At the GAR Live: Construction Disputes conference on 31 March 2022, a distinguished panel¹ led by Jane Davies Evans (3 Verulam Buildings) and Peter Rosher (Reed Smith) discussed various interesting issues. Two in particular stood out.

New obligations relating to green financing

Project stakeholders and the public are increasingly demanding sustainable, recyclable, energy-efficient buildings that are built using sustainable construction methods and materials. Many construction businesses are adapting to a ‘whole lifecycle’ approach to building, perhaps as part of their wider Environmental, Social and Governance (ESG) strategy or to meet regulations both current and expected.

However, the use of ‘green financing’ to fund sustainable projects and environmentally-friendly activities means that parties are starting to include new, potentially onerous, sustainability obligations in construction contracts (for example, requiring cement-free concrete) alongside Key Performance Indicators. Such obligations and standards then cascade down the supply chain, potentially to parties who are ill-equipped to deliver to the required standards. Their non-compliance could mean lenders/investors withhold green financing, potentially affecting project progress and causing delay, loss and/or reputational damage. Consequent disputes could be expensive and complex.

Parties should ensure that: new green finance related terms are drafted clearly; obligations are passed down and fully understood by the supply chain (including reporting obligations); suppliers are able to deliver to specification; and achievable, measurable standards are agreed at the outset.

Human rights – new terms to eliminate slavery

While the Modern Slavery Act 2015 has raised awareness of slavery in the construction industry and its supply chains (both domestic and global), more needs to be done − as acknowledged by the UK government which recently announced a new Modern Slavery Bill alongside a modern slavery strategy (expected imminently).

However, regulation alone will not eliminate slavery. One panel member pointed to construction’s “blindness” to [poor] labour conditions but warned that, increasingly, contractors will not be able to rely on their agreed lump sum to justify low labour costs. Rather, parties will have to monitor labourers’ working conditions, pay and performance requirements. Parties will also be expected to know the provenance of materials specified/used in their projects and will have to check whether forced/bonded/child labour has been used in their production.

Mrs Davies Evans wanted GAR Live’s key message to the international community to be that human rights abuses will not be tolerated – in supply chains and particularly not in contractors’ own labour forces. She warned that obligations relating to labour conditions and pay will become standard contract terms.

Those who do not accept such terms, or cannot because of their business practices, will lose business. Those who accept such terms but do not rigorously monitor their workforce and supply chain could find themselves in contractual disputes facing damages claims, loss of future business, reputational damage and, potentially, as regulations are strengthened, financial penalties.

Unethical behaviour could also prove to be a distinct disadvantage in settlement negotiations. Mrs Davies Evans has already come across parties using opponents’ unethical behaviour to add weight to their arguments in arbitration.

Embedding sustainability and addressing human rights issues in business practice are no longer simply ethical choices: they are essential elements of commercial risk and reputation management. Introducing sustainability and human rights related obligations in contracts could be the incentive needed to effect change. In the short term, to avoid/minimise disputes, parties should pay careful attention to the drafting of these new terms and ensure all affected understand them.

1. Also on the panel highlighting and discussing these issues were: Professor Douglas Jones AO, David Kaggwa, Emma Schaafsma, and Karl Fickenscher.

This article was first published here by Construction Law on 6 June 2022. You can sign up to Construction Law's newsletter here.