‘Green' clauses — the new ties that bind

14 September 2010

As energy targets become linked to clients’ cold, hard cash, there’s a risk that new areas of loss and litigation could open up, warns Brad Fearn

In our recent survey on sustainability in the UK property sector and subsequent report — Hitting the Green Wall ... and Beyond — almost 70% of respondents considered the sustainability agenda to be very or highly important. With the built environment accounting for 40% of carbon emissions in this country, both legislative and commercial pressures look set to make the industry a target for more regulations that promote low-carbon construction and sustainable buildings.

As a result, “green” provisions will filter into leases, building contracts and finance agreements. But what are the risks for contractors signing up to such contracts? Could an employer sue a contractor if a building does not meet its sustainability targets? It’s worthwhile looking at how sustainability goals can be incorporated into building contracts, and the legal risks for contractors that sign up to them.

More than 70% of UK building contracts are based on the Joint Contracts Tribunal’s (JCT) suite of agreements. So the JCT’s decision in May 2009 to incorporate optional provisions that allow sustainable development and environmental considerations to be addressed was seen as a turning point by the industry. Specifically, these clauses state:

“The Contractor is encouraged to suggest economically viable amendments to the Works which, if instructed as a Change, may result in an improvement in environmental performance in the carrying out of the Works or of the completed Works.”                  

“The Contractor shall provide to the Employer all information that he reasonably requests regarding the environmental impact of the supply and use of materials and goods which the Contractor selects.”

The first clause is aimed at creating a collaborative dialogue whereby the contractor suggests amendments to the works that may result in environmental improvements. But could a contractor ever be sued for not suggesting amendments? The answer is probably no, as it is difficult to envisage how a contractor could be liable for not responding to an encouragement. There is no defined obligation for the contractor to breach.

The second clause is more interesting as it does place an obligation on the contractor to provide information and would be enforceable if the information requested is reasonable. As what amounts to a reasonable request could be open to interpretation, it is important that contractors ensure that employers incorporating this clause understand the kind of information they can supply. If this is understood at the outset, contractors should avoid situations where they cannot comply with the employer’s requests or compliance results in an unworkable administrative burden.

These standard clauses are not that onerous and do not place any obligation on the contractor to design more sustainable buildings or use more sustainable materials. However, JCT contracts are normally heavily amended and these amendments could specify environmental requirements and express sanctions for non-compliance. The clearer the contract is regarding the importance of meeting environmental criteria, the more likely a court would be to provide a contractual remedy for failure to meet them.

Environmental requirements need to be defined at an early stage, probably in the specification, and should be repeated in the employer’s requirements. If, for example, a particular BREEAM outcome is clearly specified, it is likely that a contractor could be sued if it fails to achieve the rating. Also, as a contractor’s liability normally extends for 12 years after practical completion, failure to meet BREEAM post completion energy checks may also land the contractor in trouble.

The legal position of a party that claims substantive damages for a breach of a green clause, or failure to meet minimum environmental design criteria, is currently speculative, given the lack of any authority from the courts as to how they would apply damages for any such breach.

The absence of such authority may be explained by a reluctance of parties to take these matters to court. However,
as a real financial value to such green clauses is perceived, this position may change. For example, failure to meet
such specified criteria may cause a developer to lose revenue from feed-in tariffs, or having to purchase more
carbon tonnage allowances under the CRC Energy Efficiency Scheme.

Hitting the Green Wall ... and Beyond also reveals that the industry is taking “green” value and energy performance seriously — more than 80% of respondents said responsibility for sustainability or environmental policies was dealt with at senior management level. And almost three quarters measured sustainability, with particular emphasis given to energy performance certificates, BREEAM ratings and environmental impact assessments.

As the green credentials of a building start to impact on its value, contractors can expect more sustainability clauses in their building contracts. These clauses can potentially be onerous and contractors need to make sure they are properly advised and understand the risk profile of these obligations.

Brad Fearn is a senior associate in the construction and engineering group at Taylor Wessing.

Hitting the Green Wall... and Beyond was produced with collaboration from the British Property Federation and consultant Spada


Back to basics: Liquidated ascertained damages

Liquidated ascertained damages (known as LADs or LDs) are commonplace in the industry’s standard form contracts. If a party to a contract suffers loss as a result of another party’s breach, the usual remedy will be an award of general damages at a level determined by a court (or other forum).

But as construction contracts are notoriously complex and the disputes that arise out of them both costly and time-consuming, most contain LADs as a pre-determined level of damages that an employer is entitled to deduct for certain breaches of contract. As long as the LADs are a genuine pre-estimate of loss, the employer does not have to prove it has actually suffered the loss.

LADs are most commonly related to a failure to meet the contractual completion date, where an employer will seek to recover a pre-determined sum for each day, week or part thereof that practical completion is delayed.

While a LADs provision can provide the parties with contractual certainty as to the levels of potential loss and recovery, it is important, particularly for an employer, to consider the level of LADs incorporated into the contract.

The sum must be a genuine pre-estimate of the likely losses the employer will suffer as a result of the delayed completion. If an arbitrary figure is used, a contractor may argue that the true purpose of the LADs is to penalise the breach and not compensate the employer for its losses, and the LADs may be unenforceable.

Equally, a LADs clause generally represents an “exhaustive” remedy for delays — so an employer cannot recover general damages over and above the level of LADs — and also limits a contractor’s liability for delay damages. The parties therefore need to be careful when agreeing and completing the relevant part of the contract particulars.

Dan Preston is an associate at Reynolds Porter Chamberlain

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