Climate Contract Risk Sharing (ex Force Majeure)
Amendments and additions to standard Force Majeure agreements to ensure contracting parties work together to balance financial risks and avoid unintended adverse environmental and social issues.
What this clause does
This clause enables parties to work together in good faith to take control of contractual climate risk and plan to mitigate negative climate and social impacts arising from adverse events whilst looking after commercial needs. This creates an orderly transition to a new normal based on balancing financial obligations and environmental and social impact.
Clauses
Climate Risk Sharing
[Drafting note: 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.]
1. Climate Risk Co-operation
1.1 The parties agree and acknowledge that 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.
1.2 If a party is prevented from performing its obligations under this Agreement due to a Climate Change Event or Pandemic, the party shall as soon as reasonably practicable after the start of the Period of Disruption [or earlier date], notify the other party and provide details of:
(a) Its understanding of the existence, location and nature of the Climate Change Event or Pandemic; and
(b) how the Climate Change Event or Pandemic has prevented and will continue to prevent it from performing its obligations under the Agreement.
1.3 If a party gives notice under clause 1.2, the parties will work together, in good faith, [using reasonable efforts] to [promptly]:
(a) prevent the occurrence, or minimise the impacts, of any related ACO or 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 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 During the Period of Disruption, the parties will prepare weekly 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) and share these with the other party [no later than the last business day of the applicable week].
2.2 If a party’s Disruption Liquidity Ratio is less than [●], the parties’ finance directors shall discuss in good faith an amendment to the payment terms under this Agreement by a reasonable additional period (up to a maximum of [●] days) to assist each party to maintain an Operating Cash Flow sufficient to meet its Current Liabilities and therefore avoid any ASO that could be caused by cash flow problems.
2.3 If a party does not provide its Disruption Liquidity Ratio in accordance with clause 2.1, that party is deemed to have a Disruption Liquidity Ratio above the figure stated in clause 2.2.
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/ Services] might be wasted where the [Products/ 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 solutions to mitigate the ACO and either party may by written notice to the other party request that it:
(a) stops providing the affected [Products/ Services] during the Period of Disruption without terminating this Agreement;
(b) offers to sell the affected [Products/ Services] to other customers and provide a corresponding payment discount to the notifying party; or
(c) 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
(d) 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 consider the request in that notice within [●] days and shall only reject the request to the extent that:
(a) it will have a materially disproportionate effect on that party compared to comparable businesses in its sector; or
(b) it will or may have [wider environmental impact], in which case the parties shall work together to consider whether these can be avoided or mitigated; or
(c) other steps can be taken to avoid the ACO from wasted Embedded Carbon,
and upon such rejection the parties shall collaborate to consider and implement alternative solutions to mitigate the ACO.
3.4 To the extent that the parties have not been able to otherwise mitigate an ACO in accordance with clauses 1.3, 3.2 or 3.3 they shall:
(a) consider and implement other options to mitigate the effects of the ACO; and
(b) Offset, in [equal/ agreed] contributions.
4. Impact and risk analysis
4.1 In the event of [a Climate Change Event or Pandemic/ a notification under clause 1.2], including where the Period of Disruption is or is likely to be ongoing, the parties shall consider the ongoing impact of performance of the Agreement on the environment and climate and shall plan to mitigate such impact as relevant.
4.2 In the event of [a Climate Change Event or Pandemic/ 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.
Definitions
Additional Definitions
Adverse Climate Outcome (ACO) means where non-performance of an affected obligation, or the enforcement of this clause [FORCE MAJEURE] in relation to that non-performance, directly leads to:
a) reduced air quality;
b) an increase in GHG Emissions;
c) dumping of stock that was created using Natural Capital;
d) wasted Embedded Carbon; or
e) [INSERT OTHER ADVERSE EFFECTS].
Adverse Social Outcome (ASO) means where non-performance of an affected obligation, or the enforcement of this clause [FORCE MAJEURE] in relation to that non-performance, directly leads to:
a) the insolvency of a party;
b) redundancies over and above [●];
c) an increase in poverty, deprivation or hunger; or
d) [INSERT OTHER ADVERSE EFFECTS].
Carbon Dioxide Equivalent means the standard metric measure used by [the UN’s Intergovernmental Panel on Climate Change (IPCC)] to compare the emissions from various Greenhouse Gases (GHGs) on the basis of their global warming potential over a specified timescale.
Climate Change Event means an event, series of events or circumstance arising from the physical impacts of climate change that is either Pan-terra or Epi-terra in scope and prevents a party from performing its obligations under this Agreement [including an obligation to pay money], and includes but is not limited to:
a) unavailability of water, clean air or other natural capital required by a party to manufacture or supply the [Products/ Services];
b) damage to a party’s premises, including flooding due to sea level rise or an increased intensity of rain and storms;
c) disruption of logistics and transport systems relied on for the supply and distribution of key inputs or outputs;
d) unsafe working conditions due to heat stress, extreme weather or increased disease;
e) damage or disruption to food supply chains, housing or transport affecting the availability of food, shelter or transport for workers;
f) unavailability of insurance;
g) unavailability of workers for other reasons caused by the event; and
h) [INSERT OTHER ADVERSE EVENTS]
Current Liabilities means a party’s financial obligations falling due for payment during the Period of Disruption.
Disruption Liquidity Ratio means a liquidity ratio measuring a party’s ability to maintain its operations (where possible) and pay its staff for the Period of Disruption, calculated as Operating Cash Flow divided by Current Liabilities.
Embedded Carbon means the GHG Emissions emitted during the lifecycle production, delivery and disposal of the [Products/ Services].
Epi-terra means a Climate Change Impact that affects a large number of people within a community, population, or region.
Force Majeure means any circumstance not within a party’s reasonable control including, without limitation:
a) terrorist attack, civil war, civil commotion or riots, war, threat of or preparation for war, armed conflict, imposition of sanctions, embargo, or breaking off of diplomatic relations;
b) nuclear, chemical or biological contamination or sonic boom;
c) collapse of buildings, fire, explosion or accident;
d) any labour or trade dispute, strikes, industrial action or lockouts; or
e) interruption or failure of utility service,
but excluding a Pandemic or Climate Change Event.
Greenhouse Gases (GHGs) means the natural and anthropogenic gases which trap thermal radiation in the earth’s atmosphere and are specified in Annex A to the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) [or otherwise specified by the UNFCCC at the date of this Agreement], as may be amended from time to time[, which include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3),] each expressed as a total in units of Carbon Dioxide Equivalent.
Greenhouse Gas (GHG) Emissions means the [parties’] emissions of GHGs from all sources [related to this Agreement], categorised as scope 1, 2 and 3 emissions by the The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015 as updated from time to time [Drafting note: Scope 1, 2 and 3 emissions are defined on page 27 of the GHG Protocol].
Natural Capital means that part of nature which directly or indirectly underpins value to people, including ecosystems, species, freshwater, soils, minerals, the air and oceans, as well as natural processes and functions. [Drafting note: This definition is taken from a UK Government publication on Natural Capital Terminology.]
Offset means the purchase of carbon credits from a project:
(i) that has been verified in accordance with [insert name of voluntary standard] or under the United Nations Framework Convention on Climate Change (UNFCCC) clean development mechanism (CDM) [or [successor/ equivalent] UNFCCC mechanism];
(ii) where the emissions of GHG avoided, reduced or removed by the project are additional;
(iii) that, in relation to GHG removals, employs long-lived storage methods that have a low risk of reversal over millennia;
(iv) that prioritises the removal of GHG from the atmosphere rather than avoids or reduces third party emissions of GHG; and
(v) that takes account of a just transition and addresses wider social and ecological goals.
Operating Cash Flow means the net amount of cash or cash-equivalents being transferred into and out of a party’s business during the Period of Disruption.
Pandemic means an incidence of an infectious disease that spreads through multiple countries and is declared a ‘pandemic’ by the World Health Organisation.
Pan-terra means a Climate Change Impact that affects multiple countries or continents.
Period of Disruption means the period during which one or both parties is prevented from performing obligations under the Agreement due to a Climate Change Event or Pandemic.
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