Red Diesel Reform – What Will it Mean for your Business?

Adrian Kerr and Connor Mulligan from Construction Law Experts and CEF patrons, Mills Selig discuss likely contract ramifications of red diesel reform...

From April 1, 2022, the construction industry, along with many others sectors, will face a serious blow from the new restriction on the use of “red” diesel introduced by the Finance No 2 Bill 2021. Many in the construction industry are questioning how they will be legally affected by the changes in light of ongoing or future construction contracts.

JCT Contracts
In relation to JCT Design & Build 2016, under Clause 2.26.12, contractors will be entitled to
claim that a Relevant Event (for time) has occurred if the law has changed after the contractual Base Date. However, one must query how useful an entitlement to additional time will be in relation to transitioning away from red diesel. Will it be possible to put forward a legitimate, critical path-based time claim as a result of this law change? Changes in the law under JCT give no entitlement to money. This will inevitably be frustrating for contractors as, given the increased costs of using white diesel, money is perhaps more pivotal in relation to the change in law.

NEC
In the context of NEC contracts, X2 is an optional additional clause which parties may have
selected, meaning that any change in law in the jurisdiction where the site is located after the Contract Date is a Compensation Event thereby potentially entitling contractors to time
and money. Project Managers may notify the Contractor of the change in law; however, the
Contractor should also notify the Project Manager under Clause 61.3, otherwise contractual
entitlement to time/money may be lost due to the frequently discussed NEC time-bar. If clause X2 has not been included in the contract, the Contractor accepts the risk of any
changes in the law and therefore will not be able to recover any costs or time.

Interestingly, we are seeing Employers being reluctant to include X2 because of the experience they have had in recent years following significant changes in the legal landscape e.g. Brexit, Covid-19 and now, red diesel.

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Practical Steps to Take
The change in the law happens when the Bill comes into force. Close attention to the Contract Date (NEC) and Base Date (JCT) is required as this will affect any claim. When entering new NEC contracts prior to the Finance Bill being passed, it is wise to agree, where possible, how the red diesel issue is going to be dealt with. Will it be a Compensation Event or not?
Similarly, under the JCT umbrella, we advise that the parties expressly agree within the contract whether or not the red diesel issue is a Relevant Event (potentially allowing more time) and/or Relevant Matter (potentially allowing more money).

Regarding existing contracts, it is imperative that the parties check what the relevant contract says. Many standard form contracts have been amended or tweaked, so the parties should be sure of their contractual position before taking any steps. Where a contract based on NEC contains clause X2, we envisage it being debated as to when the event should have been notified, both as an Early Warning but more importantly as a Compensation Event. We advise that the “safest” approach is to issue Early Warning and Compensation Event Notices now on the premise of what is expected to happen. This notice can include that the change applies from April 1, 2022, and if this date is changed, it can be updated by issue of an updated Compensation Event notice.

Moreover, under JCT, given that an extension for time claim is the only relief available to contractors, it must be noted that despite time being granted, eventually the new legal provisions will catch up, and so, putting measures in place in advance would be wise to avoid any issues. Employers under JCT will benefit from no contractor entitlement to money in light of the change of the law, however, employers must bear in mind the financial implications this may have for some contractors.

While red diesel restriction alone may not be enough to put a Contractor (and therefore a project) into difficulty, when you take into account the impact of Brexit, Covid-19, material
costs increases and availability, many contractors may fold under the pressure with the effect that individual projects will suffer.

For further advisory information relating to the introduction of the Finance No 2 Bill 2021, please visit www.millsselig.com