Contract clauses for the climate

Those working in the built environment are aware the sector is one of the most polluting, contributing more than a third of the UK’s carbon emissions. The upside is that the opportunities to contribute to the drive to net zero are vast. This includes the way in which construction contracts are put together.

Many will have seen that the NEC recently published a new sustainability clause, X29, which may be used across its suite of contracts. Also available are a selection of free-to-use clauses from not-for-profit organisation The Chancery Lane Project (TCLP). TCLP brings together lawyers from around the globe to draft contract clauses to incentivise climate-positive behaviours and practices. The clauses are designed for use across a range of commercial contracts and sectors, including the built environment and construction. Each clause in TCLP’s toolkit is given a child’s name, the intention being to remind users that our actions now will affect our children’s future.

There are 10 construction clauses in total. These provide a range of drafting options, such as:

• Ashkan’s clause, which rewards a contractor for complying with a “green working practices” schedule, similar to the principles in the NEC’s X29 performance table.
• Edgar’s clause, which requires landscape design to be carried out with climate resilience in mind and allows an employer to set targets for biodiversity.
• Estelle’s clause, which requires, among other things, carbon offsetting and for the completed works to be designed to withstand the anticipated effects of climate change as set out in the Intergovernmental Panel on Climate Change’s 2021 report.
• Luna’s clause, which incentivises the contractor to propose modifications that may increase the completed project’s resilience to climate change, reduce the overall carbon footprint of the project, or better protect the natural environment.
• Rose’s clause, which is designed for use in a development funding agreement and requires project-specific climate targets, the appointment of a sustainability consultant to monitor, and requirements for corrective proposals if the works are not progressing as planned against climate targets.
• Tristan’s clause, which sets a carbon budget for each project and imposes liquidated damages if it is exceeded.

We are not yet seeing such requirements being widely adopted in construction contracts outside of specialist projects. However, with an increasing number of companies setting carbon and climate targets, the use of and demand for such clauses is growing.

With an increasing number of companies setting carbon and climate targets, the demand for such clauses is growing

If the clauses do enter into common use, the areas likely to be subject to particular negotiation are as follows:

Are the obligations insurable?

For example, will an insurer pick up the cost (or at least part of it) if after 10 years a building has not withstood the currently anticipated effects of climate change? The insurance market seems not to offer such coverage and, given the tightening of insurance cover, that is unlikely to change without a legal requirement (or a strong commercial incentive) for it to do so.

How does a project establish its carbon budget?

A great deal of upfront work will be needed to establish the likely carbon footprint of the project and how it can be reduced. A significant proportion of carbon emissions in construction projects come from scope 3 emissions – indirect emissions from the supply chain, travel to work and the like – as opposed to scope 1 and 2 emissions, which are those directly generated by a contractor on a project. Measuring emissions, particularly scope 3, will require a huge amount of data collection and monitoring.

Who is prepared to bear the additional costs of, for instance, carbon offsetting?

Given contractors’ small margins, they are unlikely to be able to do so from existing profit. Employers in turn tend to be drawn towards contractors with the lowest price. While carbon reduction should lead to costs savings in the long run due to greater efficiencies, significant initial outlay and change costs are likely.  

Given all of this, TCLP’s clauses as currently drafted probably represent an end goal of where construction needs to get to.

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In order to make progress, the industry will have to change its too often adversarial approach and work together to assess where the opportunities for carbon reduction sit, who is best placed to take advantage of those opportunities and manage the process, and, crucially, how the costs of the transition will be met between all those involved.

In essence, to make a meaningful difference, the industry will require greater collaboration – and what greater incentive is there to do so than the wellbeing of those children and grandchildren after whom the clauses have been named.

Chris Hallam is a partner and Charlotte Eccles a senior associate in the Manchester office of CMS Cameron McKenna Nabarro Olswang