Gillian Thomas and Ben Willis look at the potential for a rise in construction disputes over ESG-related clauses.
According to the UK Green Building Council, the UK’s built environment is responsible for 25% of the UK’s carbon emissions. As a result, the built environment has been the focus of a number of green and ESG-focused initiatives.
These initiatives affect all manner of property stakeholders, including landlords, tenants, investors and developers. The most obvious and high-profile initiatives include the introduction of energy performance certificates and the Minimum Energy Efficiency Standard Regulations. Instead, this article looks at the construction industry and the ESG-related initiatives we are seeing in that sector, as well as the potential for disputes in relation to those initiatives and some of the difficulties parties to those disputes will need to grapple with.
ESG-related initiatives
The ESG-related initiatives we are seeing in the construction industry are almost endless, as we see a particular push to further the industry’s ESG credentials. Not only have many contractors committed to various carbon reduction and net zero initiatives, but the industry has also seen a push towards more ESG-compliant contracts. To take just a few examples:
- The NEC now has an optional clause for its NEC4 contract, being clause X29 Climate Change. This clause provides for a “Climate Change Plan”, as well as introducing the possibility of performance tables, enabling employers to set financial incentives for achieving stated performance targets.
- The JCT includes an optional clause requiring a contractor to provide certain information requested by the employer relating to the environmental impact of goods and materials.
- The Chancery Lane Project has been working on a suite of clauses aimed at achieving net zero, including a clause which sets a carbon budget for developments (known as Tristan’s clause).
- Further, for many years now, and with increasing focus in recent years, more and more developers have wanted to ensure their developments obtain certain green building certifications, including:
- the Building Research Establishment Environmental Assessment Method (BREEAM) green building certification;
- the Leadership in Energy and Environmental Design (LEED) green building certification; and
- the International WELL Building Institute certification.
In addition, many developers will want to ensure that their buildings, including refurbishments of existing buildings, meet any expected EPC standards. This is particularly important in circumstances where stringent MEES Regulations make it unlawful to sell or let property with an EPC rating below E.
This, of course, all sounds very positive, but, as is always the case, where there is change this opens up the possibility for disputes.
What disputes may arise?
It is inevitable that, as these ESG-focused clauses and requirements make their way into building contracts, there will be instances where they are breached. This could lead to major disputes, and an immediate question which arises is what relief will be sought.
In some cases, the matter will be relatively straightforward. A contractor may have failed to carry out a stated development in accordance with the required design, with the result that the employer suffers a loss, either because the building has been devalued or because the employer has had to incur costs in remedying the defects. In relation to the E of ESG, for example, if, as a result of an error in the design or construction of the building, the building does not achieve a satisfactory EPC rating, then the employer under a JCT design-and-build contract would appear to have a clear claim, and clear loss, resulting from the contractor’s breach.
However, the position may become more complicated when dealing with other ESG clauses. For example, what if a building contract requires a contractor to provide certain information to an employer relating to the environmental impact of goods and materials used, and the contractor fails to provide that information? In some cases:
- it will be difficult to point to a loss that the employer has suffered; and
- depending on the exact nature of the obligation, a court may well refuse an order for specific performance if it would require excessive court oversight.
One answer could be to include liquidated damages provisions, as is envisaged with Tristan’s clause produced by the Chancery Lane Project. However, liquidated damages clauses are, for obvious reasons, a key battleground in the negotiation of building contracts, and so realistically this may be something that does not make it through to the final contract.
Alternatively, the innocent party could seek to claim for the difference in value between the contracted service and the delivered service; however, this difference in value could be hard to quantify and/or could be negligible.
What does this mean for ESG clauses in construction contracts?
The fact that enforcement of ESG clauses may be complicated is not to suggest that parties should not look to include them in their building contracts. There are many reasons why parties will want to include green and other ESG-related clauses in their building contracts, not least because employers and contractors alike may well require such clauses to be included in order to comply with their own internal ESG policies. However, parties should think carefully about enforcement, as it may not be that straightforward to enforce all ESG clauses.
No doubt this is an area in which we will see an increase in disputes as ESG-focused clauses become more prevalent and parties grapple with issues including enforcement.
Gillian Thomas is a partner and Ben Willis is a senior associate at Hogan Lovells International LLP
