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Out-Law Analysis 4 min. read

Standard form construction contracts must support decarbonisation

Standard form construction contracts in use in Southern Africa could be improved to better support the industry in reducing the greenhouse gas emissions associated with building and operating new infrastructure.

There is a pressing need to address climate risk and improve sustainability in construction projects, but this need is not sufficiently accounted for in many of the popular standard form contracts used in construction projects in Southern Africa at the moment. However, the ‘Option X.29’ clause, developed by the UK’s Institution of Civil Engineers to sit within its suite of NEC standard contracts, does offer a blueprint that other institutions behind standard forms could build on.

The impact of climate change in Africa

Developing countries have been particularly vulnerable to the damaging effects of climate change. The Global Climate Risk Index (2019), for example, put Mozambique, Zimbabwe, and Malawi in the top 10 countries in the world affected by climate change at that time, in part due to tropical cyclones Idai and Kenneth, the latter of which was and remains the strongest cyclone ever recorded in Africa. These two disasters caused extensive damage to infrastructure – roads, electricity supply, communication, water and sanitation – as well as agricultural land and homes, and together are estimated to have cost the countries affected in excess of $3.2 billion in economic development costs.

South Africa is also not immune. Whilst not ranked as poorly as its neighbours, in the same index it is still among the top 25 countries most affected by climate change, and listed in the top 50% of at-risk countries looking longer term. These statistics were influenced by the catastrophic drought in the Western Cape between 2017 and 2018. Recent flooding in Kwa-Zulu Natal in 2022 due to storm Issa and also in the Western Cape in 2023 – showing a complete swing from the drought experienced in the same province not five years before – provide further evidence of the impact in the country of extreme weather events linked to climate change.

The impact of these events is disproportionately felt in developing countries. According to the Global Carbon Budget, African countries, generally speaking, are low contributors to greenhouse gas emissions – only 4% in total. South Africa, however, contributes 25% of the continent’s overall emissions due largely to its reliance on fossil fuels in support of the energy and construction sectors, which ranks it in the top 15 greenhouse gas emitters globally.

Africa is, however, inherently an optimistic continent and South Africa has sought to follow the lead of the UK government which, in June 2019, became the first major country to legislate for a net-zero target for carbon emissions by 2050. Most African countries signed the Paris Agreement in 2015. In 2021, South Africa also announced a Just Energy Transition (JET) Partnership with the EU, UK and US, to support its accelerated energy transition away from coal. The JET Partnership aims to mobilise $8.5bn from participating donors, over five years. A Climate Change Bill is also the subject of debate in parliament.

The above commitments represent a start, but to achieve the necessary reductions in greenhouse gases and carbon emissions a mindset shift in the development and operation of built assets and energy generation is required. That shift will have to be supported by the underlying contracts chosen to govern future projects.

Option X.29 should spur other climate clauses

The standard forms used most often throughout Southern Africa, do little to encourage the required shift in mindset.

The JBCC is silent on sustainability obligations. Those behind the JBCC clauses see sustainability obligations as something the parties can build into the contract data, to suit their own parameters for compliance.

The 2017 version of the FIDIC contracts in contrast takes a more proactive approach, although more could be done. It includes an obligation on the contractor to take all necessary measures to protect the environment, both on and off site. The contractor is also required to comply with any environmental impact statement for the works. More recently, in 2021, FIDIC also published its Climate Change Charter, which sets out in basic terms how to address climate mitigation, adaption and resilience in the built environment. However, this has yet to translate into specific official drafting.

The drafting committee of the NEC has, in our opinion, a more forward-thinking approach. Following a unique period of direct engagement with industry, it published clause Option X.29 in mid- 2022.

The idea of Option X.29 is for parties to practically be able to implement carbon reduction initiatives by linking those initiatives to the processes in the contract. Option X.29 seeks to achieve a sharing of risk by using a practical set of climate change requirements, which are to be implemented using a climate change plan, in cooperation with climate change partners. There is also the possibility of using a performance table to measure maturity of compliance, or as a financial incentive to contractors to fulfil particular metrics.

This approach makes sustainability requirements less of an aspirational concept in that it becomes “part of the furniture” of familiar clauses. The detail includes, for example: notification of compensation events, notifying early warnings and managing climate change risks as if those are ordinary risks of the contract, provision for value engineering proposals by the contractor regarding climate change initiatives, and integration of climate change targets within the recognised payment and reporting regimes.

Implementation of climate change initiatives is therefore likely to be more easily managed and demonstrable, in the ordinary course, than if the parties were simply left to their own devices, as the JBCC would have parties do.

What makes Option X.29 even more attractive is its recognition that climate change is a whole project issue – from feasibility stage to beyond construction. It therefore encourages the early and continued engagement of clients and all members of the supply chain, recognising that climate change is not just a contractor problem.

Given that Option X.29 is still relatively new, however, it remains to be seen how and if it will be adopted by industry on the continent going forward. NEC is, however, currently winning this particular race for the moment, and it is for the others to catch up.

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