Construction firms must ‘contract differently’ to address climate claims risk

In a new academic paper, ‘Contractualising climate change: challenges, solutions and opportunities', drafted for the Society of Construction Law, Anne-Marie Friel of Pinsent Masons said it is “inevitable” that claims relating to the CO₂ produced during the construction phase of projects – sometimes called ‘embodied carbon’ – “will be the defects claims of the future”. She said such claims would expose businesses involved to “significant liability”.

“It is possible that, in five or 10 years, such claims will gather similar momentum to what we have seen with fire safety defects in buildings,” Friel said.

Currently, it is estimated that the buildings and construction sector accounts for about 21% of global greenhouse gas emissions – over half of which are carbon emissions associated with new materials used in construction. Friel acknowledged industry has been taking efforts to address this but also recognised that there remain challenges in doing so, including its grappling with a skills crisis and in sourcing sustainable materials that conform to stringent new building and fire safety regulations. She said that while new technological solutions like building information modelling (BIM) – which is used to support design, planning and efficient project collaboration – can help, its adoption in isolation risks “various interdependencies between sustainability issues” going unaddressed.

Friel said a more holistic approach that acknowledges the interdependencies and relationships between interacting components relevant to the way in which emissions are generated in construction, is needed. She described this as a ‘systems thinking’ approach in her paper and highlighted how it can be reflected in construction project contracts and the way they are operated and managed.

In this regard, Friel said it is important that the “required baseline level of [carbon] performance” is set out in the procurement process and contract itself, that innovation and incentives are built into the way the procurement process and contract is operated, and that there is contemporaneous measuring and management of performance under project contracts in a way that reflects evolving technological and environmental standards.

Would-be contractors should be clearly made aware of “the minimum requirements needed for compliance” at the tender stage of projects, through use of pre-qualification questionnaires and embodied carbon forecasting, she said, while developers could supplement the baseline requirements with specific provisions designed to drive good environmental outcomes – “the provision of comprehensive digital reporting on environmental impacts, specific changes to construction methodologies, procurement of green alternative materials” were cited as examples.

“Contractual requirements should be clear and specific, not vague or aspirational, preferably with reference to hardcoded figures and estimations”. Friel forecast that, “increasingly, the use of a fixed ‘carbon budget’ for the project,” may be required, in order to meet conditions placed on the development through planning process and financing arrangements: “Climate performance requirements should therefore be fixed from design and planning stage. The use of digital solutions, such as BIM design, should be prescribed along with a requirement for accurate reporting on CO₂ emissions and biodiversity impact on a live basis.”

“The consequences of failure to meet the requirements should be clearly spelled out, and there should be consideration given to the fact that a normal defects or damages remedy may not be effective (given the inability to recapture CO₂ emissions) and therefore other remedies must be considered to mitigate this chance of failure,” she said.

Friel said that getting these specifications right can help limit embodied carbon emissions from the very outset of projects, highlighting how it is impossible to “rectify them with further construction works” them once they have occurred “without generating more” emissions. It is also likely to be difficult for parties to quantify the losses associated with a breach of such a condition, so many traditional approaches to enforcement of contractual obligations may not work effectively, she added.

Contractors and suppliers also need to be incentivised to deliver good emissions-related outcomes, Friel said, citing how this should be reflected in the contract bidding process – where she said “forward thinking” in relation to sustainability should be encouraged – and in the contracts themselves, such as by requiring collaboration between parties to meet environmental goals. Forums to enable good ideas to be shared should underpin those arrangements, while financial incentives will also be needed to drive the desired behaviours, she added.

Friel said: “The right behaviour should be financially incentivised throughout the project by linking financial performance to achievement of and improvement against these targets. While these financial incentives are useful, there must also be a focus on disincentivising the wrong behaviours, as it is unlikely that financial incentives themselves can drive long term systemic change, especially when the initial financial incentives of the project stop. The most obvious of these disincentives would be likely by ensuring a full transparency approach (to the extent possible with existing confidentiality obligations) is adopted in projects.”

Building in the right incentives and encouraging continued innovation to achieve good environmental outcomes will require the industry to adjust to “a longer pre-construction phase” where contractors are involved early in the process, Friel said. This will help to “optimise design and construction planning, to ensure that all challenges are considered, acknowledged and, to the best extent possible, resolved prior to construction starting”.

On contract performance measurement and management, Friel said, suggested, among other things, that a review of the design’s climate change impact should be factored into project timelines “before construction commences, to assess any variances against the planned conditions for the project”.

In her paper, Friel highlighted how some model contractual clauses for addressing climate change have been developed to help the construction industry decarbonise. These include the NEC4 Option X29 clause, the recent sustainability and collaboration amendments to the JCT ‘design and build’ standard form contracts, and The Chancery Lane Project’s climate clauses. Friel said implementing the clauses will help construction companies adopt the ‘systems thinking’ approach to climate change that is needed in the sector.

“Improvement in sustainability outcomes from construction requires ‘system-wide’ behavioural change affecting all aspects of design and construction, backed by regulatory intervention and associated reputational and financial considerations,” Friel said. “Professionals involved in construction contracts must become expert in the individual components which contribute to the achievement of sustainability outcomes during construction phases, the forces which regulate the achievement of those outcomes and, importantly, must implement contractual approaches designed to support successful delivery. A ‘systems thinking’ based approach to contract management … can be used as a blueprint solution to how construction contracts can be used to manage this important issue.”

This article is based on a paper, 'Contractualising Climate Change: Challenges, Solutions and Opportunities', authored by Anne-Marie Friel of Pinsent Masons. The paper was published in the journal of the Society of Construction Law and is available for download - it is free for SCL members; non-members can access it for a small fee.