Sustainability Clauses in Supply Chain Contracts
Using supply chain contracts to extend positive climate change measures adopted in one country to contracting parties in other countries that may have less of a legislative focus on climate.
What this clause does
This clause assists in achieving multinational corporate carbon reduction targets and addressing the imbalance in climate regulatory activity between regions, with an option to extend obligations to subcontractors. A failure to comply with the sustainability policy or decarbonisation plan that is not remedied triggers the right to suspend or terminate.
Clauses
[Drafting note: Capitalised terms relate to either a defined term in this clause or a defined term in the main agreement that this clause is designed to be inserted into.]
1. Environmental Representations
1.1 The Parties acknowledge their common intention in the fulfilment of their obligations under this Agreement to minimise their negative impact on climate change and biodiversity, and to reduce their GHG Emissions [to help [country] achieve its GHG reduction targets/ Net Zero Target].
1.2 The Parties state that they [and their subcontractors] are in substantial compliance with the Environmental Legislation, the Sustainability Policy and the applicable Environmental Standards and Guidelines, with the exception of any action specifically noted in the Environmental Action Plan as still pending, with respect to achieving substantial compliance. Each Party further represents and warrants that [at the date of this Agreement] in the last six (6) years, it has not been fined or convicted of any offence involving the environment, nor has it been the subject of any investigation, inquiry or enforcement proceedings regarding any offence or alleged offence of or in connection with damage to the environment.
1.3 Each Party represents and warrants that the Environmental Representations are true as at the date of this Agreement, and on the date of the delivery of the Environmental Monitoring Report.
2. Environmental Covenants
2.1. Each Party shall comply[, and shall require their subcontractors to comply,] with the following obligations:
2.1.1 Each Party shall conduct its business with due diligence, in an efficient and environmentally responsible manner, adhering fully to the Environmental Action Plan, the Environmental Legislation, the Environmental Standards and Guidelines and the Sustainability Policy and ensuring that all its operations are carried out in accordance therewith.
2.1.2 Each Party shall, within 45 days from the close of each Fiscal Year, provide the other Party with an Environmental Monitoring Report.
2.1.3 Each Party shall maintain in force all Environmental Licences and shall comply with and observe all conditions and restrictions contained in or imposed by any such Environmental Licences.
2.1.4 Each Party shall use best endeavours to ensure that its Facilities, Plant, and Equipment are designed, built, operated and/or maintained in accordance with the requirements set forth in the Environmental Action Plan, the Environmental Legislation, the Environmental Standards and Guidelines and the Sustainability Policy.
2.1.5 Each Party shall, at the request of the other Party, allow the other Party or the person it designates to visit and inspect its Facilities, Plant and Equipment.
2.1.6 Each Party shall, at the request of the other Party (acting reasonably and made not more than once a year), provide the other Party with information about:
(a) its activities and compliance with the requirements pertaining to the Environmental Issues;
(b) its compliance (or non-compliance) with the Environmental Licences and the implementation of the Environmental Action Plan.
The other Party shall have no right to confidential information, any information that attaches privilege of any kind, commercially sensitive information and any information that is not directly relevant to the Party’s compliance with its obligations under Clauses 1 and 2.
2.2 If a Party [or a third party competent authority responsible for enforcing Environmental Legislation] detects any non-compliance on its part with the Environmental Action Plan, the Environmental Legislation, the Environmental Standards and Guidelines, the Sustainability Policy and/or any Serious Environmental Incident, that Party shall:
2.2.1 subject to Clause 2.2.2, notify the other Party within [five (5) Business Days] from the date of discovery of such non-compliance, or within [48 hours] in the event of a Serious Environmental Incident, providing a reasonably detailed written description of such non-compliance or Serious Environmental Incident, including an account of the expected environmental damage resulting therefrom;
2.2.2 have the option to remedy any non-compliance that does not amount to a Serious Environmental Incident within five (5) Business Days from the date the non-compliance was detected, if that Party reasonably believes it is possible to do so. That Party shall then have a further five (5) Business Days before it is required to notify the other Party of non-compliance in accordance with Clause 2.2.1;
2.2.3 engage, at its own expense, the services of an appropriately qualified environmental, sustainability consultant or other qualified professional satisfactory to the other Party (acting reasonably), to investigate the non-compliance or Serious Environmental Incident and prepare an Environmental Damage Report and a draft Corrective Action Plan for agreement between the Parties;
2.2.4 agree within [15 Business Days) the Corrective Action Plan with the other Party; and
2.2.5 diligently take, at its own expense, all the reasonable steps necessary to implement the pertinent Corrective Action Plan in a form and substance satisfactory to the other Party.
2.3 If a Party commits a material breach of Clause 2.1 or fails to take [any of/ all] the steps necessary to implement the Corrective Action Plan referred to at Clause 2.2.4, the other Party may suspend this Agreement until the breach is remedied or for a specified period but in any event for no more than [●] days, by giving written notice to the Party in breach.
2.4. The Customer or Supplier may terminate this Agreement with immediate effect by giving written notice to the other Party who commits a material breach of this Clause 2 or fails to comply with the recommendations and measures specified in the Corrective Action Plan or required under Clause 2.3. The Customer or Supplier may also claim damages for any additional costs that it incurs as a result of the breach. The Party in breach of this Clause 2 also hereby indemnifies the other Party for any loss resulting from such breach, including without limitation any reasonably incurred public relations costs or legal fees.
3. Amendments to the Sustainability Policy
The Parties agree to engage in discussions regarding proposed amendments to the Sustainability Policy within a reasonable timeframe but no later than 30 days after notice is provided by one Party to the other. The Parties agree to amend the Sustainability Policy accordingly where the Supplier’s own policies and practices exceed those set out in the Sustainability Policy.
Definitions
Corrective Action Plan means a corrective or mitigation plan agreed between the Parties (including a cost breakdown, allocation of responsibilities and an implementation schedule) which, once initiated, will enable the Supplier to:
(a) correct and remediate the damage and adverse effects resulting from any failure to comply with the Environmental Action Plan, the Sustainability Policy, the Environmental Standards and Guidelines or the Environmental Legislation; or
(b) correct or mitigate the adverse effects of any Serious Environmental Incident.
Environmental Action Plan means the plan prepared by the Parties and appended to this Agreement, which shall indicate the necessary actions (including the allocation of responsibilities and implementation schedule) to ensure that the design, construction, installation, operation, maintenance and/ or decommissioning (as appropriate) of the Parties’ [and their subcontractors’] Facilities, Plant and Equipment shall meet, within the timescales set out therein, and maintain substantial compliance with the Environmental Standards and Guidelines, the Environmental Legislation and the Sustainability Policy.
Environmental Damage Report means a written report describing:
(a) the relevant Party’s non-compliance with the Environmental Action Plan, Environmental Legislation, Environmental Standards and Guidelines, and/ or the Sustainability Policy; and/ or
(b) any Serious Environmental Incident.
The report shall include a reasonable description of the event, detailing its extent, magnitude and impact (or, where such impact is unknown, the potential impact).
Environmental Issues means issues related to:
(a) emissions, spills, or discharges to the air, water, ground, or subsoil;
(b) management of waste and Hazardous Substances;
(c) other activities or circumstances that produce Greenhouse Gases;
(d) preservation or management of habitats and ecosystems, as well as the protection of living organisms present therein; and
(e) any other issue that may have a significant or substantial effect on the environment, biodiversity, animal habitats or climate change in general.
Environmental Legislation means all statutes, laws, regulations, decrees, resolutions, codes, orders, plans and judicial or administrative decisions or interpretations issued at the international, national, state, municipal or sector level, that govern or make reference to Environmental Issues that are applicable within any jurisdiction where the Parties carry out their operations, whether or not compliance is mandatory.
Environmental Licences means all licences, approvals and permits necessary for each Party’s business and operations including, but not limited to, those issued by any governmental, local or planning authority where required by any Environmental Legislation.
Environmental Monitoring Report means the true, accurate and complete report prepared by an appropriately qualified environmental sustainability consultant appointed by each Party [after consultation with the other Party]. The report reports on the relevant Party’s compliance with the Environmental Action Plan, the Environmental Legislation, the Environmental Standards and Guidelines and the Sustainability Policy, confirms compliance therewith or details the non-compliance thereof, together with the remedial action taken to ensure compliance with the Environmental Action Plan, the Environmental Legislation, the Environmental Standards and Guidelines and the Sustainability Policy.
Environmental Representations means the representations set out in Clause 1.
Environmental Standards and Guidelines means such guidelines and performance standards that contain best environmental practices to be implemented by the Parties in the design, construction, installation, operation, maintenance and/ or decommission (as appropriate) of all their Facilities, Plant and Equipment, as referred to in the Sustainability Policy, and other guiding regulations and documents listed in the Environmental Action Plan.
Facilities, Plant and Equipment means the respective facilities, plant and equipment used by the Parties [and their subcontractors] for the purpose of carrying out their obligations under this Agreement.
Fiscal Year means a one-year period from [1 April] and ending [31 March] for the purposes of tax and accounting.
Greenhouse Gases (GHGs) means the gases that trap thermal radiation in the earth’s atmosphere. They are specified by the United Nations Framework Convention on Climate Change (UNFCCC) in Annex A to the Kyoto Protocol and may be updated periodically. [See also TCLP Glossary: Greenhouse Gases (GHGs).]
Greenhouse Gas (GHG) Emissions means emissions of GHGs over a specified area and period of time, each expressed as a total in units of carbon dioxide equivalent (CO2e) [and calculated in accordance with The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015 (as amended periodically) or such other equivalent and generally recognised greenhouse gas emission calculation methodology].
Hazardous Substances means any material, substance or organism which, alone or in combination with others, is capable of causing harm to the natural and man-made environment including all or any of the following media: air (including air within buildings and other natural or man-made structures above or below the ground), water, land and any ecological systems and living organisms (including man) supported by those media.
Net Zero Target means a target to reduce and remove GHG Emissions, including by offsetting residual emissions, to achieve a balance between sources and sinks of GHGs by [2050/ insert earlier date].
Serious Environmental Incident means a material event of emission, spillage or discharge of Hazardous Substances; explosions, fire; environmental claims, complaints, or lawsuits (including pre-action correspondence) that are not frivolous or vexatious, and which the relevant Party, acting reasonably, believes to have a reasonable prospect of success; and/ or complaints from or investigations by authorities responsible for the enforcement of Environmental Legislation.
Sustainability Policy means the Customer’s Sustainability Policy attached at Schedule [●], as amended periodically and in accordance with Clause 3.
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