Climate Change & the Construction Sector – Disputes & Dispute Resolution
By: Gauhar Mirza, Partner at Cyril Amarchand Mangaldas & Co., New Delhi & Shriya Luke, Senior Associate at JSA, New Delhi
Introduction
Climate change has undeniably affected people, institutions, societies and entities across sectors. The need shift towards generation of renewable energy – a shift to reduced carbon emissions is now widely accepted. Environmental sustainability and the energy-intensive construction industry predominantly do not complement each other.
The construction industry is one of the leading generators of carbon emissions, responsible for around 30% of global energy consumption and 26% of energy sector emissions.[1] However, despite the complexities involved, even the construction industry has begun its move towards sustainability.[2] There is an increase in use of low carbon intensity materials, implementation of climate smart technology, and the design of recyclable materials. There is a further focus on increasing the durability of buildings and allocating substantial resources to renewable energy projects. In fact, as recently as December 2023, at United Nations Climate Change Conference (“COP 28”), over 350 industry leaders in the building and construction sector signed an open letter to negotiators and heads of states demanding regulatory changes to tackle climate change.[3] The letter highlights that beyond the reduction in total carbon emissions, the building and construction industry can also create $1.5 trillion in sustainable investment opportunities in emerging markets, and lift 2.8 billion people out of energy poverty.[4]
Issues and Nature of Disputes Arising in Energy Transition Cases
As a consequence of the shift to sustainability and the increased focus on generation of renewable energy, there is seen a spurt in innovation in technology to deal with complex issues. However, it is this complexity that has led to an increase in the scope for disputes to arise. Besides their inherent complexities, these projects are high value and often take place at border areas, and across multiple jurisdictions. While these disputes are dominantly those that arise in most construction disputes, they include certain nuanced issues that are connected with climate change and sustainability.
Disputes often arise, for example, when there is a failure to achieve anticipated outputs. Disputes related to the failure to achieve anticipated outputs in renewable energy projects often revolve around the actual performance of the energy generation system compared to the projections made during the project planning and design phases. This could include discrepancies in energy production levels, efficiency rates, or other performance metrics. In addition, given that there is heavy reliance on still largely untested technology, dispute arise when there is a failure in performance of such technology to expectations as a result of misrepresentation, negligence or breach of contract.[5]
Another issue leading to disputes pertain to the failure to achieve commissioning standards. Commissioning standards refer to the set of criteria and procedures that must be met for a renewable energy project to be considered fully operational. Disputes in this context can arise when the project fails to meet the specified commissioning standards, which cover a range of technical, safety, and regulatory requirements. Failures to achieve commissioning standards can result from various factors including non-compliance with safety regulations, or incomplete testing and validation procedures. Disputes may involve determining responsibility for the failure to meet these standards.
Often, claims arise out of weather conditions.[6] Renewable energy projects depend substantially, for successful performance, on favourable weather. But weather is erratic and cannot be accurately predicted beyond a few days. As such, attribution of responsibility in cases where there is a supply failure due to extreme weather conditions becomes a source of dispute, and can further lead to claims of delay, force majeure, extension of time, frustration and breach of contract.
Apart from the above, there persist issues that are faced generally by any major infrastructure project such as claims arising out of delays, attribution of delays, cost overruns, claims arising out of defects and performance, and change of scope. Further, often, in case of cross-border projects, there exist investor-state claims under multilateral and bilateral investment treaties, which are linked to a state’s internal policies on renewable energies.
Dispute Resolution Mechanisms – focus on Arbitration
The resolution of disputes of the nature detailed above requires technical expertise and thorough examination of all factors leading to them. When selecting a dispute resolution mechanism for such construction disputes, parties should consider the technical complexity of the issues, the desired level of confidentiality, the need for specialized expertise, and the potential for ongoing relationships among the parties involved. The choice of mechanism should align with the project’s sustainability goals and environmental considerations. The mechanisms for the settlement of these disputes mainly include expert determination, adjudication board/committees, litigation, and most importantly, arbitration.
Expert determination involves appointing an independent expert to provide a binding decision on specific technical issues in dispute. For climate-related construction disputes, experts with knowledge in environmental science, sustainable construction, and climate impact assessment can be appointed to resolve technical issues. Expert determination is used mainly for resolution of very specific issues, where true expertise is required to reach a decision, or for valuation disputes where liability has already been determined. However, its efficacy in the comprehensive and conclusive determination of rights and liabilities for an entire dispute is doubted, and it is often resorted to along with other modes of dispute settlement.
While often a last resort, litigation involves resolving disputes through the court system. Climate-related construction disputes may involve claims based on breach of environmental regulations, contractual obligations, or negligence. Action for breach of environment legislations would lie with courts, raised often by public spirited persons. However, this option is suitable when other mechanisms fail or when legal remedies are necessary to address complex environmental and climate-related issues. Litigation is a time consuming mode, and is unsuitable when parties prefer maintaining confidentiality, or when the dispute involves a cross-jurisdiction aspect.
As a result, parties to construction contracts generally choose arbitration over court litigation due to confidentiality concerns and because it is perceived as more appropriate where the parties and project are based in different jurisdictions. Large-scale construction projects involve multiple parties like investors, contractors, sub-contractors and states themselves, spanning across multiple jurisdictions. In such a case, arbitral institutions provide a suitable, and unbiased forum for adjudication of disputes, the awards of which also have relative ease of enforceability under the New York Convention. Moreover, their decision is binding on parties, and they are capable of determining disputes comprehensively and conclusively. As such, most construction contracts have within them, arbitration as the preferred mode of dispute settlement. Arbitration clauses are also included in most standard form in construction agreements.
Arbitration offers a notable advantage as it allows the involved parties to actively participate in the process of choosing arbitrators. This is particularly valuable in intricate technical disputes, where the selection of arbitrators with specific technical expertise or industry knowledge can greatly benefit all parties. Such specialisation is crucial when dealing with complex climate-related issues, ensuring that the decision-makers have a nuanced understanding of the technical, scientific, and legal aspects involved.
Conclusion and Way Forward for India
Concerns regarding climate change has led the construction industry into grappling with the challenge of reducing its carbon footprint and adopting sustainable practices. The industry is gradually becoming more sustainable despite many conflicting goals and complex challenges. However, the same has led to increased risk of disputes involving nuanced issues that require an appropriate mode of dispute settlement.
It is expected that in the near future, there will be a growth of not just new projects in the renewable energy sector, but also revamping and “greening” of the existing construction industry. It would involve the use of environmentally sound and sustainable materials, and recycling of materials as well. This shift would require implementation of complex solutions making disputes unavoidable. In such a scenario, arbitration would play an increasingly important role, and there would be a growing need to improve the arbitration infrastructure.
In India, this would be all the more important given the ambitious targets it has set for itself in the climate change arena. For India’s targets in its NDCs under the Paris Agreement to reduce its carbon footprint by 30-35 percent by 2030 and net zero by 2070, decarbonisation of the construction sector is imperative.[7] This has led to a growing focus on renewable energy projects in India which includes solar plants, wind plants, hydropower plants etc. This has further led to a whole new genus for disputes, the settlement of which requires a strong arbitration regime in the country. This has been recognised to an extent, and there has been a shift towards institutionalisation of arbitration and building arbitral institutions with an aim at bringing them at par with the leading arbitral institutions of the world like SIAC and LCIA. With the growth in climate-related construction disputes, there will also rise a need for these institutions to empanel experts to deal with the complexities involved in these disputes.
[1] https://www.iea.org/energy-system/buildings
[2]https://www.forbes.com/sites/sap/2021/08/25/the-construction-industry-is-getting-greener-why-how-and-whats-changing/?sh=6ba4577152bc
[3] https://worldgbc.org/article/open-letter-launch/
[4] https://worldgbc.org/wp-content/uploads/2023/12/WorldGBC-COP28-Open-Letter-.docx.pdf
[5]https://www.nortonrosefulbright.com/-/media/files/nrf/nrfweb/publications/international-arbitration-report-issue-16.pdf?revision=40c8a703-6e1d-413c-8c7e-ac1201697383&revision=5249292846277387904
[6] https://www.stewartslaw.com/news/rise-of-renewable-energy-disputes/
[7]https://www.indiaspend.com/climate-change/how-efficient-buildings-can-help-india-meet-its-climate-goals-877297#:~:text=Operational%20emissions%20in%20India%20account,of%20emissions%2Dintensive%20building%20materials.