Climate-Linked Contractual Discretions

Clauses

Section 1: Sample discretionary wording referring to climate considerations in a new contract

1.1 Discretionary wording for use in payment/ withholding of an additional amount clause

Additional Amount means [insert type of payment relevant to the main agreement] which is paid in accordance with clause 1.1.

[Counterparty] must report to [party exercising the discretion] on [counterparty’s] achievement of the [Climate Objectives] every [insert time period]. In each report, [counterparty] must provide [list the relevant data and supporting evidence e.g. a report on greenhouse gas emissions should comply with the standards in chapter 9 of the GHG Protocol].

Following receipt of the report(s), [party exercising the discretion] may withhold payment of the Additional Amount if in their [reasonable] opinion the [counterparty] [has] not [met/ followed] the [Climate Objectives]. [Drafting note: adapted from the example of discretionary wording from the contract discussed in Braganza v BP Shipping Limited and another [2015] UKSC 17.]

If [counterparty] fails to provide the report(s) by [specify time period], [party exercising the discretion] may* in their discretion withhold payment of the Additional Amount.

* [Drafting note: the authors of this clause considered using the word ‘shall’ here, instead of ‘may’. This was so that the consequence of failing to provide a report is clear, creating a stronger incentive to at least provide a report (even if climate-related data is not aligned with the Climate Objective). Using ‘shall’, however, risks turning the clause into a penalty clause rather than a discretionary clause.]

1.2 Discretionary wording in relation to deductions

[Counterparty] must report to [party exercising the discretion] on its achievement of the [Climate Objectives] every [insert time period]. In each report, [counterparty] must provide [list the relevant data and supporting evidence e.g. a report on greenhouse gas emissions should comply with the standards in chapter 9 of the GHG Protocol].

Following receipt of the report(s), if [party exercising the discretion] forms the [reasonable] opinion that the [counterparty] has failed to meet the Climate Objectives, [party exercising the discretion] may in their discretion deduct* a fee up to [[●]% of [insert relevant baseline]]/ [£[●]] as they consider appropriate [if appropriate insert details of any costs being covered by the deduction].**

If that [counterparty] fails to provide the report(s) by [specify time period], [insert party exercising the discretion] may in their discretion deduct a fee up to [[●]% of [insert relevant baseline]]/ [£[●]] as they consider appropriate [if appropriate insert details of any costs being covered by the deduction].**

* [Drafting note: this provision allows the party exercising the discretion to deduct from amounts due if the counterparty fails to achieve the Climate Objectives. Another option is to write this provision as a retention clause, instead of a deduction clause – in other words, where money is retained as security for performance and then released if the Climate Objectives are met.]

** [Drafting note: the party exercising the discretion may deduct sums to cover costs. If that is the case it may be appropriate to give details of the offsetting which governs the exercise of the discretion to determine the amount deducted. See, for example: Owen’s Clause - clause 8.2(c)(ii) (planting of native trees to compensate for not meeting climate targets) or clause 8.2(c)(iii) (cost of carbon credits to offset emissions due to failure to meet targets); or Climate Remediation Fee or Emissions Payment in Jessica’s Clause. Users of this clause must take care to not create a penalty which may not be enforceable.]

1.3 Discretionary wording in a bonus clause/ schedule 

[Drafting note: insert into full bonus clause or schedule. For example, Bonus schedule (personal performance targets) from Practical Law Employment, Bonus clauses (discretionary) from Practical Law Employment or Clauses - bonus from LexisPSL.]

[Counterparty] must report to [party exercising the discretion] on its achievement of the [Climate Objectives] every [insert time period]. In each report, [counterparty] must provide [list the relevant data and supporting evidence e.g. a report on greenhouse gas emissions should comply with the standards in chapter 9 of the GHG Protocol].  

Following receipt of the report(s), [party exercising the discretion] may in its discretion pay [counterparty] a bonus of such amount, at such intervals as it may in is absolute discretion determine [based on/ calculated by reference to/ taking into account] [insert relevant targets] and the Climate Objectives, from time to time.

If [counterparty] fails to provide the report(s) by [specify time period], [party exercising the discretion] may in their discretion refuse to pay a bonus of any amount. 

1.4 Discretionary wording in a clawback clause 

[Counterparty] must report to [party exercising the discretion] on its achievement of the [Climate Objectives] every [insert time period]. In each report, [counterparty] must provide [list the relevant data and supporting evidence e.g. a report on greenhouse gas emissions should comply with the standards in chapter 9 of the GHG Protocol].

Following receipt of the report(s), [insert component of payment capable of being clawed back] or a part thereof as determined by [party exercising discretion] in their discretion, shall be capable of being clawed back if in their [reasonable] opinion the [Climate Objectives] have not been [met/ followed] [if appropriate insert details of any costs being covered by the retention].*

If [counterparty] fails to provide the report(s) by [specify time period], [insert component of payment capable of being clawed back] or a part thereof as determined by [party exercising discretion] in their discretion, shall be capable of being clawed back.

[Party exercising discretion] must notify [counterparty] of any decision to clawback such sums by [refer to notice provisions]. Once clawed back, the sum subject to clawback may be set off against future payments due to [party subject to decision].

* [Drafting note: the party exercising the discretion may deduct sums to cover costs. If that is the case it may be appropriate to give details of the offsetting which governs the exercise of the discretion to determine the amount deducted. See, for example: Owen’s Clause - clause 8.2(c)(ii) (planting of native trees to compensate for not meeting climate targets) or clause 8.2(c)(iii) (cost of carbon credits to offset emissions due to failure to meet targets); or Climate Remediation Fee or Emissions Payment in Jessica’s Clause. Users of this clause must take care to not create a penalty which may not be enforceable.]

Section 2: Sample wording to clarify what climate objectives are relevant considerations for the exercise of an existing contractual discretion

[Drafting note: this sample wording may be appropriate where an existing contractual discretion allows for a party to unilaterally notify the definition and development of a contractual discretion to the other party without requiring their agreement. In such cases, parties should ensure that the contract does not require variation. If parties decide that the wording of any contract and existing discretion does not permit subsequent reference to climate objectives without varying the contract, the following template notice may not be relevant. The following templates may apply if a notice is sufficient to bind the counterparty.]

2.1 Template notice to counterparty (non-binding)

Additional clauses to insert into the template notice:

2.1.1 [Party] [has signed up to the Race to Zero and] intends to:

(a) achieve its [net zero targets/ Science Based Targets] [Insert details of targets and sustainability objectives]; and 

(b) align with the UNFCCC Paris Agreement objectives, in particular pursuing efforts to limit global temperature increase to 1.5 degrees Celsius above pre-industrial levels and achieving net zero or net negative emissions by 2050 or sooner, 

(c) in a manner that promotes a just transition to a low carbon economy.

2.1.2 Clause [●] of the Agreement includes a discretion in the exercise of [describe contractual discretion] (the Contractual Discretion). [Drafting note: refer to existing contractual discretion in the main agreement.]

2.1.3 We give you notice that from the date of this letter the Contractual Discretion shall be exercised also by reference to your success in achieving the following objectives (the Climate Objectives):

(a) [Insert relevant objectives, see Section 3 below].

[Drafting note: check that the contract has a suitable reporting mechanism so that the party can assess the level of success in achieving the objectives.]

2.2 Clause to insert into a template side letter to vary contract

[Drafting note: ensure that the complete side letter satisfies the relevant requirements as to form and consideration to be binding (e.g. offer and acceptance, intention to create legal relations, certainty and consideration as well as compliance with any specific requirements set out in the contract). See Contracts: side letters by Practical Law Commercial; or Contract variation by Lexis PSL.]

Additional clauses to insert into the template variation, such as Practical Law: Letter agreement to vary a contract or LexisPSL: Letter of Variation:

2.2.1 Clause [●] of the Agreement includes a discretion in the exercise of [describe contractual discretion] (the Contractual Discretion).

2.2.2 [Party] [has signed up to the Race to Zero and] intends to:

(a) achieve its [net zero targets/ Science Based Targets] [insert details of targets and sustainability objectives]; and

(b) align with the UNFCCC Paris Agreement objectives, in particular pursuing efforts to limit global temperature increase to 1.5 degrees Celsius above pre-industrial levels and achieving net zero or net negative emissions by 2050 or sooner, 

(c) in a manner that promotes a just transition to a low carbon economy.

This [letter of amendment] aligns the Agreement with these intentions.

2.2.3 With effect from the Variation Date [Drafting note: this wording presumes that Variation Date will be defined elsewhere in the main agreement. If this is not the case, please ensure Variation Date is defined] the parties agree the following amendments to the Agreement:

(a) This definition is inserted to the Agreement: 

Climate Objectives means [insert relevant objectives, see Section 3 below].

(b) Clause [●] is [amended to read as follows/ replaced with the following clause [●]]: 

[Insert clause and amend it so that the discretion refers to the Climate Objectives, for example, ‘The Climate Objectives [will/ may] be taken into account when exercising this discretion’].

[Drafting note: check that the contract has a suitable reporting mechanism so that the party can assess the level of success in achieving the objectives.]

Section 3: Climate objectives and targets

[Drafting note: select from the following suggested targets to align with parties’ specific climate goals and the appropriate level of net zero ambition. Order the list as appropriate. For guidance, please refer to TCLP’s Net Zero Dashboard and Drafting Checklist tools, available in TCLP’s Net Zero Implementation Toolkit.]

3.1 Climate targets relevant to an organisation

[Drafting note: use sustainability objectives, as required, from Sebastian’s Clause or Scarlett's Performance Conditions.]

3.2 Climate targets relevant to an individual officer or employee

[Drafting note: adapt from the organisational targets, as referenced above, those that are relevant to the officer or employee’s role (e.g. specific identified emissions reductions or sustainability goals), and/or use objectives taken from Elliot’s Handbook.]

Section 4: Variation of contracts that have no discretion clauses  

[Drafting note: if the contract does not contain a discretion clause and parties wish to insert such a clause, the parties have to vary the contract. In such cases, parties should ensure that the variation satisfies the relevant contractual requirements as to form and consideration to be binding (e.g. offer and acceptance and consideration as well as compliance with any specific requirements set out in the contract) [Source: Contract variation by Lexis PSL]. The parties may use the sample discretionary wording in Section 1 above for the purposes of writing the variation to the contract.]

4.1 [Party] [has signed up to the Race to Zero and] intends to:

4.1.1 achieve its [net zero targets/ Science Based Targets] [Insert details of targets and sustainability objectives]; and 

4.1.2 align with the UNFCCC Paris Agreement objectives, in particular pursuing efforts to limit global temperature increase to 1.5 degrees Celsius above pre-industrial levels and achieving net zero or net negative emissions by 2050 or sooner, 

4.1.3 in a manner that promotes a just transition to a low carbon economy.

4.2 The parties agree that the Contract should be varied to insert the following clause: [insert clause from Section 1 above].