As we fast approach the UN Climate Change Conference (COP 28) to be hosted in Dubai at the end of 2023, our international construction team consider how the wider net-zero and environmental commitments of the Gulf Cooperation Council (GCC) member states is impacting the drafting of construction contracts in the region, and the outlook for the future.
Throughout the GCC, public and private sector organisations are placing net-zero commitments and sustainability goals at the forefront of their strategic and operational blueprints. The UAE and Oman have committed to be net-zero by 2050, and the Kingdom of Saudi Arabia, Kuwait and Bahrain have all committed to being net-zero by 2060. In addition, the UAE government's National Energy Strategy aims to triple renewable power‑generation capacity and increase the share of clean energy (including nuclear) in the energy mix to 30% by 2030.
The GCC's net-zero commitments are an increasingly prominent feature of the projects which are coming to market across a range of industry sectors, including those which have been traditionally carbon intensive. In considering the issue of whether and how construction contracts address net-zero commitments, a holistic approach requires us to think about:
- Is what is being built (i.e. the carbon footprint of the completed asset during its operation phase) compliant with net-zero agenda?
- Is how the project is designed and built compatible with a net-zero agenda? (i.e. the sustainability of the construction process, including in relation to the selection and use of materials, shortening of supply chains and utilising less carbon intensive modern methods of construction, etc)
- Is the overarching net-zero objective reflected and documented in the construction contract, and if so, how?
It is the last of these questions that we are focusing on in this article - contract drafting that parties may consider adopting in the main conditions of a construction contract (rather than in ancillary technical documents such as specifications) to lessen the environmental impact or carbon footprint of a construction or engineering project.
Current drafting practice
Currently, the prevalent drafting practice in the GCC construction industry is to include requirements that are relevant to climate change (if any) in the contract’s technical schedules, or to incorporate relevant environmental standards by reference to applicable environmental laws, regulations and / or policies. This is in keeping with the conventional wisdom that contract conditions set the legal framework and the rights, obligations and liabilities of the parties, while the technical annexures attached to the contract such as the specifications detail how the works will be carried out and what end results (such as the completed assets' performance requirements, which may include environmental standards or emissions targets) are required.
As such, provisions addressing climate change issues in a construction contract's terms and conditions remain relatively rare, and arguably there is little need for such provisions unless compliance or non-compliance with such obligations changes the amount payable or permits termination. However, even where contract drafting orthodoxy suggests that a requirement should appear in a schedule to the contract, it may be included in the terms and conditions in order to draw attention to it and emphasise its importance, and we have seen this approach increasingly adopted in recent years for analogous ESG-related issues such as human rights / anti-slavery / trafficking / labour conditions, particularly on project financed transactions (due to the ESG requirements of investors and funding institutions) and where GCC governments have commissioned major construction projects for world scale events attracting global attention, such as the Dubai Expo and the Qatar World Cup.
The construction industry remains one of the most carbon intensive industries and a key driver of the GCC economies, so the existing consensus of leaving sustainability provisions to the technical annexures of a construction contract is increasingly open to question.
Standard form construction contracts
Whilst industry standard form construction and engineering contracts seek to place environmental obligations on the contractor, these provisions are often problematic for 2 main reasons:
- The drafting is typically vague, for example FIDIC does not develop Sub-Clause 4.18 (Protection of the Environment) of its most popular forms of construction contract by defining “environment” nor does it clarify what “reasonable” or “necessary” steps the Contractor may take to protect it.1 This approach is unsurprising as environmental requirements are bespoke to each project, the parties’ aspirations, and national and local laws and regulations, so standard forms such as FIDIC introduce short and generic environmental obligations in the main body of the contract conditions and expect the precise details to be included in the technical documents. However, this is not the only solution: clients can bolster and clarify the environmental provisions through bespoke Particular Conditions, for example by including obligations for the Works to meet certain sustainability ratings / carbon footprint thresholds, use sustainable materials, and/or to mandate the use of more environmentally friendly construction practices. This alternative approach is starting to gain traction in the UK, where NEC4 recently published an optional clause known as X29, which aims to incentivise the supply chain to meet the owner’s emissions and sustainability targets, and encourage the contractor to collaboratively (with the project stakeholders) consider the scope of the project to reduce the climate change impact of both the construction and operation of the asset under construction (in a similar manner to traditional value engineering)2.
- It is unclear what action the Employer might take if the obligations are breached but the Employer suffers no economic loss (as is often the case). This issue is not peculiar to FIDIC and is a common question with these types of clauses – they are often aspirational in that they encourage good sustainability practice but do not include specific requirements or consequences for failure to adhere to them.
What climate-related contractual provisions might we see in the future?
Encouragingly, the international legal community has already started to give careful consideration to the drafting and operation of numerous potential net-zero / sustainability-related contractual mechanisms which could be incorporated into construction contracts. The Chancery Lane Project (TCLP) is one such key initiative which has drafted a number of provisions to fight climate change and could well influence the way in which construction contracts develop over the coming years. TCLP provides general construction clauses, definitions and guidance as well as drafting for commercial contracts, supply contracts, finance, property development, intellectual property, and heavy industry – all of which can be adapted and incorporated into construction contracts to target net-zero construction. The precedent clauses are drafted in accordance with the law of England and Wales, but can be tailored for use in the GCC.
In general, TCLP adapts familiar contractual incentive mechanisms, including bonuses and or liquidated damages for compliance or non-compliance with environmental or sustainability targets, the incorporation of net-zero objectives into commonly used definitions and concepts relating to the contractor's standard of care and performance (see "Mary's clause" from the TCLP), introduction of project specific carbon budgets (see "Tristan's clause" from the TCLP), implementation of climate aligned waste management practices, use of modern sustainable methods of construction and requirements for assets to meet certain energy efficiency and / or environmental enhancement targets before completion is certified (see "Madhavi’s clause" from the TCLP) . An overview of the Chancery Lane Project is beyond the scope of this article, but further information can be found here.
Challenges
Whilst contractual mechanisms and drafting such as those identified by TCLP and NEC4 can be used to incentivise contractors to reduce their carbon footprint, compliance is likely to have adverse effect on the cost and timing of projects. Therefore, it is critical that these contractual mechanisms are underpinned by a complimentary legal, regulatory and commercial environment. Three key challenges which need to be considered and addressed in this regard are as follows:
- the GCC construction market remains one in which clients still overwhelmingly focus on building projects to time and with budgetary constraints in mind rather than focusing on building a climate friendly asset in a sustainable manner. Whilst this is starting to change, what we need to see is sustainability / carbon footprint becoming a key driver in procurement as well as the traditional 3 tenets of time, cost, quality – and ultimately this needs to be government, funder and industry led rather than contract led;
- the key industry players (i.e. developers and contractors) need to be appropriately incentivised to achieve net-zero objectives, but that requires agreement on who should shoulder the risk and cost of net-zero / sustainability obligations. Considering the tight margins and other well publicised challenges which the industry has traditionally grappled with, reaching agreement on this may not be straightforward. The lead may need to come from funders and governments so that project developers, contractors and the rest of the supply chain follow (e.g. by project funders or equity providers making lending or investment conditional on meeting environmental objectives, or increased pressure from the governments and from clients enquiring about green initiatives during the tendering process); and
- performance against any net-zero requirements must be capable of being monitored and measured during construction. There are resources which provide advice on monitoring and measuring sustainability performance including guidance published by the UK Green Building Council and the Royal Institution of Chartered Surveyors, and the GCC construction industry will need to adopt or introduce similar measurements for environmental impact so that contractor proposals can be compared on the basis of net-zero targets, and their environmental impact effectively evaluated.
Time for change?
Although NEC4 is the first standard form construction contract to introduce prescriptive environmental provisions it is expected that other forms, including FIDIC, will soon follow suit: FIDIC has already (in November 2021) published its Climate Change Charter, in which it promises to “provide best practice templates and clauses that can be incorporated at the scheme, project, and programme level…” and will publish “guides, briefings and tools that also need to be developed” to achieve carbon reduction. A set of sample obligations that could be adapted for use depending on the project specifics will help to standardise the market's approach and provide much-needed guidance on how to adapt FIDIC contracts to work with globally recognised sustainability ratings.
However, it appears unlikely that substantive express environmental drafting such as TCLP clauses will find their way into GCC construction contracts until the 3 key challenges highlighted above are addressed. Nevertheless, at a macro-level the GCC construction industry is starting to follow the wider commercial trend for organisations adopting and promoting ESG policies aimed at tackling climate change and setting targets for reducing their environmental impact as businesses, which provides us with hope that this trend will trickle down from government entities, equity investors and international funding institutions involved in the rapidly expanding regional PPP market, to developers, contractors, and the wider construction supply chain in due course.
Notes
[1] Sub-clause 4.18 of the main FIDIC forms of construction contract require the Contractor to take "reasonable steps" (1999 edition) or "necessary measures" (2017 edition) to:
-
Protect the environment both on and off site.
-
Comply with any environmental impact statement for the Works (2017 editions only).
-
Limit damage and nuisance to people and property resulting from noise pollution and other results of the contractor’s operations or activities.
[2] NEC's new optional clause, X29, allows the Client to include “Climate Change Requirements” within the Scope, which the Supplier (contractor, professional designer or sub-contractor) must comply with. If the Supplier fails to achieve the Climate Change Requirements, this is treated as a failure to “provide the Works in accordance with the Scope”. There is also an option to include a “Performance Table”, which imposes additional targets on the Supplier relating to climate change, Net Zero and sustainable development which can be used to monitor performance or to include specific sustainability-based financial incentives such as performance liquidated damages / KPIs.
