than a month's time on 5 to 8 December. Nor is it a surprise that Scotland's Lord Advocate and the Counsel General for Wales will be allowed to address the court on the issues. The Supreme Court decision is expected in early January 2017.
    • In the meantime, the government continues to work towards the promised March 2017 trigger date for Article 50 and, apparently, to prepare the way for Brexit as evidenced by high-profile meetings aimed at strengthening international trading relationships, such as Theresa May's recent meetings with the Indian Prime Minister, Narendra Modi.
    • It's worth noting that the House of Lords Constitution Committee made clear its position on Article 50 before the High Court's decision in Miller: see its report calling for Parliament to take a vote on whether to serve Article 50 notice. (See also The Guardian, 13 September 2016.) The report challenges the Cabinet's view that it already has authority by virtue of the referendum vote to trigger Article 50 when it considers it appropriate.
    • A further Article 50 challenge was made in the Northern Irish High Court: it was dismissed on 24 October by Judge Paul Maguire, who decided that it was not in the power of his court to stop the government serving Article 50.
  • New legal argument about whether the UK needs to serve notice to leave the European Economic Area (EEA): the government might also have to deal with a new Brexit argument about how the UK leaves the EU single market. The treaty of the EEA created the single market and its members include EU member states as well as three non-EU members: Iceland, Liechtenstein and Norway. Under the EEA treaty, the non-EU members enjoy some of the benefits of the EU's single market in return for payments into the EU and free movement of workers. The government's position is that the UK will leave the EEA automatically when it exits the European Union. However, others are arguing that in order to leave the EEA, the UK will need to serve another notice (as well as Article 50 of the EU Treaty) – this time under article 127 of the EEA treaty, which requires twelve months' notice in writing. The legal issue is whether the UK is a member of the EEA in its own right or only by virtue of being in the EU. There is more information about the arguments and their political implications (as well as the implications for the UK's membership of the single market), in the BBC's report of 28 November 2016 here: Brexit: Legal battle over UK's single market membership.
  • Commons paper on the Brexit impact: the House of Commons has assessed the impact of Brexit on policy areas and produced a briefing paper (number 07213) dated 26 August 2016. The paper "looks at the current situation in a range of policy areas (including environment, trade, employment and immigration) and considers what impact Brexit might have. This will depend, among other things, on the Brexit negotiations, whether the UK stays in the European Economic Area and how the government fills any policy gaps left by withdrawal."
  • Autumn Statement: Mr Philip Hammond's Autumn Statement of 23 November announced good news for housing, road and rail projects, a renewed commitment to PF2 and promises of economic and social infrastructure projects to look forward to in 2017. However, the grave financial effects of Brexit on public finances and the wider economy – based on the Office for Budget Responsibility's (OBR) forecasts - were set out starkly. Mr Hammond was quick to reference the OBR's acknowledgment that "there is a higher degree of uncertainty around their forecasts than usual".
  • The Great Repeal Bill: at the Conservative Party Conference on 2 October, Prime Minister Theresa May confirmed that the next Queen's Speech (around April or May 2017) will include a Great Repeal Bill, which will include provisions to repeal the European Communities Act 1972. (See also the speech in Parliament by Mr David Davis, the Secretary of State for Exiting the European Union, on 10 October on the next steps in leaving the European Union.) In effect, the Great Repeal Bill would convert existing EU law into domestic law and enable Parliament to take back control of law-making in the UK from the EU. In response to the proposal, Keir Starmer, Shadow Secretary of State for Exiting the EU called on behalf of Labour, for a Parliamentary vote on the basic terms proposed by the government before Article 50 is invoked. To access the recording of the session, click here.
  • No Brexit before March 2019: if Article 50 is indeed served in March 2017, it will be followed by two years of negotiations. It will therefore be at least March 2019 before the UK departs the EU formally.
  • May's position at the EU Summit in October: Theresa May outlined broad Brexit principles but did not set out a specific vision for the UK's departure from the EU. Instead, she presented "guiding principles" on limits to migration and ensuring free trade. You can read her press release of 21 October 2016 here.
  • Transport issues: the House of Commons has issued Briefing Paper CBP-7633 of 19 July 2016: Brexit: how will it affect transport? This paper discusses some of the pertinent issues in the four main transport policy areas: aviation; railways; roads and road-based public transport; and maritime.
  • Brexit impact on skills: the All Party Parliamentary Group for Excellence in the Built Environment (APPGEBE) is to look at the impact of Brexit on future skills needs in the construction industry and the built environment professions. (See the Construction Industry Council press release.) This subject is of special significance given the reliance of construction on workers from the EU at both a trades and a professional level, and at a time when construction is already facing a skills shortage. Written electronic submissions are required no later than 25 November to the APPGEBE Secretary, Graham Watts OBE, c/o apppginquiry@cic.org.uk.
  • Nissan letter of comfort: Nissan demanded a letter of comfort from the government that it will suffer no adverse effect from Brexit before deciding to retain its car manufacturing base in Sunderland (according to The Guardian, 31 October 2016). Greg Clark, the Business Secretary, has neither published the letter nor revealed the detail but has confirmed that the government has not offered compensation for future tariffs. The extent to which the government/Nissan deal sets a precedent for deals with other major foreign companies remains to be seen but its existence fuels speculation about what compromises the government might be prepared to make in the Brexit negotiations. Expect the clamour for the details of the deal to grow!
  • Irish border to remain open: Enda Kenny, Ireland's Prime Minister, has reportedly agreed with Theresa May that there will be "no hard border" between the Irish Republic and Northern Ireland and that the benefits of the common travel area will be preserved. (See The Independent, 2 November 2016.)

European Commission Task Force established

  • The European Commission has set up a Task Force to be led by Michel Barnier as Chief Negotiator to prepare and conduct the negotiations with the UK. The Task Force's work will take account of the framework for its future relationship with the European Union and will coordinate the Commission's work on all strategic, operational, legal and financial issues related to the negotiations. It will also be able to draw on policy support from all Commission services. (See EU press release of 14 September 2016.)

Preparing company accounts and reports ahead of Brexit

  • Financial reporting: ahead of the shareholder reporting season, the Financial Reporting Council (FRC) (the UK's competent regulatory authority for audit, and its standard-setter) wrote a letter to investors in which the following advice was given on Brexit: "Companies may well be currently considering the risks and uncertainties associated with the UK's renegotiation of its EU position and potential exit. If the board considers this to be a principal risk they should disclose that to their shareholders."
  • Guidance on preparing company reports and accounts: the FRC also issued guidance to listed companies in a letter dated 10 October 2016 addressed to audit committee chairs and finance directors. The guidance recommends that "companies consider the consequential risks and uncertainties in the political and economic environment and the impacts of those risks and uncertainties on their business. Not all businesses will be affected to the same extent. Boards must determine what disclosures, if any, are required to meet the needs of investors and comply with regulatory requirements." As more information becomes available, companies will need to be increasingly specific about the risks they disclose in their report and accounts.

Dentons working on an artificial intelligence (AI) solution for Brexit contract reviews

The Brexit effect on the construction industry: a round-up of soundbites

There are many different views on what might lie ahead or be best for the UK and opinion vacillates about whether Brexit will be good for the construction industry or not. The truth is, no one yet knows. We've collated a few "soundbites" as examples.

The construction industry

"Brexit will cast a shadow over the global economy. ... The repercussions and fallout will emerge in the next five to 10 years." (Lou Jiwei, China's Finance Minister, The Telegraph, 26 June 2016)

"Weaker pound only Brexit impact so far" (Bam Construct UK, Building, 18 August 2016)

"Contractors have said they are uncertain about future workloads following the Brexit vote, according to the latest trade survey from Build UK." (Building, 22 August 2016)

"Construction output held steady in July, the first full month after the EU referendum, latest ONS data has revealed." (Building, 9 September 2016)

"Cumulatively, I think Brexit will have a huge impact on construction and infrastructure. The only thing that will compensate for the impact of Brexit will be serious, rapid stimulus of the construction industry by the government … even without Brexit, I'd have been making that argument." (Lord Kinnock – discussing the decision not to make the National Infrastructure Commission a statutory body, Building, 23 September 2016)

"There's an old joke that US president Harry Truman once asked for a one-handed economist because all his economic advisers favoured the phrase 'on the one hand … but on the other'. This is particularly apt for those of us trying to determine the post-referendum outlook, as it is difficult to gauge how the economy is reacting to the result to leave the EU and how it will fare over the next couple of years as Brexit negotiations progress." (Brexit Britain: three scenarios for construction output following the EU referendum by Rebecca Larkin, senior economist at the Construction Products Association, Construction News, 27 September 2016)

"As workload Index recovers from Brexit shock, outlook remains volatile" (RIBA, following publication of the RIBA Future Trends Workload Index for August, 29 September 2016)

"Brexit paves the way for procurement process opportunities." (Marie-Claude Hemming, head of external affairs at CECA, Construction News, 19 October 2016)

"The majority of UK construction sectors are experiencing a slowdown in growth, as Brexit uncertainty continues to cause concern … Financial constraints and lack of investment continue to hamper growth … However, outlook expected to improve with nearly 50 per cent more respondents forecasting rise in workloads over the coming year." (latest RICS Construction Market Survey, 20 October 2016)

Despite an overall growth in the economy, Office for National Statistics (ONS) figures released on 14 October 2016 showed a fall in construction output of 1.4 per cent. (See Building report of 27 October 2016 and ONS report.) The Financial Times suggested it was premature to make definitive judgments about the commentary in its 27 October 2016 article: British economy sees off Brexit for another day.

[Following the election of Donald Trump as the US President-Elect … ] "Given America’s significance to the UK as a trading partner and investor, UK construction will hope that any potential for protectionism or isolationism will be limited." (Will Waller, market intelligence lead at Arcadis, in Building, 9 November 2016)

On access to EU labour

"Secure post-Brexit access to a skilled workforce or risk a construction crisis, professional bodies warn government." (See the press release of 14 September 2016 accompanying the publication of a letter of 12 September 2016 to government Brexit Minister David Davis by a coalition of The Royal Institution of Chartered Surveyors (RICS), The Royal Institute of British Architects (RIBA), The Chartered Institute of Building (CIOB) and The Royal Town Planning Institute (RTPI).)

"Access to a skilled workforce of the highest quality and a focus on developing the next generation of home-grown talent are critical to ensure we can build the homes, businesses and infrastructure we need to compete globally." (Letter of 12 September 2016 as above)

"Modernise or die!" (Farmer Review, October 2016)

"We cannot afford to ignore the Farmer Review and we should see Brexit as a catalyst for change." (Martin Wright, managing director – architecture for AHR, Building, 28 October 2016)

"We must remain a free and open economy, not for ideological reasons but because we won’t have the quality of people." (Jeremy Blackburn, RICS, quoted in Building on 2 November 2016)

"For many we have consulted over the last two months, plans to trigger Article 50 raise questions about our ability to train enough skilled engineers to meet the country's needs, to attract the brightest and best international talent to the UK to address specific skills shortages, and to collaborate with colleagues in non-UK European Union countries in a way that accelerates innovation that is of value to wider society." Professor Dame Ann Dowling OM DBE FREng FRS, President of the Royal Academy of Engineering, on the publication of Engineering a future outside the UK published on 17 October 2016)

A list of guidance notes on Brexit (with a construction focus)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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