Taking the X29 from Chancery Lane

In March 2022, NEC released (for consultation) a new secondary option clause for the NEC4 Engineering and Construction Contract (ECC). Titled ‘Impact of the works on climate change’, NEC’s goal is to give parties a contractual framework to ‘support the reduction in the climate change impact of built assets’, rather than having such requirements buried away in the technical documentation.

The mechanism is drafted with generic terminology and various elements that may or may not be utilised, depending on the parties’ requirements. By way of brief overview:

• The Employer is responsible for setting out its Climate Change Requirements (CCRs) in the Scope.
• The Contractor is responsible for preparing the Climate Change Execution Plan (CCEP), which may form part of its Contract Data or be provided for acceptance within a period stated in the Contract Data. There is a process for acceptance / rejection, as well as ongoing revision, of the CCEP – much like the current process applicable to the programme.

Impact of the CCRs as part of the Scope

It is evident that NEC wants this mechanism, if adopted by the parties, to be a central focus when carrying out the works. Cl. 20.1 requires that the ‘Contractor Provides the Works in accordance with the Scope’. Including the CCRs as part of the Scope makes compliance with them a pre-requisite to Completion, with any part of the works not in accordance with the CCRs constituting a Defect.

Measuring performance

The parties have the option of using a Performance Table to set specific targets for the Contractor, with incentives / disincentives for achieving / failing to achieve such targets. A generous amount of flexibility exists with respect to the Performance Table – the example given in NEC’s guidance notes is effectively blank, albeit with some headings to get the parties thinking. Ultimately, it is for the parties to decide on the performance targets, measures and rewards / penalties (for want of a better word). Notably, any amount the Contractor may be required to pay the Employer by operation of the Performance Table will be viewed as an ‘excluded matter’ for the purposes of Secondary Option X18 (if it applies), and is therefore carved out from any aggregate cap on the Contractor’s liability.

Early warnings and compensation events

Anything that could adversely affect the achievement of the CCRs is added to the list of matters that the Contractor and the Project Manager must give early warnings about.

An instruction to change the CCRs will constitute a compensation event under the existing cl. 60.1(1), as it ultimately constitutes a change to the Scope. The existing compensation event process applies as normal, with some new provisions to acknowledge that changes to the Performance Table (if applicable) may result, and how such changes are to be assessed and implemented. 

In addition, NEC recognises that there may be some compensation events that only affect the Performance Table and have included provisions to deal with this, specifically with respect to the notification process. These provisions sit alongside (and closely mirror) cl. 61.1 to 61.3, essentially operating in place of them with respect to compensation events that only affect the Performance Table.

Today’s climate

Reducing the impact of climate change is at the forefront of everyone’s minds – and so it should be. It is therefore not surprising that climate risk is becoming more of an issue in the front end conditions of construction contracts. While parties are always free to negotiate bespoke provisions to deal with specific issues such as climate change, NEC is the first standard form publishing body to propose a default contractual mechanism to address this. However, it is by no means the first organisation to turn its mind to these issues.

The Chancery Lane Project is just one collaborative initiative that creates ‘new, practical contractual clauses ready to incorporate into law firm precedents and commercial agreements to deliver climate solutions’. The project vision is a world where every contract enables solutions to climate change – and Clyde & Co is proud to have contributed to this effort. There are over 100 model clauses, covering numerous sectors, including construction. A number of the construction clauses focus on incentivising the contractor to achieve certain objectives and, while the intent is admirable, some have questioned if the means are too onerous for contractors (by the use, for example, of up-front warranties alongside fitness for purpose obligations, an expanded definition of Best Industry Practice and the application of liquidated damages).

NEC’s proposed Secondary Option X29, however, provides a fairly balanced approach to the allocation of climate risk, with a flexible incentivisation framework for the parties to develop to best suit the particular circumstances in question. It appears a respectable first attempt to extrapolate key themes from the likes of the Chancery Lane Project in the context of a well-established standard form contract. 

Consultation on Secondary Option X29 closed on 13 May 2022. Currently, there is no indication as to when feedback may be shared or when an updated version of Secondary Option X29 may be released. So it remains to be seen how parties may look to utilise this option in practice and whether it will be an effective starting point to, as NEC hopes, ‘support the global drive towards net-zero greenhouse gas emissions and sustainability’.