UK: How Can Sustainability Be Embraced In Construction Contracts?

Last Updated: 4 April 2011
Article by Simon Tolson
  1. Every project needs a clear set of contractual requirements and obligations so that all the participants know where they stand. A good contract should set out:

    • what each party must do;
    • what each party receives;
    • the time for performance;
    • (sometimes) consequences of failure/breach; and fundamentally
    • address where risk is to fall.

  2. Obligations relating to sustainability should, in my view, be treated no differently to other provisions in a contract dealing with Employer's requirements. The scope of the obligation should be clear, and, more importantly, so should the sanction.
  3. Construction projects and contracts are of course already subject to certain sustainability provisions as a matter of general law. The Government has introduced a number of legislative provisions, (some of which are mandatory some of which are voluntary) which fall within the sustainability umbrella. I am thinking in terms of the CRC Energy Efficiency Scheme which is a mandatory scheme to improve energy efficiency and therefore cut CO2 emissions in large public and private sector organisations. The controversial scheme (now not a hypothecated tax) features a range of reputational, behavioural and financial drivers which aim to 'encourage' organisations to develop energy management strategies that promote a better understanding of energy usage. Also things like energy performance certificates (EPCs) and the revisions to Part L of the Building Regulations are having a huge impact on designers and suppliers.
  4. This legislative drive continues with this coalition Government committed to improving resource efficiency and sustainability as part of its drive to address climate change. The current set up includes:

    1. Waste : the Site Waste Management Plans Regulations 2008, SI 2008/0314;
    2. Landfill Tax : introduced in Finance Act 1996, Aggregates Levy introduced in Finance Act 2001, Climate Change Levy introduced in Finance Act 2000; and
    3. Building Control: Building Regulations:

      • Part L (October 2010)
      • Energy Performance of Buildings (Certificates and Inspections) (England and Wales) (Amendment No.2) Regulations 2008, SI 2008/2363;
      • Housing and Regeneration Act 2008 section 317: Time Limit for Prosecutions of Breaches of Building Regulations and the Housing and Regeneration Act 2008 (Commencement No. 1 and Transitional Provision) Order 2008; and
      • The Building (Electronic Communications) Order 2008 (SI 2008/2334) (to save paper);

    4. Code for Sustainable Homes 2008 (Dept. for Communities and Local Governments) – Voluntary published November 2010 and the work of the Zero Carbon hub.
    5. Feed in Tariffs which pay property owners for generating electricity will stay in place until 2013, unless take-up is unexpectedly high from solar farms and commercial parks and the provisions in the Energy Act 2008 that will have an environmental impact, including provisions in respect of the Renewables Obligation (RO), feed-in tariffs (FITs), financial incentives for renewable heat (RHI), nuclear power plants and carbon capture and storage (CCS).

      Many of the provisions in the Energy Act are closely connected to the provisions in the Planning Act 2008 and the Climate Change Act 2008, both of which also received Royal Assent on 26 November 2008. The government's aim is that these three Acts will underpin the long-term delivery of the UK's energy and climate change strategy. In particular, the Planning Act 2008 includes provisions designed to speed up the decision-making process for large-scale infrastructure projects that are of national significance, which is likely to be critical in delivering new renewables projects (such as offshore wind) and nuclear power stations. Also, the UK's ability to meet the targets in the Climate Change Act 2008 for reducing greenhouse gas emissions will depend to a certain extent on the UK being able to generate more of its electricity using low-carbon energy sources (such as renewables and nuclear power).

Building your project. What does your contract say?

  1. Some contracts do contain provisions that may be considered to be "sustainability" provisions. Clause 4.18 of the FIDIC Red Book is entitled, "Protection of the Environment" and states:

    "The Contractor shall take all reasonable steps to protect the environment (both on and off the site) and to limit damage and nuisance to people resulting from pollution, noise and other results of his operations.

    The Contractor shall ensure that emissions, surface discharges and effluent from the Contractor's activities shall not exceed the values indicated in the Specification, and shall not exceed the values prescribed by the Applicable Laws."

  2. This clause demonstrates the need to comply with local legislation and the specification as we have already discussed. It also raises the major problem that you are faced with when drafting contracts to incorporate sustainability provisions. What is a "reasonable step"? To what extent can a contractor "limit damage and nuisance"? Is there any remedy for a breach of these provisions, apart from termination?

JCT Building Contracts

  1. The JCT decided three years ago to extend the sustainability provisions within its contracts. Given that JCT remains by far the most widely used standard form contract for UK building projects its scope for influencing the sustainability credentials of the construction industry should not be under estimated. The Revision 2 suite of contracts contain a number of sustainability provisions.
  2. A glance at the Contract Particulars in the 2009 suite reveals a number of optional provisions which impact sustainability. This cross refers to Schedule 8 which reveals the following obligation placed on the contractor:

    "The Contractor is encouraged to suggest economically viable amendments to the Works which, if instructed as a Variation, may result in an improvement in environmental performance in the carrying out of the Works of the completed Works. The Contractor shall provide to the Employer all information that he reasonably requests regarding the environmental impact of the supply and use of materials and goods which the Contractor selects".

  3. The first point to note is that the provision is optional (you simply complete the Contract Particulars to state whether or not it applies). In these environmentally conscious times this may be considered an unusual approach. Why would an employer not want the contractor to make such environmentally beneficial amendments to the works? JCT offers no reason (other than it envisages most of the environmental decisions are principally for, the client and the professional team during the pre-construction phase) but it may be that those clients who are committed to the environmental credentials of their projects have already made adequate provision elsewhere in the contract documents and so the optional nature of the clause avoids confusion. The second point to note is that the contractor is not incentivised to offer any environmental improvements to the works (other than the fact that he receives his mark-up on the cost of the variation if instructed by the employer).
  4. Contrast this with the preceding section of Schedule 8 entitled Cost savings and value improvements. In the spirit of the last governments OGC's Achieving Excellence in Construction initiative, Schedule 8 encourages the contractor to suggest changes that reduce costs (both in terms of the cost of construction and lifecycle costs). This states:

    1. "The Contractor is encouraged to propose changes to the design and specifications for the Works and/or the programme for their execution that may benefit the Employer, whether in the form of a reduction in the cost of the Works or their associated life cycle costs, through practical completion at a date earlier than the Completion Date or otherwise....Where the Employer wishes to implement a change proposed by the Contractor the Parties shall negotiate [the value of the variation, the cost saving and the share of the financial benefit to be paid to the Contractor].

  5. Again, you may query why this is an optional provision given that all employers would want to benefit from the contractor's input in this respect. The reason would appear to be that if the employer accepts the contractor's suggestion then the employer pays the contractor an agreed share of the employer's saving. To avoid any sharp-practice on the part of the employer by not paying its share, the contractor's idea can only be instructed under this provision. It cannot be instructed as a variation thereby entitling the contractor only to his mark-up on the cost of the variation. However, there is nothing preventing the employer from engaging others to carry out the suggested changes after practical completion but in most cases the savings will be greatest if implemented during construction rather than as a bolt-on at a later date.
  6. In effect, JCT will reward those contractors who suggest cost savings and value improvements (by way of a share of the saving) but will not reward those in a similar manner who suggest environmental improvements. It is not difficult to imagine a number of cost savings which could be made to projects that do not have sound environmental credentials.

JCT Framework Agreement

  1. The JCT Framework Agreement 2007 also includes a number of sustainability provisions. A framework agreement is an agreement which is reached between two parties to cover a long-term collaborative arrangement. Framework agreements are used, typically, where an employer has a long-term programme of work in mind and is looking to set up a process to govern the individual construction or supply packages that may be necessary during that framework term. Framework agreements allow an employer to instruct another party to carry out works or provide services, by reference to pre-agreed terms, over a (usually) pre-agreed period of time.
  2. Clause 16 of the JCT 2007 Form headed, "Sustainable Development and Environmental Considerations", states the following:

    14.1. "The Provider will assist the Employer and the other Project Participants in exploring ways in which the environmental performance and sustainability of the Tasks might be improved and environmental impact reduced....

  3. The JCT Framework Agreement Guide provides further details of this at paragraph 56. However, clause 16 of the JCT Framework Agreement again illustrates and reinforces perhaps the main difficulty when it comes to deciding how to incorporate sustainability provisions into a contract. The wording of the clause notes that the provider is to "assist" the employer in "exploring ways in which the environmental performance and sustainability" might be improved and the environmental impact reduced. How is that assistance to be measured? What might amount to a breach of that obligation? If there is a breach, will there be any loss? Isn't this all a bit too woolly?
  4. Establishing the parameters of that assistance is actually something which the JCT Framework Agreement is set up to measure. Clause 21 refers to key performance indicators ("KPIs") and provides that where KPIs are adopted, then a contractor's contribution or assistance can be monitored and assessed by reference to the KPIs. The purpose of the KPI and the Framework Agreement is to enable an employer to:

    16.1. Identify aspects of the provider's (or contractor's) performance which may have been overlooked;

    16.2. Identify aspects of the employer's performance which may have had an adverse effect upon the contractor's performance;

    16.3. Identifying any aspects of the contractor's (and employer's) performance which could be improved;

    16.4. Assessing whether the current KPIs amount to a fair, reasonable and appropriate indication of the contractor's contribution to progress.

  5. Thus, it would be possible to set up sustainability KPIs and monitor the performance of the contractor. Actual targets could be set. The likely result of poor performance (or poor assessment) under the Framework Agreement, is that the contractor will not receive further work under the particular framework arrangements.
  6. So that is a possible way forward for the JCT. However, framework agreements hold a particular place within the construction industry. Would the framework agreement approach work under the JCT Standard Building Contract? The easiest way to look at this question is probably in reverse. Can you ascertain the consequences of a breach of sustainability provisions within a standard form of contract? The Ruxley principles suggest that there would be certain problems, but BREEAM shows they can be quantified. Of course I do see cases where the Employer does damage to its position by poor change management. One escape card for the design team is where Employer changes have been made during construction - for example if value engineering makes it impossible to achieve the required ratings. Then the client could find it hard to prove a party is in breach of a BREEAM rating obligation. Even if the obligation is expressed as absolute, the Employer's actions may constitute an act of prevention so the Employer cannot sue. A prudent designer would, however, be well advised to warn its client of the likely impact of any such changes on the BREEAM rating. It may be that failure to do so would in itself constitute breach of a general obligation to exercise reasonable skill and care. Even assuming breach can be established, this is just the first fence to jump. What loss has the client suffered? It is not enough to prove a breach. It has to be shown that a loss has arisen directly from it. What losses might arise from a lesser BREEAM rating? It is very difficult to achieve many of the credits retrospectively, so it will be down to putting a monetary value on the losses by way of damages. Has a tenant backed out from a building with a lesser rating? Has it proved less marketable? Is its value diminished? Are there increased life cycle or maintenance costs? These sorts of losses are difficult to prove. Many are driven at least in part by the economic climate. Any basis to 'knock' the price. So what can be done by way of prevention? The following questions need to be considered.

    • When appointments are being negotiated, what is the written obligation relative to BREEAM? Is it absolute or will your client water it down to, for example, 'reasonable endeavours'?
    • Will your client accept a cap or limit on liability in respect of any losses arising from failure to achieve a stipulated rating?
    • Does the appointment give you a 'get out' if the rating is not achieved as a result of the actions of others?
    • Have you flagged to the client the consequences of any proposed changes on the BREEAM rating?

    Whatever the contractual position, one thing is certain: sustainability is here to stay. It may be just a matter of time before the extent of such obligations is tested before the courts. 

  7. It is difficult to see the point of including aspirational provisions in any contract. There really is little point in agreeing that your agreement is to be non-binding unless you are prepared to accept that you have no redress if things go wrong.
  8. Perhaps the area to focus on is completion. Under Condition 2.30 of the JCT Standard Building Contract, the architect/contract administrator will certify that the works are practically complete. It would be fair to say that most people treat practical completion as meaning the stage at which the works are reasonably ready for their intended use, even though there may be an outstanding "snagging" or "punch" list.
  9. Under English law, that is not what the authorities suggest. They seem to suggest the works must be free from patent defects. In HW Neville(Sunblest) Limited v William Press & Son Limited, HHJ Newey QC said:

    "I think that the word 'practically' in Clause 15(1) gave the Architect a discretion to certify that William Press had fulfilled its obligation under Clause 21(1) where very minor de minimis works had not been carried out, but if there were any patent defects in what William Press had done the Architect could not have given a certificate of practical completion."

  10. An alternative is the Taking-Over Certificate, for example under clause 10.1(a) of the FIDIC Red Book, the engineer will:

    "issue the Taking-Over Certificate to the Contractor, stating the date on which the Works or Section were completed in accordance with the Contract, except for any minor outstanding work and defects which will not substantially affect the use of the Works or Section for their intended purpose (either until or whilst this work is completed and these defects are remedied)."

  11. It is possible to build sustainability provisions into the definition of practical completion - a project is not complete unless certain sustainability standards have been achieved. These provisions would of course need to be clearly defined. For example, the contract might require that a building achieve an "excellent rating" under the BREEAM rating standard. The risk of liquidated or delay damages would be a powerful driver to ensuring compliance on the part of the contractor.
  12. Of course, the contractor might have their own views about amendments that may be required to the contract. If the incorporation of sustainability provisions is a key aim of the project, the contractor might require the addition of a new relevant event under clause 2.29 of the JCT Standard Building Contract to account for the risks of such provisions. Clause 2.29.12 already deals with the risks of a change in the law, and thus the introduction of new environmental regulatory provisions. The nature of the amendment would depend on the requirements sought. If certain sustainable products are specified, who is responsible for their procurement? What if there is only a limited supply? What if particular products are in short supply and so cost substantially more? Well this is not something unique to sustainability provisions.
  13. These are familiar problems under any contract. Currently, the problems caused by the massive increase in prices of commodities such as steel are widespread. What if the contractor is suffering because he is working to a fixed price? In such circumstances, contractors often say that the developer is better placed to manage the risk since he can pass on the increased capital expenditure to the end user; whereas with respect to building materials, the contractor practically has nowhere to go to. There is no difference between steel and sustainable timber. It is up to the parties to agree where the risk lies.

Conclusions

  1. The key to enforcing any contractual obligation is clarity, understanding what is required and what the penalty for failing to comply with what has been specified might be. Simply attaching the tag "sustainable" to projects is meaningless unless it is given a meaning, given a clause and given a sanction. Without this there is a real danger that the desired outputs will not be achieved. Aspirational approaches to sustainable construction are as weak as dishwater without wider education and the perceived benefits being grappled with i.e.:

    • Cheaper buildings in the long term
    • More saleable asset that maintains its market value for longer
    • Ability to future proof the development's energy requirements.

  2. The JCT seems to be deciding between aspirational clauses and specific obligations. Aspirational clauses sound good, but in reality mean nothing. The key to incorporating sustainability provisions into your contract lies with getting your specification right. Make sure you have incorporated within that specification what you want to achieve beyond 'mere' Building Regulation adherence. Again, do not treat sustainability any differently to any other requirement you may have. When it comes to enforcing that specification, there are two options, which are perhaps best used in concert. First, monitor the performance of the contractor through the use of Key Performance Indicators, which must of course be agreed in advance. Second, make sure that the achievement of practical completion is linked to the achievement of the testable sustainable goals you want incorporated into your project. Once again, in this regard, sustainability provisions are no different to any other as one commonly sees with EPC contracts in the process engineering industry.
  3. And perhaps that is the key to the incorporation of sustainability provisions into your contract. Do not treat them differently from anything else.

This is an edited extract from a paper prepared for the LexisNexis webinar on Sustainability, renewable energy and green procurement. Further articles by Simon Tolson can be found at www.fenwickelliott.com/articles

www.fenwickelliott.co.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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