Rising contractual obligations

Sustainability has become a buzz word in the development industry, but what does it really mean?  Many equate it with the energy efficiency of building stock, particularly with the coming into force of the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) on 1 April this year. While the CRC may have turned many organisations’ minds to the challenge of energy efficiency seriously for the first time, sustainability encompasses more than just making building stock energy efficient.

Sustainability, in its wider sense, looks at the whole life cycle of a building or project, not just its ongoing operations and maintenance. Though energy efficiency is obviously a key plank of sustainable development, parties must also look at how such buildings are constructed as well as the materials used in their construction and minimise any impact of the same.

Whilst contractors and professional consultants may be more familiar with issues of sustainability than other players in the development market such as end users, historically such aspects have rarely been addressed contractually. Until recently most industry standard form of contracts did not address sustainability at all, and it was left to parties to agree bespoke amendments. In May 2009 the Joint Contracts Tribunal (JCT), the pre-eminent body for construction contractual forms in the UK, issued a guidance note on sustainable development. The guidance note contained some draft contractual provisions dealing with the need for parties to cooperate in exploring ways to address achieving efficiencies in wastage limitation, energy and water saving, emissions reduction and the use of sustainable materials and products.  

The JCT clauses
With the issue of Revision 2 shortly thereafter, the JCT went further and incorporated for the first time in its suite a new part to the supplemental schedule two which may be used to address sustainable issues. In the guidance note and the supplemental schedule, the JCT sets out several clauses which may be incorporated into contacts to address a variety of issues.

Sustainable development and environmental concerns are dealt with by placing a requirement on the contractor to assist the employer and the other project participants in exploring ways of improving environmental performance.

The environmental impact of goods now requires the contractor to provide all information that an employer may reasonably require regarding the environmental impact of goods and materials, may practically require the contractor to give thought to these issues.

Value engineering is also addressed. While traditionally used to drive cost savings through innovation in design and/or construction, a contractual encouragement may be given to the Contractor to suggest changes to the employer’s requirements which may give rise to environmental benefits.

Finally, performance indicators and the assessment of a contractor’s performance by reference to appropriate Key Performance Indicators (KPIs). Parties are suggested to select suitable and achievable targets, with BREEAM ratings being one such example.

Whilst encouraging, the new draft provisions, which are optional at the parties’ election, are what might best be termed “light green”, meaning parties would take a collaborative approach to address environmental issues and proposing alternatives rather than a need to meet mandatory requirements. In the absence of prescriptive legislation for aspects of sustainable development, parties are often free to choose to what extent they include concepts of sustainable development in their project, and may indeed choose to have just the ‘bare’ statutory minimum. 

The inclusion of mandatory or prescriptive provisions in a contract which address environmental issues by reference to some agreed measurement may be termed to be “dark green”. At present neither the JCT nor any of the other main suites in the UK include such provisions in their contracts. It is therefore necessary for the parties to expressly include the same by agreement. Given the increasing importance of sustainable development, and increasing pressures on developers, either from their tenants, funders or insurers, such dark green sustainability clauses may soon become commonplace in construction contracts. If the dawn of the dark green sustainability provision is upon the construction industry what sorts of provisions might be we therefore see?

The proposed JCT clauses discussed above essentially look at issues of input and output. They both require the Contractor to provide information on the environmental impact of the goods or materials used within the building process, as well as looking at suitable performance indicators against which sustainable development can be assessed.

Negotiated provisions
Many larger developers are now looking at the construction process of their developments as an adjunct to their corporate social responsibility programmes. Developers often quote the sustainable aspects of their new developments, by reference to the re-use of demolished materials as well as the environmental credentials and/or recycled status of the building materials. In order to be able to refer to such green credentials developers must ensure that it is clear in construction contracts what standard it expects with regards to re-use of such materials or indeed the sustainable nature of new or recycled materials to be included in the project.
 
Once the parties have decided which sustainable issues they wish to focus on, rather than leave it as a voluntary obligation the developer may wish to specify KPIs against which such elements will be measured. Such KPIs must be suitable for the project as well as achievable. However, one of the problems facing the development industry is a lack of uniformly accepted benchmarks. Whilst BREEAM is probably at the forefront of specifications, there are further benchmarks and criteria on the market which are being used in developments. The next best known is probably the ISO1401 accreditation, which specifies minimum environmental performance. Other standards are less widely adopted and may be used only where a Developer or a Tenant specifically requests them, such as the US-based LEEDS and the Carbon Trust gold standard.

Whilst property organisations such as the International Property Databank and the Building Research Establishment race to establish indices for measuring the sustainable performance of buildings, the absence of a commonly accepted and understood index for performance poses a barrier to the incorporation of appropriate KPIs. Several corporate landlords already incorporate their own bespoke performance measures into their construction contracts to reflect the needs of their end users. The continued development of “green” lease agreements will similarly feed the development of “green” construction contract provisions.

Where a developer becomes aware of the financial costs involved for failing to meet specific environmental credentials, either through an increased requirement for CRC Carbon allowances or failure to meet some service specifications in leases with its tenants, it may wish to include KPI clauses that have a financial consequence for the contractor for failure to meet them. Once the parties have agreed an appropriate measuring stick they may also agree an appropriate abatement regime whereby the contractor bears some financial costs, or retention from contract sums for failure to meet such KPIs. This is not yet common in the market but as the financial costs of greening building stock becomes clearer this may be something that parties will adopt.

With the incorporation of its sustainability provisions, the JCT has given users the building blocks to start incorporating sustainability provisions in their contracts. The extent to which this will be used and the extent to which it may impose mandatory obligations still remains to be seen, but the increasing importance of sustainability in development should see it incorporated in one manner or another.

Brad Fearn is a senior associate in Taylor Wessing’s Construction and Engineering group