Model clause

Climate Risk Sharing Provisions

Iris' Clause

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.

Skip to clause

Why use this?

Contracting parties will not want to take the risk of known and foreseeable events such as global pandemics and climate change.

This clause has been drafted for a supply contract. However, the principles of “Climate Risk Sharing” can be applied to a variety of contractual agreements.

In effect this creates an orderly transition to a new normal for contractual risk assessment based on balancing financial obligations and the environmental and social impact.

How it promotes a net zero future

The proposed clauses will ensure that the parties take a fair share of risk. This should:

- make the supply chain more resilient as it enables both parties to stay in business and pay staff if impacted;

- make transactions work in the new context;

- give certainty to what would happen if climate change impacts affect a counterparty; and

- ensure that if parties are affected by Force Majeure events, they work together to minimise the impact on the climate and the environment.

Disclaimer - please read

The clauses on this website (and published in our Climate Contract Playbook) have been prepared in good faith on a pro bono basis and are free to download and use. The clauses have been drafted and edited by a variety of lawyers and, as such, the approaches to drafting may not conform to any particular drafting norms. We acknowledge this as a consequence of the collaborative drafting process.

The clauses on this website (and published in our Climate Contract Playbook) are provided on an ‘as is’ basis and without any representation or warranty as to accuracy or that the clauses will achieve the relevant climate goal or any other outcome.

This website (and the Climate Contract Playbook) does not comprise, constitute or provide personal, specific or individual recommendations or advice of any kind, and does not contain legal or financial advice. The clauses are precedents for legal professionals to use, amend and negotiate using their professional skill and judgement and at their own risk.

While care has been taken in the drafting of these clauses, neither The Chancery Lane Project nor any of its contributors owe a duty of care to any party in relation to their preparation and do not accept any liability for any errors or omissions, nor for any loss incurred by any person relying on or using these clauses or any other person. Users should use their own professional judgement in the application of these clauses to any particular circumstance or jurisdiction or seek independent legal advice.

At present, all the clauses are based on the laws of England and Wales. We encourage the conversion of these precedent clauses for use in other jurisdictions.

The clause

Additional Definitions 

Adverse Climate Outcome (ACO): 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 Greenhouse Gas 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): 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 [x];

c) an increase in poverty, deprivation or hunger; or

d) [INSERT OTHER ADVERSE EFFECTS].

Climate Change Event: 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: a party’s financial obligations falling due for payment during the Period of Disruption.

Embedded Carbon: the Greenhouse Gas Emissions emitted during the lifecycle production, delivery and disposal of the [Products/Services].

Force Majeure: 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 Gas Emissions: gases that contribute to or accelerate the greenhouse effect by absorbing infrared radiation, including but not limited to: carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydrofluorocarbons, perfluorocarbons and chlorofluorocarbons.

Disruption Liquidity Ratio: 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.

Operating Cash Flow: the net amount of cash or cash-equivalents being transferred into and out of a party’s business during the Period of Disruption.

Pandemic: an incidence of an infectious disease that spreads through multiple countries and is declared a ‘pandemic’ by the World Health Organisation.

Period of Disruption: the period during which one or both parties is prevented from performing obligations under the agreement due to a Climate Change Event or Pandemic.

Epi-terra: a Climate Change Impact that affects a large number of people within a community, population, or region.

Pan-terra: a Climate Change Impact that affects multiple countries or continents.

Climate Risk Sharing

  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 a reasonably detailed summary 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.

  1. 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 that [X], 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 [NUMBER] 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 to 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.

  1. 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, 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 [NUMBER] 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) other steps can be taken to avoid the ACO from wasted Embedded Carbon.

Join hundreds of lawyers fighting climate change

Help us and take part