NEC publishes final version of new X29 secondary Option to help tackle climate change; a very encouraging development, but, as always, the devil is in the detail

In April of this year, we highlighted that NEC had released a new secondary Option clause X29 (Climate Change), for consultation, that was to be used with the NEC4 Engineering and Consultancy Contract (the “ECC”).

After the period of consultation which ended on 13 May 2022, the clause has now been published across the full suite of the NEC4 Contracts, including the Professional Service Contract.

In this note, we examine some of the key elements of the clause, some of the changes with the version listed for consultation (including the approach in the Professional Service Contract) and provide our comments.

As mentioned in our previous note, this is a very positive step in helping the industry help tackle climate change. However, we are already seeing an increase in new provisions imposing additional risks in respect of climate change etc. and there are some key risks associated (including unlimited liability). X29 which will therefore need to be considered very carefully when it is used.

The Key Elements

X29 introduces several key elements that will help the construction industry address climate change in their contracts.

• Climate Change Requirements: The scope of the works will specify the Climate Change Requirements that must be complied with. A failure to comply with the requirements will be a defect if it is considered to relate to the works and consequently will require rectification at the contractor’s/consultant’s own cost.
• Climate Change Plan: The Climate Change Plan is devised by the contractor/consultant and needs to identify the key stakeholders and the expected timescales. The plan is meant to be updated as and when instructed and required. The form of the Climate Change Plan will be for the parties to decide.
• Performance Targets: The clause includes the provision of a table for setting out any targets and rewards. This provides a regime for measuring compliance with specified performance targets, for which the client may set out financial incentives.
• Contractor’s/Consultant’s Proposals: If the contractor/consultant believes that it can reduce the environmental impact of the lifecycle of the asset, it can propose changes to the project scope.

The Changes from the Consultation

As mentioned above, during the consultation period the only clause published for comment was intended for use with the NEC4 ECC. In this section we focus on some of the changes to the ECC but also the NEC4 Professional Services Contract (the “PSC”).

ECC

• 4 – Climate Change Plan: Whereas before this was titled the ‘Climate Change Execution Plan’, it has been simplified to the ‘Climate Change Plan’. The clause has been streamlined, with the removal of wording with regard to acceptance and non-acceptance by the Project Manager and the suggested sub-clauses 4 and 5 of the consultation clause have been removed, which referred to compensation events and instructions from the Project Manager. Sub-clause 4 provided that if the Climate Change Execution Plan was changed as a result of a compensation event, then the contractor would include any alterations to the Climate Change Execution Plan in the quotation for the compensation event. Sub-clause 5 provided that the Project Manager may instruct the contractor to correct a failure to comply with the Climate Change Execution Plan and that the instruction would not be a compensation event.
• 12 – Performance Measurements: the contractor/consultant is now required to provide reports from the starting date until Completion of the whole of the works, rather than the Completion Date as in the consultation version of the clause.

PSC

Whilst the PSC also incorporates the above changes from the consultation version of the clause, it also contains its own differences:

• X29.11 – Consultants’ Proposal: is more streamlined and does not contain sub-clauses 4 or 5. There are less detailed requirements as to what the quote must contain if the Service Manager wishes to consider a change to the Scope.
• X29.13 – Limitation of Liability: this clause is titled ‘Limitation of Liability’ rather than ‘Excluded Matters’, although the wording is largely the same without a reference to secondary Option X18.   The key point to note is that amounts payable by the consultant in accordance with the Performance Table will be excluded from the cap on liability and therefore liability for such matters will be unlimited.  This is a key risk associated with X29 (under the ECC and PSC).

Comment

Employers, contractors and consultants can now take advantage of X29 to incorporate climate change requirements into their NEC contracts.

Adding to the work the Chancery Lane Project and others are doing, NEC should be lauded for being the first of the construction industry standard contract bodies to introduce new green drafting to aid with the move towards decarbonisation.

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

1. The clause is not a complete solution that can just be inserted. 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.
2. 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 this promotes flexibility, it does enable the employer to specify the determination of each definition. Contractors and consultants should assess the definitions and metrics for each and every contract that it enters.

In addition, there are some key risks associated with X29:

1. Consultants and contractors will need to carefully consider the requirements of the clause in line with their professional indemnity insurance policies. There is a risk that some of the Climate Change Requirements could be drafted in a manner that makes them fitness for purpose obligations. A fitness for purpose obligation exists outside of the normal standard of care being reasonable skill and care, and as such it is usually excluded from the cover of professional indemnity insurance policies.
2. On a similar note, if the contractor or consultant fail to meet a target stated in the Performance Table they are required to pay the sum stated in the Performance Table. This is effectively a form of liquidated damage which again is likely to be excluded from the cover of professional indemnity insurance policies.
3. As mentioned above, liability for sums payable under the Performance Table is a new excluded matter and so is unlimited.

X29 and attempts at “green drafting” in general, 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.  This is something we are already seeing.  The potential benefits that X29 can bring may make the effort worthwhile, but it is important that the risks associated with it are understood at the outset.

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