Climate change clauses for NEC contracts – A sign of things to come?

The NEC form of contracts has now formally adopted voluntary clauses to address climate change considerations.     

X29 clauses in NEC 4

Following conclusion of its consultation into standard climate change clauses the NEC has now published the final form of Secondary Option X29 clauses for all forms of its NEC4 suite of contracts.

Published on 26 July, the X29 clauses are the first of their kind, providing standard form drafting for construction contracts, which specifically and explicitly targets the impact of the project on climate change. This is welcome given the emphasis put on this issue by the UK's governments Construction Playbook, which suggested that parties use drafting to address the impact of the construction industry on climate change.

Such concern is merited, given that the construction industry is responsible for 37% of all carbon emissions globally[1], and is not on track to be a net zero emitter by 2050, as committed to by the UK government (and others) in the Paris Agreement.

Operation

The main operation of the X29 clauses is to incorporate clauses relating to the project's impact on climate change as conditions of contract.  By incorporating the climate change clauses into the body of the contract, the parties are incentivised to comply with agreed upon climate change requirements and plan (which are to be agreed at the outset of the project). For example, where a contractor (or other party to a contract including the X29 clause) does not meet such requirements, this can constitute a defect. The employer can then rely on the usual defects clauses to require the contractor to remedy the defect in the usual way.

The X29 clauses also suggests the incorporation of a performance table, which sets out the climate change related targets agreed between the parties, along with the financial consequences of meeting (and/or not meeting) such targets.

The X29 clauses act to keep the impact of the works on climate change at the front of the minds of parties to such contracts by including early warning provisions, requiring both parties to consider and notify the other party as soon as it becomes aware of any matter likely to be detrimental to the achievement of the climate change requirements.

Where a compensation event will affect the performance table, the X29 clauses provide drafting to amend the performance table, subject to the usual compensation event caveats including contractor fault and prompt notification.

Lastly, the X29 clauses provide that at any time during the works, the contractor may propose changes to the scope in order to further reduce the impact of the works on climate change, and provides a process for considering and agreeing such proposals.

Benefits

Clearly, having a standard framework in which to deal with green issues during construction projects is a boon to the industry, and, as noted above, is in fulfilment of the recommendations of the UK government. This is particularly the case where such clauses form part of the NEC4 suite, given their widespread use in the increasingly climate-conscious public sector.

Previously, climate change drafting had largely come by way of bespoke clauses such as those from the Chancery Lane Project, which although commendable, was not widely accepted. The publishing of the X29 clauses removes any such barrier that had existed in the market by virtue of there being no standard form clause.

Our hope is that momentum builds such that it becomes standard practice to use these clauses. This may lead to contractors competing with one another to show their green credentials, in turn driving innovation and cost efficiencies in the supply of green products and practices.

Given the current social and political capital behind green initiatives, it may be that the other popular contract suites publish their own climate change clauses in due course. Such publication would be welcome, and would help to foster a new culture in the construction industry.

Caution

However, our optimism is cautious. These clauses are not an 'oven-ready' solution to climate-change-considerate construction.

The inclusion of these clauses is completely optional and parties may simply opt not to include them. The inclusion of these clauses will certainly have an impact on tender pricing, and it remains to be seen the extent to which employers are willing to put their hands in their pockets for green construction.

Even if these clauses are used, the impact of them turns almost entirely on the parties to the contract. The scope of how the parties intend to tackle climate change in the built environment, and the rewards/penalties for success/failure, is to be set entirely by agreement between the parties. Again, this leaves an open door for employers and contractors alike to engage in green-washing, by simply agreeing very minimal climate change objectives, whilst their marketing teams leverage the fact of their use of the X29 clauses in their ESG publications.

The NEC's own guidance notes to these clauses militates against their use in the majority of cases. The NEC recommends that X29 is not used in contracts where options X17 (low performance damages) and X20 (Key Performance Indicators) are selected. Unfortunately, clauses X17 and X20 are, for good reason, common selections. Consequently, the NEC effectively asks an employer to sacrifice its ability to hold a contractor to functional/commercial KPIs in order to be able to hold it to climate change KPIs under X29. Employers who might otherwise have welcomed this clause may, as a consequence of this guidance, now find it hard to accept.

Lastly, the climate change requirements are fundamentally a technical issue to which there is yet no market consistent solution. Whilst the legal drafting is now standardised, meaningful use of these clauses is unlikely until there is some market consensus on the technical aspects required to give the clauses effect. Such consensus is unlikely to be quick in coming.

Summary

Whilst the publishing of the X29 clauses is certainly welcome progress, it remains to be seen how widely they will be adopted, and exactly how ambitious employers are prepared to be in setting climate change requirements. At a time where construction costs are already spiralling, adoption may be slow, at least initially, but we do expect funders and employers to more and more often procure climate conscious construction.

For further information in relation to this topic, please contact Micaela Diver, Partner, Brendan Fox, Partner or James Flanagan, Senior Associate in ALG's Belfast Litigation & Dispute Resolution team.

Date published: 1 December 2022