The contractual implications of a shift towards more sustainable methods of construction

The contractual implications of a shift towards more sustainable methods of construction

It’s no secret that the construction industry has a significant impact on the environment, with it being said to account for 60% of all materials used, a third of all waste and for generating 45% of all CO2 emissions in the process. As a result, construction companies are always looking for new and innovative ways to deliver high quality results whilst also helping to protect the environment.

In a world first, scientists in Scotland have recently developed a brick, known as the K-Briq, which is made from 90% recycled construction and demolition waste. The K-Briq slashes the CO2 emissions of a traditional fired brick, using less than a tenth of the energy in its manufacture, and can be made in any colour. The product, which is stronger and lighter than traditional kiln-fired bricks, is now commercially available and it is hoped that the brick could soon be used more widely across the construction industry.

Whilst the K-Briq could provide a sustainable alternative for developers and contractors in the future, the carbon footprint of the construction industry has already started to improve with the increasing popularity of modular construction.

What is modular construction and why is it so popular?

Modular construction involves the design and construction of individual sections of a building away from the site which are then transported and assembled at the site to create the final structure. This pre-fabricated approach is seemingly more effective than many traditional methods, helping to reduce not only the build cost and build time on projects but also proving to be a more sustainable and eco-friendly alternative to traditional methods.

Using modular construction as opposed to traditional construction methods is said to reduce emissions from jobsite travel, use less raw material waste during construction and have less harmful environmental impact on site.

Due to the techniques involved, modular construction is perhaps more suitable for use during large projects, particularly where flexibility and scalability is key.  These environmental benefits, together with the potential costs, quality and programme benefits, have resulted in modular construction techniques being used across a range of sectors, including the education sector.

The contractual difficulties that modular construction techniques can cause

Owing to the rise in popularity of using modular construction techniques, there is an increasing demand for express contractual provisions dealing with the use of these techniques to be incorporated into traditional construction contracts. Traditional contracts were not necessarily drafted with modular construction in mind and therefore often need to be amended to suit the commercial needs of the parties. This however can present its own problems as was recently seen in the case of Bennett (Construction) Ltd v CIMC MBS Ltd (formerly Verbus Systems Ltd).¹

Bennett were engaged as the main contractor for the construction of a new hotel and had contracted Verbus to carry out the design, supply and installation of 78 pre-fabricated bedroom units for the hotel.
Due to the use of modular construction techniques, the contract between the parties was a heavily amended JCT contract, whereby the provisions relating to interim payments had been deleted in their entirety and replaced by five “milestones”. Milestones 2, 3 and 4 provided for payments on “sign-off” by the contractor.

An  issue  arose as  the parties disputed the meaning of “sign-off” and therefore when payment became due. Verbus obtained a judgment that milestones 2 and 3 did not comply with the Construction Act as it was not an adequate payment mechanism.   As a result Verbus claimed that the payment mechanism in the contract should be replaced with the Scheme for Construction Contracts, meaning that Bennett would have to make interim payments by reference to the value of the work carried out. The decision was appealed by Bennett.

On appeal, it was decided that the milestone payments contained within the contract were compliant with the Construction Act and that an objective interpretation of “sign-off” meant that the units were complete when they were in a condition where they could be signed off.  This was, therefore, the time that the payment mechanism was triggered.

The impact of Bennett on modular construction contracts

This case demonstrates that the courts will seek to honour the terms of the original contract between the parties as far as possible.  This underlines the freedom of the parties when negotiating contracts –  the court will only replace part of a defective payment mechanism should it fall foul of the requirements of the Construction Act.

It is therefore up to the parties to agree the most appropriate payment terms where modular construction is used.  Monthly interim payments may not commercially be the most appropriate payment mechanism where modular techniques are used. If stage payment are to be used instead, the contract terms should be crystal clear as to when the stage payment is triggered.

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¹ [2019] EWCA Civ 1515