CONSTRUCTION JOURNAL

Law project promotes climate-aligned contracts

A legal initiative is drafting open-access clauses to make progress towards net-zero carbon at the contractual level

Author:

  • Josh van den Dries

09 August 2022

Aerial view of construction site; Shutterstock ID 1382371433

Organisations worldwide have set net-zero targets and climate commitments. However, there is often a disconnect between net-zero mandates and guidance for procurement and construction.

Achieving net zero will require a collaborative and strategic approach, with early engagement and a whole-life-cycle perspective – and contract clauses can help.

Clauses set contracts up for climate

The Chancery Lane Project (TCLP) is a rapidly expanding initiative of lawyers, construction industry experts and sustainability professionals working to rewire contracts to combat the climate crisis. It envisages a world where every contract helps to tackle climate change.

With the support of 2,500 participants from more than 320 organisations, including many of the leading global law firms, TCLP has drafted more than 115 free, open-access clauses that can be inserted into contracts immediately.

These clauses, along with TCLP's glossary of climate-related terms and net-zero toolkit, give construction professionals and their lawyers practical tools to contribute to meeting net-zero and emissions reductions targets.

TCLP has more than 30 buildings and land clauses covering property, construction, environment and planning practice areas. It also has more than 25 supply chain clauses and ten universal clauses relevant to the construction industry.

These clauses can be added directly to a contract or tailored to meet your specific requirements. Each of the clauses is given a child's name, to remind users of the generation who will be most affected by the climate crisis.

Foot Anstey construction team managing associate Suriya Edwards says: 'As I was the lead coordinator on Madhavi's Clause, which focuses on off-site construction, I got to use my daughter's middle name, which means "Earth". I am looking forward to seeing practitioners use this clause and many others in the future.'

Tables 1–3 detail some of TCLP's most popular construction clauses.

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Table 1: Tristan's Clause

What it does Creating a formal carbon budget for construction projects, Tristan's Clause encourages decarbonisation through procurement of more sustainable materials. A liquidated damages provision, whereby contractors pay for every tonne by which the project exceeds the carbon budget agreed by the contractor and employer, gives an incentive to contractors to stick to that budget.
Associated contract JCT Design and Build Contract (Schedules of Amendments or Special Conditions).
How it works Typical construction contracts offer incentives to developers and contractors to procure the most cost-effective construction materials, regardless of the associated levels of embodied carbon. By encouraging more sustainable procurement practices in design and build contracts, Tristan's Clause cuts down on these emissions. For an explanation of the clause and tips for getting it into your contracts, listen to series one, episode two of TCLP's podcast Contracts for the Climate.

Table 2: Rose's Clause

What it does

Rose's Clause builds climate change mitigation into the environmental and social standards for transactions conducted by development finance institutions (DFIs) and export credit agencies (ECAs). It makes public or private finance conditional on project companies or borrowers developing and adopting whole-life decarbonisation management plans, which are split into two phases: a greenhouse gas (GHG) emissions management plan for the construction phase, and another for the operations phase.

Associated contract

DFI or ECA finance transaction documents.

How it works

While standard DFI and ECA transaction documents commit to promoting environmental and social standards, they and the projects they support can lag when it comes to decarbonisation or climate change safeguards. Rose's Clause creates a market-standard framework for including decarbonisation provisions in such standard documentation, addressing climate change risks and giving incentives for whole-life decarbonisation of assets. Series one, episode three of the Contracts for the Climate podcast gives an explanation of the clause and advice for integrating it into contracts.

Table 3: Izzy's Clause

What it does

Izzy's Clause provides a benchmarking mechanism so employers can assess the climate footprint of contractors or suppliers and compare it with the market. This mechanism is only triggered if the contractors or suppliers do not meet the forecast assessment of emissions submitted as part of their tenders.

Associated contract

Supply agreements in a competitive tender process.

How it works

Existing clauses in the market may require prospective contractors or suppliers to report on and improve their climate impact. However, these rarely if ever include a mechanism for the employer to consider contractors' or suppliers' footprints against the market, which would improve the ambition and competitiveness of such clauses in terms of reducing emissions. Izzy's Clause does provide such a mechanism, enabling employers to select the contractor or supplier with the lowest climate impact. Listen to series one, episode five of Contracts for the Climate for an explanation of the clause and tips for including it in contracts.

Climate clauses offer speed and flexibility

In contrast to legislation, contracts can be changed quickly, implemented immediately and enforced using standard tools. Many of the contractual mechanisms commonly used in the construction industry today to ensure the right pricing, specifications and standards can be repurposed to meet ambitious sustainability targets as well.

The flexibility of contract clauses means they can be used to ratchet ambition up over time, allow improvements in line with market innovations, and prevent parties from being locked into highly emitting long-term relationships.

TCLP's clauses include a range of drafting options to enable the parties' climate ambition to be increased over time. The bespoke nature of contracts means that companies can encourage their stakeholders to help realise their climate goals by making them part of their specific contractual relationship.

When it is time to refinance, organisations able to show that they have such requirements written into their contracts will be in a better position to secure green projects or corporate financing, and mitigate the risks of climate litigation.

Jamie Olsen Ferreira, a knowledge lawyer in construction at TLT, comments: 'Climate-aligned contract clauses can help businesses to ensure they are playing their part in the collective effort to address climate change and meet the UK's net-zero target. They can also help businesses achieve their own sustainability goals; and might even be necessary to secure project funding from certain debt or equity funders as a condition of a loan or investment.

'There are various examples of how this can work in practice in the construction industry – for example, requiring parties to use sustainable materials, or ensuring that the contractor uses energy-efficient or low-emission working practices on a project. This could be by way of a specific clause or, perhaps more suitably, in the work specification or employer's requirements.

'This may result in an increase in the overall cost of the project, particularly if the chosen contractor does not yet adopt these methods as a matter of course. But it's important to look at the whole picture, including the potential for long-term savings and other benefits.'

'The bespoke nature of contracts means that companies can encourage their stakeholders to help realise their climate goals by making them part of their specific contractual relationship'

Programme contracts follow TCLP precedent

The Environment Agency (EA) Thames Estuary Asset Management 2100 programme (TEAM2100) is an integrated flood risk management team, and the agency has looked to TCLP for precedents for its sustainability clauses.

Due to the use of heavy construction materials, flood management accounts for more than 50% of the EA's carbon footprint, and more than 75% of this comes from its supply chain.

Inspired by circular economic precedents such as Alex's and Aatmay's clauses, TEAM2100 now requires that its contractors use a certain amount of materials certified as sustainable, using standards such as Cradle to Cradle, and meet wider sustainability objectives, including carbon reduction.

TEAM2100's intent was to use clauses that demonstrated adoption of ambitious sustainability targets, including among other things its carbon footprint. Achieving these targets means bringing its supply chain along with it.

The EA proposed the use of sustainability clauses when renewing a long-term contract, and by engaging early with the other parties it was able to have constructive dialogue about the need for such clauses, which were then smoothly adopted.

New project urges climate clause adoption

In January, TCLP and the philanthropic Laudes Foundation launched an initiative to promote adoption of climate clauses at scale across the UK and Europe's construction industry.

As part of this project, it has formed a multidisciplinary advisory committee that brings together practitioner experience in project and property financing, construction, property management, risk assessment and technical design. The committee advises TCLP's built environment team on strategic decisions, technical law and commercial practice.

The committee includes representatives from Arup, BRE Group, Fenwick Elliot LLP, Field Energy, Foot Anstey LLP, Gowling WLG, JLL, Landmark Information Group, Mason Hayes & Curran LLP, Thomson Reuters' Practical Law and TLT LLP.

These representatives have collected feedback on how their organisations have used climate clauses, and advised on the potential for effective climate contracting.

To enable and support practical climate contracting, the team has run events for construction companies and their lawyers to explore the risks and opportunities of using climate clauses in the built environment. TCLP has presented such opportunities to a number of initiatives, including the UK government's Construction Community, the British Council for Offices and the World Green Building Council.

With the EA, TCLP recently submitted a detailed, joint response to NEC's consultation on its new X29 secondary option to encourage carbon reduction, which has been drafted for use with construction and engineering projects worldwide. TCLP is contributing to further guidance to ensure that drafters include or address climate-aligned metrics in their contracts.

In the coming months, TCLP will also publish dedicated built environment resources, including a dedicated web page, clause use guidance and case studies, so that construction practitioners can quickly access the content most relevant to them.

What can construction lawyers do?

  • Sign up to TCLP's newsletter for fortnightly updates on the project.

  • Watch TCLP video Introducing Climate Clauses to find out more about the project.

  • Explore the clauses on TCLP's website. You can search for key terms and sort by practice area and industry sector to find those most relevant.

  • If you are using or negotiating climate provisions in your construction contracts, get in touch with me to provide feedback and inspire others in your industry to use the clauses.

  • Ask your legal teams and contract managers to review TCLP's free resources for ready-made decarbonisation measures in your construction contracts. For guidance, they can attend TCLP events and one-to-one clinics.

The Chancery Lane Project are excited to announce their upcoming event 'The Power of Climate Clauses: Open-source Tools for Built Environment Contracts' on Tuesday 20 September at 10:00am CET/09:00 BST. This event is specifically designed for lawyers in the EU, Switzerland and Norway.

 

Attendees will join like-minded professionals from the planning, real estate and construction industries across Europe to:

  • access built environment clauses and tools to help you deliver net zero
  • hear from European built environment stakeholders using TCLP clauses in practice today
  • get involved with adapting climate-friendly built environment clauses for your jurisdiction.

 

Sign up here.

 

 

Josh van den Dries is project associate at The Chancery Lane Project

Contact Josh: Email

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