Corrs High Vis: Episode 59 – The risks and challenges of climate change for major infrastructure assets

Trevor Thomas, Partner, Projects

Harry Frith, Associate, Projects

Amy Catanzariti, Associate, Projects

Amy: Welcome to another episode of Corrs High Vis. My name is Amy Catanzariti and I’ll be your host for today’s episode where we’ll be delving into the risks and challenges that climate change presents to major infrastructure assets. The effects of climate-related risks on the natural, as well as the built environment, in terms of damage and deterioration to assets, are becoming increasingly foreseeable. With the intergovernmental panel on climate change recently predicting that climate change risks to key infrastructure will rise sharply in the mid and long term with further global warming. Today, I’m joined by Trevor Thomas, a partner in our projects team, and Harry Frith, an associate, who are here to talk to us about the potential impacts of changes in climate on major infrastructure assets designed to have a long operational life; who should be concerned about these risks, and how major infrastructure projects can be future proofed to manage these risks. So Trevor, why should the building and construction industry be concerned about the physical risks of climate change?

Trevor: Thanks very much Amy. I think the place to start is to consider what we mean by climate change. In this context, we’re not really concerned with short term, acute events such as weather events. We’re really talking about longer term changes to the overall climate and what effect those might have on projects. An interesting example might be something like the occurrence of a cyclone and the damage that that might cause to a piece of infrastructure and what the obligations might be on designers of that infrastructure to be resilient towards cyclone damage, as opposed to things like long term increases in sea levels and what are the obligations on designers to take into consideration when designing things like port infrastructure, for example. So that’s really the first thing to consider is: what do we mean by climate change? Then the second thing to consider is really that, if we have a look at the increase over the last two decades in the number and variety of climate change-based litigation. There is a report, the Grantham Report, that was recently released in June 2023, and that published a snapshot on global trends related to climate change litigation. It identified that there have been more than 2,341 climate lawsuits filed globally since 2015. The bulk of these are in the US, but it is interesting to note that Australia has the second highest number of claims. There are 134 cases falling into the following groups that were identified in this report and they are: attempts to prevent project approval, so really permitting-based claims; human rights-based claims; a broad bucket of things that are identified as anti-climate actions, which tend to be related to things like tortious claims; and then claims against companies, directors and advisors for things like breach of fiduciary duties and financial disclosure obligations; and a final bucket of claims relating to greenwashing.

The main thing to take away from all this is that it is obvious that there are an increasing number of climate change-related cases being brought and this is a trend that is likely to continue and/or increase and whilst these may fall into categories that are not like breach of contract type claims, which we would be familiar with in a construction context or project context, it does demonstrate that there is an increasing willingness of people to try and hold governments responsible for climate change consequences.

Amy: So given the possibility of a new wave of climate-related litigation within the building and construction industry, what do you think, Harry, are the risks for contractors upstream in terms of contractual liability for the physical effects of climate change?

Harry: Thanks, Amy, for your question. As Trevor has outlined, the impacts of climate change are posing a real risk to the resilience of major infrastructure across the country and these risks, both acute and chronic impacts of climate change, pose a real danger to the deterioration and degradation and health of these assets. And the question really is, is that when a climate change event impacts a project, from a physical point of view, who bears that risk and who bears liability? And it will of course always be subject to the terms of the contract and the nature of the project as to how that risk will be allocated, but in terms of major contractors that are responsible for designing, building, operating, maintaining, delivering these projects, they are the parties that may be on the hook for failing to properly have regard to the foreseeable physical impacts of climate change. Now it’s common in construction contracts for a contractor to warrant that the works will be fit for their intended purpose, and that intended purpose may be then further defined in the contract and may even include a requirement that the works be climate resilient. A second warranty may be that the works will have a particular design life and another warranty being that the contractor will carry out its obligations with reasonable due care and skill. And it only take a cursory examination of those causes to consider how they might respond in the event of a physical impact of climate change. And as Trevor has outlined, there really may be a new wave of climate change related litigation that will impact the building and construction sector over the coming decades and there are real questions as to how these warranties will operate and stand up in the event of acute and chronic climate change impacts. Now coming back to that topic of climate resilience, this is a real key talking point for many of our clients that we work with and is becoming an increasing priority for owners and principals that are concerned about the particular major infrastructure asset that is being designed and built with a long term design and operational life. It makes sense if we are designing these projects to exist for a long period of time that we will want them to be able to withstand and be resilient against changes in the environment, but there are a few matters that complicate the risk of a breach of a contractual warranty. First is the question of causation and questions of reasonable foreseeability. These are quite complex but are becoming increasingly more capable of being overcome as a result of changes in technology and advancements in that space and climate attribution science. Another complicating risk is what knowledge and information would be reasonably available to a major contractor at the time of performing its obligations and whether that information would have influenced how it could or should have acted in terms of actually delivering and designing these assets to be climate resilient. And the last point is also the impact and relevance of technical standards. A lot of the technical standards that are used by designers, engineers, major contractors, potentially rely on historical climate data and if they are not fit for purpose for an evolving climate into the future, then reliance on those technical standards may not be sufficient in terms of satisfying these contractual warranties. So where this lands is that contractors must carefully consider their obligations in terms of climate change risk, whether their project is particularly susceptible or vulnerable to more frequent and severe weather events and therefore how they can allocate that risk and deal with the liability under contractual warranties.

Amy: So given the contractor might have upstream liability based on a breach of warranty, are there any other defences or types of clauses that might apply in circumstances where a breach of warranty is alleged?

Harry: Yes, thank you, Amy. There are a number of different common or bespoke clauses in a construction contract that might apply if an allegation is made that a contractor has breached a contractual warranty. One can image how an extension of time clause, a variation clause or even potentially a latent condition clause might apply, but the one that most commonly comes to mind here would be a force majeure clause. Most of us as construction practitioners will understand that these are clauses that are a creature of contract and that they relieve the parties of their obligations if performances render it impossible, and the event is beyond the parties’ reasonable control. And so the key point to get across here is that we need to understand the operation and the interpretation of a force majeure clause and how it might differ between acute and chronic climate change events. In terms of acute events, those short-term, severe extreme weather events, a force majeure clause might have application, but in terms of the more chronic, long-term, incremental impacts of climate change, it might have limited application. And so, when we’re thinking about whether a climate change event constitutes a force majeure event, we have to ask ourselves whether the parties at the time of entering into the contract could foresee that particular event or its consequences, and whether there is anything they could have done to mitigate or avoid that particular event or its consequences. And, in considering the amount of advanced technology and climate attribution science and modelling that’s being done around the world, it's now an open question as to whether the particular effects of climate change are beyond the party’s reasonable control. And so the logic of the past, in regards to how force majeure clauses might have applied and operated, may not prevail into the future in terms of climate change. And we only really have to reflect on how force majeure clauses responded when the COVID-19 pandemic hit the world and the amount of disputation that followed. And we can see, naturally, that in a climate change context a similar outcome might occur. And just as a matter of completeness, parties should also consider statutory limitation periods as a defence for any contractual warranty breach, given that a climate change event may only be felt a long time after the design or the construction is carried out. And so what we can see is that the variety of contractual and statutory defences that might be raised, even if a breach of contractual warranty is alleged.

Trevor: Yes, it’s a very good point Harry, about the operation of the statute of limitations or any limitation periods. And I guess that particularly, when it comes to things like design life warranties or warranties in relation to defects, why the drafting in some of those long-term arrangements sees those warranties being provided every day for the period of, say for example, a concession period. And that might well have a significant impact on the availability of recovery by a principal against the contractor for a warranty that they want to apply over the course of a long period.

Amy: So insurance is obviously another important overlay and contractors are often required to take out various forms of construction insurance. Harry, how do you see policies applying to indemnify contractors in the future for climate change-based risks?

Harry: And that’s an incredibly important and complex question in relation to insurance. And it’s something that is quite topical in the industry at the moment in relation to how policies might change over the coming decades in response to climate change, particularly in relation to the particular terms or carveouts or caps that might be included in property insurance or other forms of construction-based insurance, and particularly to deal with the fact that insurers are being stretched in relation to the amount of coverage that they have to apply in response to a variety of different climate change risks. In 2023, the Commonwealth Bank of Australia released a report that classified $29 billion of its home loan portfolio as a high risk to climate change. And although this is in the domestic building context, what it really demonstrates is that insurance has become increasingly more limited in particular areas that insurers denote as red zones. And we only have to look at how much insurers have had to pay out in terms of flooding in different parts of the country and how much of their catastrophe budget they’ve had to rely on to consider that there might be a driving force for insurance to change. And the point here for contractors in the building and construction sector is that reliance on these policies for climate change-related events may not be the same as they’ve always thought, and there might be some nuanced complexity about how these policies might apply. And what we really mean there is whether a climate change event and its consequences is something that a policy will cover and will be triggered by, or whether there are questions of causation and whether the consequences of a climate change event are actually a result of deficient design for instance. And so these questions of causation and interpretation of any particular insurance policy is a real open question and really might change over coming decades.

Trevor: And Harry I might add that the whole question of insurance in this context is particularly interesting in that if there’s a long-term climate change risk that’s going to be present with us, is that going to lead to a situation where insurers and reinsurers are going to decide not to offer coverage for such risks? And that would seem like a reasonably likely outcome. Were that to occur, we would then be in the position where we would have to say, “well, absent a fallback to an insurer to provide an indemnity for these risks, those risks are going to have to be carried by the parties to the contract”, and so ultimately in a large-scale public procurement exercise, that risk either sits with the government party or it’s going to sit with the contractor. I suppose it’s a question that people will need to think about as to whether putting that risk on the contractor really offers the best value for money to price that risk or whether that should be retained by the government party. So that’s just something else I think to consider in relation to the insurance question.

Amy: I’m with you, Trevor. Where governments are held culpable for climate change, how might this impact potential liability of counterparties?

Trevor: I think the proposition that we’re considering here is that if we accept that there is going to be an increased amount of climate change litigation, that litigation is going to be increasingly successful in spheres that sit perhaps outside of the traditional project infrastructure contractual claims, but develops into a situation where governments are held culpable for climate change, then what might that do in the domain where we’re considering contractual claims of the kind that we are used to? Now, perhaps it’s worthwhile considering a purely hypothetical scenario by way of example. So let’s just say the Department of Defence enters into a long term contract with a services contractor in relation to a naval base. The contract provides that if the contractor fails to maintain the availability of the port, it is liable to the Commonwealth for LDs. Due to climate change, the sea level rises. This impacts the ability of the contractor to maintain the availability of the port. The question then becomes: should the contractor be liable to the Commonwealth for these pre-agreed LDs? Further, and perhaps pivotal to this question, is: could the prevention principle have any role to play in this scenario? The prevention principle is not a particularly complex proposition. It embodies the objective that a party should not be able to benefit from its own wrongdoing. A sort of classic description of this arose in Spiers Earthworks, where it was held that the essence of the prevention principle is that a party cannot insist on the performance of a contractual obligation by the other party if it itself is the cause of the other party’s non-performance. Similarly, in Amalgamated Building Contractors, Lord Justice Denning held that “A party cannot insist on a condition if it is his own fault that the condition had not been fulfilled”. In a construction context, the doctrine of prevention most commonly arises where there is a fixed time obligation, typically for the completion of the works. That is the sort of place where we see the prevention principle played out most frequently. But in the present context the question is: if culpability for climate change can be attributed to governments by virtue of climate change litigation, can the consequences of climate change amount to preventative conduct? So I think that is an area that could be quite an interesting thing to explore in the future because one of the aspects of that proposition is the recent case of Bensons and Quay Infrastructure, which was a 2021 decision of the Supreme Court of Victoria Court of Appeal. It’s beyond the scope of this particular discussion to get into that case, but that case acted as a means of constraining the prevention principle to circumstances of breach of contract which would have limited application in this proposition, but it is an interesting thing to consider.

Amy: Interesting angle to consider in terms of possible principle responsibility for climate-related risks and I think overall you’ve both given us a lot to think about in terms of possible avenues for exposure for both contractors and principals as a result of climate-related risks. So if you could distil the issue into a few key takeaways for our clients, what would you say are the most important messages?

Trevor: The key takeaways can be distilled into a few discreet propositions. Firstly, the frequency and severity of the impact of climate change is likely to increase as we go forward. This is driving the development of climate change litigation and such litigation is increasingly seeking to hold governments and major remitters liable for the impacts of climate change. This is also likely to lead to disputes based on traditional warranties that we’re used to, such as fit for purpose warranties or design life warranties. And how those warranties may respond to events of climate change, which also raises issues of the foreseeability and potential remoteness of loss. The consequence of all of this is that insurers are increasingly unlikely to offer coverage for climate change-related risks. So, in the absence of such insurance coverage, this leaves parties to a contract typically responsible for those risks. What that then means is that we need to devise appropriate mechanisms for how best to allocate such risks between the parties in a contractual sense. That leads to the question of whether or not it is appropriate to do that in the traditional forms of risk allocation which we are used to in large project infrastructure type of contracts. And so there may well be an opportunity for parties to develop more sophisticated risk allocation mechanisms to deal with the foreseeable impacts of climate change.

Amy: Thanks for joining us on this episode of Corrs High Vis. The topic of today’s discussion was presented on by Harry and Trevor at this year’s Society of Construction Law national conference and I understand the paper is in the works and may be published. If you’re interested in learning more keep an eye out for the paper or you can reach out to Harry and Trevor who are both available on LinkedIn.

This podcast is for reference purposes only. It does not constitute legal or other advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.