Introduction

The recent years have seen sustainability and climate change move to the forefront of the construction industry, with these topics being considered by many engineers, contractors and consultants in their working practices.

With a view to ensuring that climate change requirements are reflected in contracts and with a view to drive construction professionals to focus on sustainability and climate change, the NEC introduced a new secondary Option clause for climate change.  Option X29 (climate change) has been drafted as a Secondary Option that parties using the NEC4 suite of contracts can choose to include in their contracts.  Published in August of 2022, Option X29 represents a very positive step in helping the construction industry help tackle climate change.

Since its publication there has been a steady increase in its adoption, with a further increase in the use of this clause expected as practices focus on setting their climate change goals and missions.  However, its use does not come without some additional risks and liabilities that parties intending to use this option clause should be aware of.

In this article, we discuss the use of Secondary Option X29, its key features and the risks that may arise when Option X29 is selected to apply in an NEC4 contract.

Key Features

Option X29 introduces several key elements that will help the construction industry address climate change in their contracts.  Discussed below are some of the key features that will need to be considered carefully when navigating Option X29 if selected to apply on a project.

Climate Change Requirements

The Scope must specify the Climate Change Requirements that must be complied with. This means that any contractor/consultant will be required to comply with the Climate Change Requirements in order to Provide the Service in accordance with the Scope (as is required under the NEC4 PSC, for example).  Therefore, a failure to comply with the requirements will be a Defect if it is considered to relate to the services/works and consequently will require rectification at the contractor’s/consultant’s own cost.

It is therefore essential that careful consideration is given to the contents of the Climate Change Requirements to ensure that they are both achievable and do not place undue risk on the parties.  For example, the Climate Change Requirements will need to be carefully reviewed for obligations that may cause an insurance concern, such as a fitness for purpose obligation.

Climate Change Plan

The Climate Change Plan is to be devised by the contractor/consultant and is required to set out the contractor/consultant’s strategy for achieving the Climate Change Requirements (e.g., setting out stakeholders, roles, timescales. key milestones, tools and tasks to get there). The intention behind the drafting is for the plan to be updated as and when instructed and required. The form of the Climate Change Plan will be for the parties to decide and may be set out in the Climate Change Requirements.

It will again require very careful consideration to ensure that the Climate Change Plan proposed on a project is both appropriate and achievable.

An open dialogue with clients on the Climate Change Requirements and Climate Change Plan on projects will be important (and should be encouraged) to ensure the documents and requirements contained therein are palatable and workable for all involved.

Performance Targets 

The drafting of Option X29 includes the provision of a table for setting out any performance requirements and the targets that must be met. This provides a regime for measuring compliance with specified performance targets, for which the client may set out financial incentives.

It is for the parties to set the targets in the Performance Table, which can be in any form that they wish, whether this be through implementing key performance indicators (“KPIs”) or through providing specific values or requirements that are to be met.  The targets may also go beyond the Climate Change Requirements.  Given the flexibility of the table provided for in the drafting of Option X29, it is key that any targets entered are objectively measurable, with a clear methodology.

If the targets in the Performance Table are not met, the contractor/consultant will be required to pay the amounts stated in the Performance Table to the client, whilst achieving or exceeding the targets will entitle the contractor/consultant to a payment in accordance with the Performance Table.

Whilst largely intended to be a positive incentive mechanism to encourage parties to meet the targets, it will be important that the Performance Table is carefully reviewed to ensure that ideally no negative incentives/damages/penalties are included.  Any negative incentives/damages/penalties are akin to liquidated damages, which are typically excluded from the scope of cover under a consultant’s typical insurance policy.

If the Performance Table includes any KPIs, these should be reflected in the contractor’s/consultant’s commercial model (e.g., pricing etc) for the project. It will be important that any KPIs are understood and reviewed to ensure they are acceptable (and are achievable – especially where any negative incentive/damages/penalties are proposed).

Contractor’s/Consultant’s Proposals 

One positive feature of Option X29 is that the contractor/consultant can propose changes to the Scope if they believe that they can reduce the environmental impact of the lifecycle of the asset.

The process requires the proposal to be ratified by the client before any change can occur. Whilst the client does not have to accept the proposal, it is hoped that this feature will be positively accepted by clients to reduce environmental impacts on projects.

Limit of liability

The standard NEC4 liability provisions introduce a concept of ‘excluded matters’, for which liability is unlimited.  Any amounts payable by the contractor/consultant in accordance with the Performance Table will be an excluded matter and therefore excluded from the cap on liability (if secondary Option X18 is used). This means that liability for payments of any amounts in the Performance Table is unlimited.

The potential of exposure to significant and/or unlimited liability under this clause emphasises the need for careful consideration to be given to the Performance Table, particularly if any negative incentives/damages/penalties are included.

Conclusion

The intention of this clause is a positive step in helping the industry tackle net zero and other related climate change and biodiversity goals, and its inception by NEC is one that should be lauded.

However, it is not a “complete solution”, and parties will need to consider carefully how it should be used and whether any amendments are necessary to balance commercial needs and reflect project-specific standards.  The use of this clause and the implications therefore require a great deal of thought.

Option X29 has been drafted in a deliberately flexible manner that enables the parties to decide upon the approach that they want to take on a project-by-project basis. This means that project specific amendments may be made to the standard positions discussed within this article. Therefore, the drafting (and implications) of Option X29 will need to carefully considered on a project-by-project basis.

However, there are a few key points to highlight in relation to Option X29 before it is used:

• As mentioned, the clause is not a complete solution that can just be inserted into a contract. It requires a great deal of thought and discussion between the parties as to how it will be used and the targets that will be set. These targets need to be both attainable and measurable for the clause to be used effectively.

 

• The definitions of Climate Change Requirements and the Performance Table do not include a reference to any of the emerging standards or definitions that we are seeing developed, such as the UK or World Green Building Council’s definition of ‘net zero’.

Whilst the drafting promotes flexibility, it does enable the client to specify the determination of each definition. Contractors and consultants should assess the definitions and metrics for each and every contract that it enters.

• Consultants and contractors will need to carefully consider the requirements of the clause in line with their professional indemnity insurance policies. As mentioned in this article, there is a risk that some of the documents discussed may contain provisions that are inconsistent with insurance cover.

It goes without saying that the potential benefits that Option X29 (and “green drafting” more generally) can bring may make the effort worthwhile, but it is important that the risks and liabilities associated with and being imposed on the Contractor/Consultant are understood at the outset. Option X29 and “green drafting” more generally, therefore need to be considered carefully as it could lead to additional risks and liabilities being imposed on the contractor/consultant in the guise of tackling climate change.

If you would like any further information or would like to discuss this note or the use of Option X29, please contact the authors.

Article provided by Kathryn Eva (Associate at Beale & Co) and Harry Coates (Solicitor at Beale & Co)