--- title: Climate-Linked Contractual Discretions date: 2024-03-27T14:16:11Z modified: 2025-07-23T11:15:43Z permalink: "https://chancerylaneproject.org/clauses/climate-linked-contractual-discretions/" type: clause status: publish excerpt: "" wpid: 2053 jurisdiction: - England & Wales maintenance-status: - Not maintained practice-area: - Commercial clause_child_name: Lewin and Darwin’s Clause clause_summary: "

Climate-linked contractual discretions creating scope for parties to encourage good environmental practice.

" clause_last_updated_date: 2023-01-16 related_clauses: false --- ## Child’s name Lewin and Darwin’s Clause ## Summary Climate-linked contractual discretions creating scope for parties to encourage good environmental practice. ## What this clause does Linking contractual decision-making and the exercise of powers to the other party’s performance against climate objectives may incentivise positive environmental business practices, thereby reducing emissions and speeding up the transition to net zero. ## Clause Content **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_](https://www.supremecourt.uk/cases/docs/uksc-2013-0099-judgment.pdf).\] 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 \[_if appropriate insert details of any costs being covered by the deduction_\].\*\* \* \[_Drafting note: this provision allows the party exercising the discretion to deduct from amounts due if the counterparty fails to achieve the Climate Objectives. Another option is to write this provision as a retention clause, instead of a deduction clause – in other words, where money is retained as security for performance and then released if the Climate Objectives are met._\] \*\* \[_Drafting note: the party exercising the discretion may deduct sums to cover costs. If that is the case it may be appropriate to give details of the offsetting which governs the exercise of the discretion to determine the amount deducted. See, for example:_ [_Owen’s Clause_](https://chancerylaneproject.org/climate-clauses/net-zero-target-supply-chain-cascade/) _– clause 8.2(c)(ii) (planting of native trees to compensate for not meeting climate targets) or clause 8.2(c)(iii) (cost of carbon credits to offset emissions due to failure to meet targets); or Climate Remediation Fee or Emissions Payment in_ [_Jessica’s Clause_](https://chancerylaneproject.org/climate-clauses/carbon-performance-clauses/)_. Users of this clause must take care to not create a penalty which may not be enforceable._\] **1.3 Discretionary wording in a bonus clause/ schedule** \[_Drafting note: insert into full bonus clause or schedule. For example,_ [_Bonus schedule (personal performance targets)_](https://uk.practicallaw.thomsonreuters.com/2-204-2002?originationContext=document&transitionType=DocumentItem&contextData=(sc.Default)&ppcid=1a526fddae494b069afb98b277cd5e49&comp=pluk&navId=43D6327242641900C09BA7E716F4A4E0&view=hidealldraftingnotes) _from Practical Law Employment,_ [_Bonus clauses (discretionary)_](https://uk.practicallaw.thomsonreuters.com/2-200-2633?originationContext=document&transitionType=DocumentItem&contextData=(sc.Default)&ppcid=ad5ccc1028204033a698c0a5806c6ff0&comp=pluk&navId=6B3C6A2E0630D2CD123325E442635C91&view=hidealldraftingnotes) _from Practical Law Employment or_ [_Clauses – bonus_](https://www.lexisnexis.com/uk/lexispsl/employment/docfromresult/D-WA-A-EDC-EDC-MsSWYWC-UUW-UZEYAAUUW-U-U-U-U-U-U-AZCCVZZEWZ-AZCBUVDDWZ-VAVUDDDDZ-U-U/1/391573?lni=55T3-K9D1-F188-K0PC-00000-00) _from LexisPSL._\] \[_Counterparty_\] 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 \[_party subject to decision_\]. \* \[_Drafting note: the party exercising the discretion may deduct sums to cover costs. If that is the case it may be appropriate to give details of the offsetting which governs the exercise of the discretion to determine the amount deducted. See, for example:_ [_Owen’s Clause_](https://chancerylaneproject.org/climate-clauses/net-zero-target-supply-chain-cascade/) _– clause 8.2(c)(ii) (planting of native trees to compensate for not meeting climate targets) or clause 8.2(c)(iii) (cost of carbon credits to offset emissions due to failure to meet targets); or Climate Remediation Fee or Emissions Payment in_ [_Jessica’s Clause_](https://chancerylaneproject.org/climate-clauses/carbon-performance-clauses/)_. Users of this clause must take care to not create a penalty which may not be enforceable._\] --- **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** \[_Drafting note: ensure that the complete side letter satisfies the relevant requirements as to form and consideration to be binding (e.g. offer and acceptance, intention to create legal relations, certainty and consideration_ _as well as compliance with any specific requirements set out in the contract). See_ [_Contracts: side letters_](https://uk.practicallaw.thomsonreuters.com/w-006-8876?contextData=(sc.Default)&transitionType=Default&firstPage=true) _by Practical Law Commercial; or_ [_Contract variation_](https://www.lexisnexis.com/uk/lexispsl/commercial/synopsis/130913:130917/Contracts/Varying-a-contract/BCT) _by Lexis PSL._\] **Additional clauses** to insert into the template variation, such as [Practical Law: Letter agreement to vary a contract](https://uk.practicallaw.thomsonreuters.com/4-525-6809?contextData=(sc.Default)&transitionType=Default&firstPage=true) or [LexisPSL: Letter of Variation](https://www.lexisnexis.com/uk/lexispsl/commercial/document/391447/59KW-MVC1-F189-4025-00000-00/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** \[_Drafting note: select from the following suggested targets to align with parties’ specific climate goals and the appropriate level of net zero ambition. Order the list as appropriate. For guidance, please refer to TCLP’s Net Zero Dashboard and Drafting Checklist tools, available in TCLP’s_ [_Net Zero Implementation Toolkit_](https://chancerylaneproject.org/toolkit/net-zero-implementation-tools/)_._\] **3.1** **Climate targets relevant to an organisation** \[_Drafting note: use sustainability objectives, as required, from_ [_Sebastian’s Clause_](https://chancerylaneproject.org/climate-clauses/entire-business-net-zero-objectives/) _or_ [_Scarlett's Performance Conditions_](https://chancerylaneproject.org/climate-clauses/esg-based-performance-conditions-for-employee-incentive-awards/).\] **3.2** **Climate targets relevant to an individual officer or employee** \[_Drafting note: adapt from the organisational targets, as referenced above, those that are relevant to the officer or employee’s role (e.g. specific identified emissions reductions or sustainability goals), and/or use objectives taken from_ [_Elliot’s Handbook_](https://chancerylaneproject.org/climate-clauses/net-zero-employment-handbook/)_._\] --- **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) \[Source:_ [_Contract variation_](https://www.lexisnexis.com/uk/lexispsl/commercial/synopsis/130913:130917/Contracts/Varying-a-contract/BCT) _by Lexis PSL\]._ _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: \[_insert clause from Section 1 above_\]. ## Topics **Jurisdictions:** [England & Wales](https://chancerylaneproject.org/wp-content/uploads/wp-mfa-exports/taxonomy/jurisdiction/england-wales.md) **Maintenance status:** [Not maintained](https://chancerylaneproject.org/wp-content/uploads/wp-mfa-exports/taxonomy/maintenance-status/not-maintained.md) **Practice Areas:** [Commercial](https://chancerylaneproject.org/wp-content/uploads/wp-mfa-exports/taxonomy/practice-area/commercial.md)