Net Zero in Global Construction: The Challenge of Specifying and Allocating Liability
The UN has identified construction sector as the single largest source of carbon emissions worldwide. The pressure is on the industry to move toward Net Zero whether by new renewables projects, reduction of emissions on other projects (e.g., using renewable energy sources to power construction and subsequent operational activities), or retrofitting where appropriate (for example in a residential setting).
The contractual starting point for liability is often familiar standard forms containing well-known general conditions, albeit accompanied by bespoke, and often vast, technical specifications dictating precise performance and functional requirements. But to what extent do currently used contractual provisions require or even incentivise Net Zero aims?
Current Approach
With respect to contracts for the largest, most complex projects in an international setting, Sub-Clause 4.18 of the FIDIC forms are arguably most relevant. The 2017 revisions require the contractor to "take all necessary measures to (a) protect the environment . . . ; (b) comply with the environmental impact statement for the Works (if any); and (c) limit . . . pollution" resulting from its operations or activities as well as ensure that "emissions . . . and any other pollutants from the Contractor's activities shall exceed neither the values indicated in the Employer's Requirements, nor those prescribed by applicable Laws."
However, for this provision to have any real consequence in a Net Zero aim environment, it depends upon specificity in drafting by the parties in the accompanying Employer's Requirements (the project/technical specification and/or other specifications such environmental impact statements). There is a fundamental question of how Net Zero requirements are to be defined and measured in any particular project—how will this be quantified in a single-project context? We will likely see increasing incorporation of objective standards such as BREEAM, though this is not a complete answer. Who will be driving quantification of these requirements when states, international banks, other sponsors, and investors are all involved? Further, the difficulties that usually face parties in drafting contracts with certainty in respect of complex projects remain. What if ultimately, the detailed technical specifications (i.e., capacities of the facility, materials to be used, design life etc.) agreed on, are in fact, incompatible with the emission aims specified, such that the latter could never have been achieved? Which will take precedence? Will failure to achieve these measures render the works / facility capable of rejection exposing the contractor to liability accordingly? How does one quantify the financial damage resulting from a failure to achieve reduced emissions targets?
Where there are applicable laws and regulations, certainly the parties will need to comply and be liable for a failure to do so. However, applicable laws are also (currently) limited in terms of measurable requirements even for state-led projects. The formal basis upon which governments have declared Net Zero goals (and the legal effect thereof) varies between jurisdictions. The UK is increasing Net Zero focus particularly post the recent 2024 election; however its aims are for the moment directed at accelerated renewables development, not dictating the liability regime as between parties.
Moreover, there are fundamental questions for the parties with respect to contracting approach. More traditional procurement and contracting structures: (a) can reward the lowest cost bid at the expense of technical expertise; (b) may ignore the need for early interface and collaboration between numerous parties each of whose inputs will be required to successfully complete the project; (c) focus on allocating as much risk as possible on the contractor resulting in early claims and disputes; and (d) may not ultimately lead to completion of a project capable of achieving its aims as regards to reduced emissions.
On large international projects (regardless of Net Zero/reduced emission aims) contractors are already resisting historic contractual structures where they take on all the risk and responsibility for design, procurement and construction aspects. We see increasing instances of disaggregated contractual structures and discussion of alliancing arrangements where good performance is incentivised in more positive terms. It seems likely that will increase in a Net Zero context.
Forward Thinking on Specific Net Zero-Related Construction Requirements
Certain groups have proposed potential additions to common construction contracts to try and assist with the practical challenges of articulating Net Zero requirements. By way of example, the Chancery Lane Project ("TCLP") (an independent collaborative initiative of international legal and industry professionals), has developed a suite of model contractual clauses which can be used in standard form construction contracts, addressing relevant issues such as materials procurement and construction waste.
For example, the draft "Ashkan's Clause" requires contractors, and its project delivery teams to use sustainable working practices on site in order to reduce the energy used in construction. The clause requires the contractor to use "all reasonable endeavours" to implement a contractual schedule of "green working practices" (examples of these green working practices include using energy saving lighting such as LEDs, reducing water usage on site and procuring electricity from renewable energy sources). Compliance with green working practices under this clause may entitle the contractor to payment from a "green retention fund", a percentage amount of the contract price.
However, implementation of these types of clauses remains to be tested. A green retention fund may increase financial pressure on contractors early on where margins are already very limited. There remains the question of how the obligation of "all reasonable endeavours" will be assessed, particularly where what is achievable may move considerably over time with developing technology.
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