NEC X29 and the development of climate change clauses

A mindset shift

There is near universal acceptance that the construction industry remains shockingly polluting. Figures vary but built assets are thought to contribute as much as 25% of the UK's greenhouse gas emissions[1]. Globally, an estimated 40% of global carbon emissions[2] come from the building and operation of infrastructure with concrete alone being responsible for 8%[3] of these. The construction industry therefore finds itself in the spotlight as a sector that needs to achieve far reaching reforms.

Participants at all levels in the industry are grappling with how to implement the required change. For those involved in preparing contracts, there are obvious questions around how climate related considerations should be reflected contractually. One view is that climate change requirements are principally technical matters to be addressed in the scope since the most relevant aspects relate to the works specification and performance requirements, choice of materials and working methods. For some time, only relatively light provision has been made in standard form construction and engineering contracts in respect of green issues.

Latterly, however, there is growing interest in the idea of 'green drafting' and of this being for the "front end" of the contract as much as the technical annexures. Compared to regulation, proponents advocate that contracts can translate climate goals into "legal obligation and action" quickly[4].

They note that regulation, while potentially potent, is a slow and sometimes blunt way of compelling reform. It can take years not only to drive through new climate legislation but then to hold those responsible to account where required standards are not achieved. There is naturally a risk that regulation, by the time in force, is quickly superseded as innovation drives things forward. For example, the UK has set itself some of the most ambitious targets for reducing carbon emissions. Even so, the Environmental Audit Committee of MPs noted that these targets cannot be met without controlling embodied carbon (ie the carbon dioxide associated with the construction process). This area is not yet specifically regulated and accordingly legislation is not currently driving a reduction of these emissions.[5]

Others have identified that green clauses in commercial contracts may have the following advantages: enabling the enforcement of climate related matters; putting sustainability discussions on the agenda during negotiations; helping future proof-against legislative changes that might introduce more onerous sustainability requirements; possibly allowing for wider access to funding via green loans; and finally the improvement of corporate reputations by enhancing green credentials.

The Chancery Lane Project, a not-for-profit body of lawyers, has produced various precedent clauses addressing climate change issues. Their contribution includes seven construction specific provisions; in our experience, however, they are yet to be widely adopted in the sector.

X29

In July 2022, the NEC published the secondary option X29 clause producing versions for all contracts in the NEC4 suite. It is significant as the first clause specifically addressing climate change per se (JCT's sustainable development and environmental considerations optional clause being more broadly focussed) included in the leading industry standard forms of contracts in the UK.

The NEC's drafting committee endorsed the view that leaving the issue purely to technical definition is inadequate. They additionally point out that it relies on users understanding what is needed in the scope and successfully linking it to contractual procedures. A standard clause should help to reduce inefficiency in producing bespoke provisions each time, whilst hopefully elevating the issue and providing consistency with existing provisions.

What does it do?

The principal features of X29 will perhaps feel reassuringly familiar to seasoned users of NEC contracts.

• Climate Change Requirements ("CCR"). These are the core technical requirements relating to climate change to be stated in the scope. Compliance is thus mandatory and a failure to achieve any such requirements will be a defect that must be corrected. As NEC acknowledge, the value of this clause is as a signpost reminding users to set out minimum standards in the scope.
• Early warnings. Anything that could adversely affect the achievement of the CCRs is something that triggers the need for early warnings.
• Climate Change Plan. The Contractor is to set out its strategy for how it will achieve the CCR.  It is a statement of intent and there is no legal sanction if the contractor does not adhere to the plan.
• There is an express requirement for the Contractor to collaborate with other climate change partners.
• The Contractor can propose changes which reduce the impact of the project on the climate, either in respect of the construction or future use of the project for agreement by the project manager.  If the changes result in the Contractor exceeding the Performance Table targets set out, they are rewarded by reference to the performance table if relevant.
• Performance Table and Performance Measurements. Stretch targets can be stated in the Performance Table with the option to back these up with financial bonuses or reductions, not dissimilar to the X20 Key Performance Indicators regime.

The Contractor is required to report its performance against the targets at regular intervals. Stretch targets might be used to incentivise contractors to meet bid commitments where innovative methods of working or new technology is being used and contractors are unable or unwilling to warrant performance levels.

A change to the CCR may also necessitate a change to the Performance Table and there is a mechanism for assessing and implementing any such changes.

Where secondary option X18 applies, any amounts paid by the contractor are excluded from the operation of the cap on liability.

• The clause explicitly allows for information relating to climate change to be disclosed to third parties reflecting that corporates are increasingly required to provide details of their climate change credentials (and some will have statutory or regulatory obligations to report on their environmental impact eg under the Companies Act 2006).

A stimulus to good climate change practice?

X29 provides a flexible and realistic framework for addressing climate change issues (even if many of the features could be addressed in the Scope or in X20). NEC's focus on collaboration and recognition that finding climate solutions will require a more nuanced approach than simply passing risk down the supply chain seems apposite in this context.

Inevitably the new provision is not a solution of itself (as the NEC points out). Considerable knowhow and judgment on the part of the client, its consultants and contractors will be needed to define the content of the CCR and also to calibrate the X29 Performance Table if these are to produce the desired outcomes.

Clients will also need to be aware that any green goals may need reflecting in ways that are beyond X29's scope, for example use of early contractor involvement and appropriate pricing mechanisms where innovative technologies are involved.

However, it is not hard to see how adopting climate clauses in the sector’s relatively small pool of standard form contracts can pay dividends in the fight against climate change[6]. NEC has made a positive first step and it is hoped that parties will consider incorporating it.

[1] UK Green Building Council (UKGBC), "Net Zero Whole Life Carbon Roadmap Technical Report" (November 2021) p 10

[2] World Green Building Council, "Bringing embodied carbon upfront", https://worldgbc.org/advancing-net-zero/embodiedcarbon/#:~:text=Buildings%20are%20currently%20responsible%20for,11%25%20from%20materials%20and%20construction.

[3] https://www.ice.org.uk/news-insight/media-centre/press-releases-list/construction-sector-could-more-than-halve-emissions-from-concrete-by-2035/

[4] Chancery Lane Project, "Introducing: Contracts for the Climate", https://chancerylaneproject.org/podcast/

[5] House of Commons, Environmental Committee, " Building to net zero: costing carbon in construction.", p. 3, https://committees.parliament.uk/publications/22427/documents/165446/default/

[6] https://chancerylaneproject.org/toolkit/built-environment/

* This article was originally published in Construction Law.

For further information, please contact Alice Herbert or your usual Herbert Smith Freehills contact.