With climate dominating the headlines in the light of COP26, it is inevitable that sustainability concerns will be edging their way up corporate agendas. The built environment reportedly contributes 43% of the UK’s carbon emissions, so the construction industry will be put under significant pressure to reduce its carbon footprint. Hopefully, all operating in the industry will now be considering what steps they can take to play their part.
One way of doing so is by adapting the terms of construction contracts and consultant appointments and the obligations and liabilities in them.
So why is climate conscious contract drafting important?
- To enable the enforcement of green/sustainable provisions;
- To push sustainability discussions to the forefront of parties’ minds during negotiations;
- To help future-proof against legislation changes which introduce more onerous sustainability requirements;
- To increase the value and marketability of the built asset concerned;
- To access wider funding opportunities through green loans; and
- To improve parties’ green credentials to benefit its corporate reputation and brands.
The agreements made at COP26 are not legally binding although over the coming months and years we will see the introduction of new legislation and reporting requirements designed to assist the UK in fulfilling its commitments. However, the introduction of new legislation is often very slow and so it will be for industry players to take the lead. Contracts will therefore play a key role in making parties legally accountable to one another.
Green provisions which parties consider including into their contracts will vary widely. Much will depend on the type of contract and the nature of the development. For example, parties may choose to agree contractual provisions to ensure that a development achieves net zero carbon emissions; adopt sustainable on site working practices and/or making energy efficiency standards a requirement of practical completion and/ or allocate responsibility for carbon taxes. Traditional contractual mechanisms including liquidated damages and retention can also be used to incentivise parties to comply with such requirements.
It will be important that performance against any green requirements is capable of being monitored and measured during construction of a development and that the obligations can be enforced. If that does not happen the inclusion of green clauses will be meaningless aspirations and amount to ‘greenwashing’ – talking the talk but not walking the walk! There are already a number of available resources which provide advice on monitoring and measuring sustainability performance including guidance published by the UK Green Building Council and the Royal Institution of Chartered Surveyors (RICS).
Care is always required when adding to or adapting new clauses in contracts, including standard forms. It is crucial to ensure that the terms are consistent with the rest of the contract. It is also important to consider how the provisions interact with any upstream, downstream or other related documents including finance, development and lease agreements.
An inevitable question is who should shoulder the risk and cost of green/sustainability obligations. Considering the tight margins and other well publicised challenges which the industry is already grappling with, it may not be straightforward to reach agreement on this. The lead may need to come from funders and developers so that the rest of the supply chain follow.
Contractual provisions are obviously not a golden bullet to solve the dilemma of climate change. However, not surprisingly we are seeing more interest in them so don’t get left behind!
Key points
- which party will be responsible for the embedded carbon in a development?
- any targets set must be capable of being monitored and measured
- taking sustainability seriously can improve the marketability of a building