Climate Contract Risk Sharing

Clauses

Climate risk sharing

[Drafting notes: 

• This clause is designed to be included alongside, but distinct from any standard Force Majeure provisions already included in the relevant contract.
• This clause deliberately focuses on mitigation of adverse climate or social outcomes resulting from a pandemic or climate change and does not include general emissions reduction requirements. However, it could be combined with other TCLP clauses that require measurement and reduction of either contract-related and/or organisational emissions and setting ambitious net zero targets.
• This clause does not include an express right for either party to terminate the relevant contract in the event that a Climate Change Event or Pandemic continues for an extended period of time. This is because the objective of this clause is to encourage ongoing collaboration between the parties to continue to adapt and mitigate negative climate and social impacts as far as possible. However, organisations may wish to consider the interaction of this clause with any existing termination rights in the relevant contract.
• Users may also wish to consider the operation of this clause alongside any existing dispute resolution provisions in the relevant contract to ensure that an appropriate mechanism exists for parties to resolve any potential dispute which may arise in relation to the concepts in this clause.]

1. Climate risk cooperation

1.1 The parties agree and acknowledge that:

1.1.1 this Agreement is of significant commercial value to each of the parties and that neither party should bear the entire risk of a Climate Change Event or Pandemic occurring; and

1.1.2 the parties have a shared responsibility to address the risk of and mitigate the adverse effects of a Climate Change Event or Pandemic occurring.

[Drafting note: depending on the nature of the relevant contract or agreement, clause 1.1 could instead be included as a recital as opposed to an operative clause.]

1.2 If a party is prevented from performing its obligations under this Agreement, or if its obligations under the Agreement become impossible to perform, due to a Climate Change Event or Pandemic, the party shall, as soon as reasonably practicable after such party becomes aware of such circumstance, notify the other party and, to the best of its knowledge, provide details of:

1.2.1 the existence, location and nature of the Climate Change Event or Pandemic;

1.2.2 how the Climate Change Event or Pandemic has prevented and will continue to prevent it from performing its obligations under the Agreement, or has rendered its obligations impossible to perform; and 

1.2.3 when it (acting in good faith) expects to be able to resume its obligations under the Agreement.

1.3 If a party gives notice under clause 1.2:

1.3.1 the date of the notice shall serve as the start of the Period of Disruption and the anticipated end date (as notified pursuant to clause 1.2.3) shall be the anticipated end of the Period of Disruption; and

1.3.2 the parties will work together, in good faith, [using reasonable efforts] to [promptly]:

(a) prevent the occurrence, or minimise the impacts, of any related Adverse Climate Outcome (ACO) or Adverse Social Outcome (ASO);

(b) ensure that each party’s Disruption Liquidity Ratio is maintained in accordance with clause 2;

(c) mitigate wasted Embedded Carbon in accordance with clause 3; and

(d) mitigate the effects of the Climate Change Event or Pandemic on performance of this Agreement and reduce as much as possible the Period of Disruption, in each case to the extent it is safe to do so and will not cause an ACO or ASO.

2. Maintaining climate liquidity ratios to avoid ASO

2.1 If a party’s Disruption Liquidity Ratio is less than [●], the parties’ [finance directors or senior legal representative] shall discuss in good faith an amendment to the payment terms under this Agreement to allow for an extension of any relevant payment deadline applicable to the affected party (up to a maximum of [●] days), as is required to assist such party to maintain a Disruption Liquidity Ratio of at least [●] and avoid any ASO that could be caused by cash flow problems.

2.2 For the purposes of any discussion between the parties under clause 2.1, during the Period of Disruption, the affected party shall provide to the other party weekly reports showing its Disruption Liquidity Ratios [on an open book basis OR supported by reports of independent accountants] (in the format set out in this Agreement or otherwise agreed by the parties in writing).

3. Carbon mitigation to avoid ACO

3.1 In the event of a Climate Change Event or Pandemic, the parties acknowledge that the Embedded Carbon in the [Products OR Services] might be wasted where the [Products OR Services] are manufactured but not delivered, or delivered but not used.

3.2 To avoid an ACO from wasted Embedded Carbon resulting from a Climate Change Event or Pandemic, the parties shall collaborate to consider and implement actions to mitigate the ACO and either party may by written notice to the other party request that it: 

3.2.1 stops providing the affected [Products OR Services] during the Period of Disruption without terminating this Agreement;

3.2.2 offers to sell the affected [Products OR Services] to other customers and provide a corresponding payment discount to the notifying party;

3.2.3 reuse, resell or recycle the [Products or their constituent parts OR the input materials allocated to the Services] and provide a corresponding payment discount to the notifying party; or

3.2.4 donate the [Products or their constituent parts OR the input materials allocated to the Services] to an agreed community project, social enterprise or other charitable cause.

3.3 If a party receives a notice under clause 3.2, it will respond to the request in that notice within [●] days and shall use reasonable endeavours to comply with that notice, except where any proposed action(s):

3.3.1 will have a materially disproportionate effect on that party;

3.3.2 will or may have [wider environmental impact]; or

3.3.3 other [more effective (including cost-effective)] steps can be taken to avoid the ACO from wasted Embedded Carbon.In the event the requested party refuses to carry out any proposed actions, it shall provide reasonable details as to the applicable reason for such refusal, and the parties shall collaborate to consider and implement alternative actions to mitigate the ACO.

3.4 If, and only to the extent that the parties have used all best endeavours, the parties have not been able to otherwise mitigate an ACO in accordance with clauses 1.3, 3.2 or 3.3 they shall:

3.4.1 use all reasonable endeavours to consider and implement any other action to mitigate the effects of the ACO; and

3.4.2 Offset, in [equal OR agreed] contributions any increase in GHG Emissions which result from the ACO.

4. Impact and risk analysis

4.1 In the event of [a Climate Change Event or Pandemic OR a notification under clause 1.2], including where the Period of Disruption is or is likely to be [prolonged OR longer than [●]], the parties shall consider the ongoing impact of performance of the Agreement on the environment and climate, including consideration of the expected duration of the Period of Disruption, and shall plan to mitigate such impact as relevant.

4.2 In the event of [a Climate Change Event or Pandemic OR a notification under clause 1.2] each party shall update their climate risk register accordingly, and shall implement any learning gained from the Climate Change Event or Pandemic within their strategy and planning. Such implementation may include, where appropriate, consideration at senior management or board level of the implications of the relevant learnings and any resulting updates to the party’s climate risk register, as part of the relevant party’s governance processes.