What are the consequences for missing contractual environmental and sustainability targets?

Although most (if not all) practitioners in the construction industry in the UK now recognise the importance of reducing the environmental impact of their construction and engineering projects, parties need to tread carefully when imposing measures to protect the environment in their contracts. While the standard form contracts provide a structure (and sometimes a mechanism) for addressing environmental and sustainability issues, they are ultimately lacking in depth.

For example:

• The recently issued 2024 suite of JCT contracts acknowledges the parties’ desire to prioritise environmental performance and impact. It moves a previous “optional” supplemental provision to the front end terms and conditions (clause 2.15), requiring the contractor to suggest economically viable amendments to the works to improve environmental performance and sustainability, and to reduce environmental impact. This does not apply, however, to amendments to any design services. In addition, the JCT fails to create any real consequences for the contractor failing to suggest how to improve environmental performance etc. While this is arguably intentional (because any consequences will look different for each project, depending in part on the various stakeholders involved), it means parties cannot assume their environmental and sustainability needs will be met. Instead, any specific objectives, targets and consequences for failing to meet targets would need to be dealt with as a specific amendment to the conditions.
• The NEC goes a bit further. In 2023, the NEC introduced an optional clause X29 for its suite of contracts. This clause includes a mechanism for the parties to agree objectives, set performance targets and address the consequences for failing to achieve those targets as an increase or decrease to the contract sum. This mechanism will only “bite”, however, if (i) the option clause X29 is selected to apply in the contract data; and (ii) the parties include sufficiently detailed information in the scope. As with the JCT, the parties cannot simply select option X29 and do no more…

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So what level of detail should parties be including in the contract documents, and what should the consequences of failing to meet targets be? Unfortunately (and unpredictably) this is not a one-size-fit-all answer. In practice, it will depend on the importance and criticality of achieving the targets, both to the employer and stakeholders, and the type of target (and how it can be measured from a technical perspective). It is not uncommon to see the following:

Liquidated damages 

The employer may want to include a right to levy predetermined or “liquidated” damages for failure to achieve an environmental or sustainability target. The Chancery Lane Project has provided example wording that calculates the rate of liquidated damages by reference to the percentage of such failure (for example, £X per tonne of carbon dioxide equivalent of greenhouse gas over and above the carbon budget).

But parties need to be careful with the drafting of liquidated damages clauses. Although recent case law suggests the courts are now more inclined to uphold these clauses, there is still a risk such a clause could be held to be a penalty and unenforceable if the predetermined level of damages is considered extravagant, unconscionable or otherwise out of all proportion to the legitimate commercial interests of the party seeking to rely upon it, leaving that party with the very difficult task of demonstrating its actual losses arising from the failure to achieve the environmental target in question (if it is entitled to recover general damages in the circumstances).

While contractors might use this risk to their advantage (to ultimately avoid liability for failing to achieve targets), to do so would not be in line with the principle “to act in good faith”. Any pre-agreed liquidated damages should therefore be calculated on a clear, transparent and unequivocal basis, especially if the parties want to mitigate the risk of dispute.

Termination 

If a failure to achieve an environmental or sustainability target has a knock-on effect for the employer and its asset (for instance, if the purchaser pulls out of the deal, or the funder withdraws funding), liquidated damages may not provide a sufficient remedy. Instead the parties may want to be able to terminate or suspend the works, or even use this as an excuse not to certify practical completion.

There are (and will be) many other creative ways parties might adopt to ensure environmental or sustainability targets are prioritised and taken seriously, all depending on the parties involved and each project. But the key take-away is to make sure the technical detail for a target is carefully thought out (and documented) and the consequences are ostensibly fair and reasonable.

Elizabeth Cully is a senior associate in the construction and engineering team at RWK Goodman