NEC introduces new optional clause to deal with climate change

• United Kingdom

• Construction and engineering
• ESG

14-09-2022

NEC is the first standard form construction contract to adopt such a measure

NEC has introduced a new optional clause, X29, to deal specifically with issues surrounding climate change.  Although NEC is the first standard form construction contract to introduce such provisions it is expected that other forms, such as JCT and FIDIC, will soon follow suit.

This is a highly topical, as many organisations have made commitments to reduce their carbon emissions in order to respond to the growing climate change crisis.  This is of even greater significance for the construction industry which, according to the World Green Building Council, is responsible for nearly 40% of global energy-related carbon emissions.

How does X29 work?

Prior to the introduction of clause X29, there was the possibility of addressing climate change matters (relating to the creation, operation, maintenance and demolition of assets) in the Scope. However a specific X29 clause has been developed in order to raise these matters on the agenda and include some incentivising mechanisms for compliance.

Climate Change Requirements

X29 allows the Client to include “Climate Change Requirements” within the Scope, which the Supplier (which could be a contractor, professional designer or sub-contractor) is to comply with. These Climate Change Requirements are not prescribed by NEC and can be drafted by the Client, according to what is suitable for the project.  It is helpful, but not obligatory, to have a separate section identifying these matters within the Scope, rather than having them interspersed throughout the document.

Examples of issues that can be contained within the Climate Change Requirements include: reducing CO2 emissions, using low carbon materials, imposing biodiversity obligations, “designing out” waste, increasing recycling obligations, or using onsite renewable power during the construction works.  These matters are likely to be set by the Client, but can be developed jointly with the Supplier depending on the procurement process used.  The Supplier can also propose changes to the Climate Change Requirements, as part of the Scope, but this requires agreement from the Project Manager to take effect.

If the Supplier fails to achieve one of the Climate Change Requirements, this is treated as a failure to “provide the Works in accordance with the Scope”.  This will be considered a “Defect” that needs to be corrected if it relates to the works, but if it relates to the way that the Supplier is to provide the works (such as working practices), this will not be a Defect but still needs to be addressed.

Climate Change Plan

The “Climate Change Plan” sets out the Supplier’s strategy for achieving the Climate Change Requirements.  It should set out the stakeholders, roles, timescales, key milestones, tools and tasks necessary.  The exact form and content of the Climate Change Plan can be specified in the Climate Change Requirements.

The Project Manager and Supplier work together to agree the Climate Change Plan and there is no deemed acceptance of the plan if the Project Manager fails to respond.  It may need to be revised during the progress of the project, for example due to changes in the ordering and timing of the works.

This Climate Change Plan constitutes a statement of intent, so there are no sanctions if the Supplier fails to comply with this plan.

Performance Table

There is an option to include a “Performance Table”, which imposes additional targets on the Supplier relating to climate change, net zero and sustainable developments.  The Performance Table can be used to monitor performance or to include financial incentives (which can be positive or negative). It is not recommended to use X29 with Options X17 (low performance damages) or X20 (key performance indicators) and the Performance Table should be used instead for these matters.

Guidance notes from NEC state that the Performance Table should identify the following matters: subject/issue to be addressed; performance target; unit of measurement; date when performance is to be measured; adjustment to the amount due if the target is not met; adjustment to the amount due if the target is met or improved upon; and any limits on the amounts to be paid by the Supplier in accordance with the Performance Table, including any overall limits.  Again, these are likely to be set by the Client.

Unlike Climate Change Requirements, failure to achieve a target in the Performance Table is not treated as a Defect.  Instead, the consequences for any shortcomings are addressed within the Performance Table.  If Option X18 (Limitation of Liability) is included in the contract, then payments made under the Performance Table are excluded from the cap on liability.  X29 also contains a mechanism to deal with the effects of compensation events, acceleration, and agreements made for the acceptance of Defects.

Sharing information

There is provision for climate change data from a project to be used, disclosed and publicised to share examples of good practice.

Although X29 clause is no longer under formal consultation, users are nevertheless encouraged to provide continued feedback to NEC on any problems or recommended best practice they encounter.

Important points to note

1. the use of the X29 clause is optional, so it needs to be included in the Contract Data to be incorporated into the contract. If it is included, then compliance is mandatory
2. as outlined above, it is important to note the differences in the operation and effect of the Climate Change Requirements and the Performance Table
3. the X29 clause can be used across the range of NEC4 suite of contracts (including its main ECC contract and sub-contracts), making it possible to flow down the obligations to downstream suppliers
4. X29 clauses are likely to routinely feature in UK public sector construction contracts, as they align with the UK Government’s agenda to reach “net zero” claim change targets, as mandated in the Construction Playbook.
5. NEC is a heavily managed contract and using the X29 clause is no exception. A Client should be confident that they are able to set out their expectations sufficiently in the Climate Change Requirements and Performance Table.  Likewise a Supplier will have to consider if it is able to comply with these provisions and how it is able to monitor their performance to demonstrate compliance.
6. the X29 clauses and associated guidance notes are freely downloadable from the NEC website.

Further reading

For further information on environmental, social and governance (ESG) issues, please refer to Eversheds Sutherland’s ESG hub.