TCLP+Climate+Contract+Playbook+Edition+3

Climate Contract Playbook Edition 3

September 2020

[www.chancerylaneproject.org]

Hogan Lovells

Climate Contract Playbook Edition 3

Contents Introduction The Journey Updated Legal Philanthropy

5 7 8 9

Disclaimer

Precedent Clauses

Commercial Contracts: General [Hanley’s Clause] Climate Change Aligned Heads of Terms [Kaia’s Clause] Climate Purposed NDATerms Commercial Contracts: Supply Agreements [Agatha’s Clause] Termination for Greener Supplier [Annie’s Clause] Carbon Termination (short form) [Teddy’s Clause] Environmental Threshold Obligations [Jessica’s Clause] Carbon Performance Clauses [Owen’s Clause] Net Zero Supply Chain Cascade [Zoë and Bea’s Clause] Green Supply Agreement Clauses

11 13

17 20 22 24 29 33 37 42 48 51 55 61 67 69 71 74 77 82 89 95 98

[Iris’ Clause] Climate Risk Sharing Provisions

[Alex’s Clause] Circular Economy product design obligation NEW

[Zain’s Clause] Carbon Change Rights NEW

[Alice’s Clause] Reduction of CO2 from Single Use Plastic NEW [Austen’s Clause] Sustainability Clauses in Supply Chain Contracts NEW [Maria’s Scorecard] Supply chain emissions scorecard NEW Corporate: General [Arlo’s Clause] Paris Compliant Company Objects [Chloe’s Clause] Environmental Business Charter [Darcy’s Minutes] Climate Change Aligned Board Minutes Corporate: Investment / M&A [Frank’s Clause] Green Investment Obligations [Bella’s Clause] Climate Equity Ratchet [Lauren’s Clause] Green Shareholders Agreement] [Lola & Harry’s DDQ] Climate and Net Zero Due Diligence

[Nozomi’s Clause] Net Zero Convertible Loan Note

[Zack’s Clause] SPA/Investment Agreement Disclosure of Climate Change Plans NEW

[Sienna’s Clause] Green Acquisition Obligations NEW

101

Corporate: Project Finance [Callum & Theo’s Clause] Climate Standard Transaction Terms NEW Finance & Capital Markets: Loans [Harrison’s Clauses] Green Loan Starter Pack [Casper’s Clause] Sustainability-Linked Loans NEW Finance & Capital Markets: Capital Markets [Dottie’s Clause] Climate Underwriting Sponsor Warranties

106

117 126

136 139

[Gordon’s Clause] Capital Markets ESG Due Diligence Questionnaire NEW Insurance [Connor’s Clause] Exclusions from insurance coverage for Climate Obligations NEW

146 [Archie’s Clause] Premium adjustment for D&O Climate-related financial disclosures NEW 149

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Contents continued

Planning [Rory’s Clause] Net Zero Land Promotion

154 163

[Evelyn & Ezra’s Clause] Securing Net Zero in development through planning NEW Real Estate [Marni’s Clause] Report on Title Climate Change Clauses [Emma’s Clause] Residential Green Lease [Toryn’s Clause] Green Assured Shorthold Tenancy] [Rosie’s Clause] Alteration/improvement provisions within leases NEW Construction [Mary’s Clause] Build Contract Energy Efficiency Clauses

170 172 177 180 184 187 191 194 197 201

[Luna’s Clause] Green Construction Modifications [Estelle’s Clause] Net Zero Construction Standards

[Edgar’s Clause] Climate Resilient landscape design contracts NEW [Tristan’s Clause] Construction Materials: Procurement NEW [Francis’ Clause] Climate Aligned Construction Waste Management NEW

Employment [Eric’s Clause] Climate Gardening Leave

205 207

[Elliot’s Handbook] Net Zero Employment Handbook

Energy & Transport [Sava’s Clause] Sustainable Connectivity in Rail Franchise Agreements NEW Litigation &Arbitration [Emilia’s Clause] Green litigation and arbitration protocols NEW

216

221 231 234 238 241 243 244

[Mia’s Clause] Low Carbon arbitration hearings clause NEW [Toby’s Clause] Carbon Efficient Dispute Resolution NEW Public Procurement [Phillipe’s Clause] Invitation to Tender Green Obligations

Contributing, Participating or Supporting Firms and Organisations

Index

Climate Contract Playbook Edition 3

Introduction Despite the continued uncertainty and restrictions imposed as a result of the COVID-19 pandemic, we are delighted to publish this, the 3rd Edition of the Climate Contract Playbook. For ‘we’, read every lawyer and other participant who gave minutes, hours, days, weeks or months of time and energy to collaborate, coordinate and innovate, expertly and relentlessly. ‘We’ are not an organisation, but a collaboration. ‘We’ are the sum of our participants. Embracing the shift to remote working, TCLP has created new ways of online collaboration, with our legal hackathons taking place completely virtually and building a Slack community to convene the legal profession and innovate on a daily basis. This pivot online has not just allowed our work to continue but also to accelerate, publishing the 3rd Edition only 6 months after the first. Since publication of the 1st Edition in February, there has been a surge of interest in our work. Our clauses are being incorporated into law firm precedents and commercial agreements across the world. We also have plans to translate the drafting to meet the conventions and legal requirements of other jurisdictions. However, the clock is ticking. Whilst we remain optimistic of making a difference, we must keep up the momentum and increase our impact. We are asking all lawyers to amplify our work and heed the International Bar Association’s call for lawyers to integrate climate considerations in their day-to-day legal practice. Climate change no longer lives in an ‘environmental box’ but is becoming a central element of commercial decision making. This will become even more pronounced as the global corporate community sign up to the UNFCC Race to Zero and build COP26 into their 2021 strategic plans. This is clearly an opportunity for impact and one we will work together to seize. As described in our Year [11] Impact Report 1 , we made great progress towards our shared goals of bringing together the legal profession to co-create and publish precedent clauses and model laws. This work continues with drafting for further publications already underway. However, we need your help to disseminate, promote and use the clauses to amplify their impact. The work we create must take on a life outside the pages of our publications, evolving and growing with each use, to achieve our shared goals in a way that is aligned to clients, climate and the business of law. In doing so we create new market norms. We cannot do this without you. Please get in touch with us and share your ideas and actions to ‘change the precedent, change the world’. The rest of 2020 is just as exciting as we look towards our annual ‘Big Hack’ taking place across multiple jurisdictions during November.

Thank you The year [10] Steering Group, The Chancery Lane Project

1 https://chancerylaneproject.org/s/TCLP-Year-11-Impact-Report-July-2020.pdf

Climate Contract Playbook Edition 3

The Journey Updated Our journey so far in numbers:

12 0 different organisations

> 450 participants > 6000 pro bono hours

7 model laws

46 climate change definitions 75 countries reached

50 new precedents

> 20,000 downloads

Changes since Edition 2 This edition of the Playbook is re-ordered to group clauses from all editions by subject matter to help users find clauses relevant to their practice area or sector more easily. There have been no substantive changes to the clauses published in the first two editions. We encourage feedback to improve them and will update drafting in subsequent versions. Glossary Our glossary of uniform definitions for drafting climate solutions has been updated with refined and additional content. This has been published as a second edition alongside this playbook. The glossary continues to add significant value to the Project by helping participants accelerate and harmonise their drafting activity.

Climate Contract Playbook Edition 3

Legal Philanthropy

Introducing: “Legal Philanthropy” – Beyond Pro Bono and Responsible Business? The Chancery Lane Project is unique in many ways: positive, solution focused and collaborative. Not to mention the genesis of a new legal doctrine of commercial contracts driving global environmental outcomes. But this uniqueness makes it difficult to describe the Project and what the participants generously contribute. Our problem is that we struggle to do justice to their efforts. The Project has always been termed ‘Pro Bono’ and certainly the drafting has all been undertaken for free. But there is no legal advice or representation being provided and the beneficiary is the world rather than an identifiable client. As such the Project does not sit within the normal definitions of ‘Pro Bono’ . The Project transcends ‘Pro Bono’. Perhaps ‘Knowledge Philanthropy’ is a better term? This relatively new concept describes a person who shares their knowledge for the benefit of humanity . Certainly, our lawyers use their expert knowledge and skills to co-create legal solutions for the benefit of the world, but we are not sharing that knowledge per se and the Project is not a knowledge manager. The solutions we publish cannot be used in isolation. They still require the expertise, judgement, and negotiation skill of the legal community to deploy the solutions and create real world impact. Only a fraction of the knowledge developed during our legal hackathons and drafting process is put out into the world, for free, as model clauses and laws and their origin stories – the rest is retained by the contributors. Alternatively, the Project could simply be part of a participating firm’s ‘Responsible Business’ or ‘Corporate Social Responsibility’. Certainly, the elements of these concepts that relate to benefiting society and environment as a whole strike a chord, particularly when the business of law supports the project so generously. But the project also goes beyond a single business acting responsibly and we would not achieve our aims or create real world impact if only one firm were to participate. We are, as a profession, addressing a systemic issue in a way that is aligned to our businesses and clients. In truth the Project is probably a mixture of all these concepts. Lawyers engage because we can use our transactional legal skills and experience to help address one of the urgent and important issues of the day – the climate crisis – in a way that is aligned to our businesses, benefiting the communities we live and work in. We are happy to provide this for free because Pro Bono is part of the DNA of the legal profession and part of being a responsible legal business. We have coined this blend of concepts ‘Legal Philanthropy’. ‘“ Legal Philanthropy ” describes a lawyer who uses their skills, without charge, to help solve systemic issues for the benefit of society and the environment’

Thank you to all the Legal Philanthropists involved in the Project.

Climate Contract Playbook Edition 3

Disclaimer The clauses in this 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. This Climate Contract Playbook and the clauses in it 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 welcome. This 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 the preparation of the Climate Change Playbook and do not accept any liability for any errors or omissions, nor for any loss incurred by any person relying on or using this Climate Contract Playbook 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.

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Precedent Clauses

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[Hanley’s clause]

The Origin Story

Child’s name

Hanley’s clause

Full name

Climate change clauses for Heads of Terms

Practice Area / Sector

Universal

Heads of Terms for a commercial transaction or deal drive many of the workflows and set the tone and spirit of a negotiation. Precedent heads of terms do not include a section on climate change or the transition to net zero.

Issue

Incorporate a dedicated section into heads of terms precedents so that climate change issues become a key consideration for any deal team. This will be particularly relevant where one or both of the parties has a publicly stated net zero target. Heads of terms are commonly used in commercial transactions ² . They allow parties to focus on key issues to ensure time is used efficiently and to set the tone, scope and timetable of the transaction. It is rare to see sustainability or climate change issues represented on heads of terms. As such they are often overlooked or are only picked up by environmental lawyers as part of a wider legal due diligence review. Climate change risks are now a board issue 3 and as such should be given equal prominence in transactions. The clauses will ensure climate change is considered from the earliest part of a transaction and that carbon saving opportunities will become part of the due diligence exercise alongside the normal legal, financial, commercial and technical due diligence. It will also allow boards to demonstrate how climate change was considered as part of a transaction and thus potentially help mitigate future liability risk.

Solution

Context

Impact

1. Corporate finance houses 2. Banks 3. Precedent and know how providers 4. Professional support lawyers 5. Law firms and legal businesses

Stakeholders

The clauses will mean that a deal team will have to undertake specific due diligence relating to climate change issues and make known their position on these issues to the counterparty. This makes the evaluation and allo-cation of climate change risk a key part of any transaction.

Application

2 https://uk.practicallaw.thomsonreuters.com/0-107-6683?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1 , https://uk.practicallaw.thomsonreuters.com/w-014-4519?view=hidealldraftingnotes 3 https://www.nortonrosefulbright.com/en/knowledge/publications/c528fde6/the-time-is-now---climate-risk-a-mandatory-issue-for-all-boards

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A user could specify that specific climate change or sustainability due diligence could be undertaken by one of the parties, or that they will ask a third party to undertake a joint carbon audit as a result of the deal. A simple clause to add to heads of terms of a commercial or corporate deal as an aide memoire to the boards to be considering climate change issues as part of any transaction. A user that has already committed to emissions reductions (including the emissions from its supply chain and commercial partners) may impose the expectation of climate action from a new commercial partner by summarising its requirements in the heads of terms / MoU. This will save time as unwilling new partners will quickly be exposed when face-to-face discussions commence. It assumes ‘Deal’ (or equivalent ‘Transaction’ or ‘Project’) is defined elsewhere.

Notes for users

Key Climate Change Considerations

1.1

The Deal will be structured so as not to increase, or amplify the impact of, climate change or the carbon emissions of the parties. [The Deal will provide opportunities to reduce carbon emissions and the respective party’s impact on climate change and the Parties agree to work together to identify carbon saving opportunities as part of the negotiations.] The respective directors of the parties will consider the financial risks relating to climate change as part of the Deal due diligence in accordance with the [recommendations of the Task Force on Climate-related Financial Disclosures 4 / Bank of England’s climate risk taxonomy and climate stress tests 5 ] including the: a) physical risks; b) transition risks; and c) litigation risks. [If having considered the risks summarised in paragraph 1.3 the parties conclude that there are significant climate risks present in the Deal they will, as a Condition Precedent or Condition Subsequent, agree a plan to mitigate the risks identified.]

1.2

1.3

1.4

https://www.fsb-tcfd.org/.

5 https://www.bankofengland.co.uk/climate-change.

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[Kaia’s clause]

The Origin Story

Child’s name

Kaia’s clause

Full name

Climate Purposed NDA Terms (Confidentiality Agreement)

Practice Area / Sector

Universal

Climate change issues and alignment of commercial objectives with Net Zero policies are rarely discussed at the outset of a new commercial relationship and identified at that early stage as a key focus for the parties. As a result, are often relegated to secondary issues or brought up towards the end of a negotiation – if at all. Additional provisions for standard mutual non-disclosure/confidentiality agreement (NDA) to ensure climate change and environmental issues are discussed at the outset of a new commercial relationship. Hanley’s clause from the 1st edition of the Climate Contract Playbook showed how heads of terms can be used to give prominence to climate change issues. The theory being that the earlier climate issues are raised in the documentation the more likely that they will be a key consideration in the transaction or deal. This drafting solution expands on that logic: the earliest document that parties often sign is an (NDA) 6 . NDAs help build trust and encourage a more open conversation. At this stage, discussions tend to be fluid and exploratory in nature and the parties will not only be assessing the immediate commercial opportunity but also whether the parties’ values are aligned. It is common for a business to sign hundreds if not thousands of NDAs each year 7 . Therefore, this provides a unique opportunity to raise climate issues in numerous and varied scenarios across all sectors of the economy. Most precedent and template NDAs focus on the commercial purpose only. Discussions relating to climate change or the transition to net zero are rarely stated objectives. This drafting will be particularly relevant where one or both of the parties has a publicly stated net zero target. It sets the tone of every commercial conversation and in that way aims to create a pervasive net zero culture. The clauses will ensure climate change is considered from the earliest part of a commercial relationship. In effect, it will help to make climate change a mainstream topic within commercial teams. The clauses will also: • Set the tone for future documentation should the parties progress to a more formal relationship. • Allow boards to demonstrate how climate change was considered as part of every commercial relationship and thus demonstrate its commitment to a Net Zero business strategy, Corporate Social Responsibility (CSR), and Environmental, Social and Governance (ESG) factors, whilst also potentially mitigating the risk of future liability relating to climate change.

Issue

Solution

Context

Impact

6 https://www.gov.uk/government/publications/non-disclosure-agreements/non-disclosure-agreements 7 https://www.quora.com/How-many-NDAs-does-a-company-sign-each-year

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The key stakeholders that you think need to be engaged to deliver this Impact 1. In house counsel 2. Commercial and partnerships teams within businesses 3. Precedent and know how providers 4. Contract automation platforms 5. Professional support lawyers 6. Private practice firms The proposed additions will mean that the parties will have to consider climate change in the wider commercial conversations. This puts environmental and climate change issues front and centre of every business discussion. NDAs are often used by commercial teams with only minimal lawyer intervention and are often using automated contract systems. Aligning the precedent/template with the business’ Net Zero and ESG commitments will be key. If a party is not prepared to include a specific obligation in the NDA then the inclusion of the additional recital will at least signpost the issue to the parties. A party that has already committed to emissions reductions may impose the expectation of climate action from a new commercial partner by summarising its requirements in the NDA. This will save time as unwilling new partners will quickly be exposed when face-to-face discussions commence. The drafting assumes a mutual NDA based on a general commercial relationship and would need to be amended for cross border or specific sectors such as Real Estate transactions. The drafting assumes Confidential Information is defined in the precedent.

Stakeholders

Application

Notes for users

[Insert the additional recital] BACKGROUND (A)

The parties have agreed to consider the Climate Change Purpose as part of the discussions relating to the Commercial Purpose.

[Insert additional definitions (or add to existing definitions clause)] 1.1 Definitions:

Climate Change Adaption Measures means the measures taken or that could be taken by the Parties and their supply chains to achieve the Commercial Purpose whilst avoiding or minimising the actual or anticipated effects of climate change. Climate Change Mitigation Measures means the measures taken or that could be taken by each of the Parties and their supply chains to reduce their respective Greenhouse Gas emissions and to meet their Net Zero targets. Climate Change Purpose : means the consideration of Climate Change Adaptation Measures and Climate Change Mitigation Measures as part of every potential commercial relationship. Commercial Purpose : [Insert Purpose of the NDA ie Discussions about X, consideration of Y, provision of Z]

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ESG : Environmental, Social and Governance factors and standards forming a [published] policy or objective of a party. Greenhouse Gas means 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. Net Zero means that the balance between Greenhouse Gas emissions from all operations and Greenhouse Gas removals, including those accounted for by credits from either insetting or offsetting projects, is zero.

[Insert new Clause (or add to or adapt existing purpose clause)]

The Purposes

2.1

The parties shall, as part of their discussions and negotiations concerning the Commercial Purpose, discuss and consider how the Climate Change Purpose can be achieved as part of any future commercial relationship arising from those discussions and negotiations. When considering the Climate Change Purpose under clause 2.1 the parties shall disclose and consider: (a) their respective Net Zero targets; and (b) their relevant ESG characteristics and commitments. Any information disclosed by one party to the other in connection with the Climate Change Purpose shall be treated as the disclosing party’s Confidential Information (and therefore subject to the applicable use and disclosure restrictions in this agreement), save that such information may be used by the recipient (but not disclosed to any third party) to make progress against its Net Zero target or ESG goals.

2.2

2.3

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[Agatha’s clause]

The Origin Story

Child’s name

Agatha’s clause

Full name

Termination for Greener Supplier

Practice Area / Sector

Commercial

Parties being locked into supply contracts where the customer has identified that an alternative supplier offers more environmentally friendly goods or services

Issue

Include a standard clause to allow the customer to exit the agreement without incurring exit-related liability (such as cancellation fees) unless the existing supplier is able to at least match the green improvements represented by the alternative supplier’s offer. See also Annie’s Clause for a short form version. Many companies are locked into contracts without the unilateral ability to push the supplier to improve its green credentials or exit the agreement in favour of a greener supplier. In addition, companies that wish to reduce emissions in their supply chains, for example, where appropriate termination rights are available, may be prevented from doing so due to high switching costs (such as those relating to termination for convenience payouts or take-or-pay obligations). Therefore, the solution should not include any significant additional cost to the customer of going greener. The clause should encourage existing suppliers to “up their climate change game”. A contractual right to switch to a greener supplier if the existing supplier cannot match the alternative offer enables companies to green their supply chains, encourages green competition between existing and prospective suppliers, and provides a strong incentive for appointed suppliers to continuously improve their green performance.

Solution

Context

Impact

1. Inhouse legal counsel 2. Directors (Board level) 3. Shareholders (engagement) 4. Private practice firms 5. Industry bodies 6. Regulators (industry specific)

Stakeholders

The clause gives customers a right to switch supplier if the existing supplier is unable to match a ‘greener’ offer made by an alternative supplier. If this sort of clause can become the norm among customers, it will draw out greener suppliers that can do this and ensure that an assessment of green credentials is an important part of any procurement process.

Application

Climate Contract Playbook Edition 3

To reassure the supplier that the right will not be abused, the parties can set limits on the number of times the customer can use this clause according to the circumstances of the contract (e.g. once per term, or only once every 12 months etc.). This drafting is deliberately designed to be relatively fair and provide a commercially acceptable arrangement for both parties. However, the customer may find that it triggers some further discussions with the supplier about how this clause will work in practice.

Notes for users

Termination for Greener Supplier: Contractual Provisions

Insert into recitals: The parties acknowledge their common intention in the fulfilment of their obligations under this agreement to minimise their impact on climate change.

Insert into preliminary obligations: The parties agree that the information provided by the Supplier before the start date of the agreement concerning measures of the impact on climate change by the Supplier and the products and services will form the baseline environmental credentials of the Supplier for the purpose of this agreement ( “Green Baseline” ). The Green Baseline may be amended by written agreement or otherwise in accordance with this agreement. The Supplier will provide at the Customer’s request reasonable evidence of its compliance with the Green Baseline.

Insert into clause or definitions: In this clause, “equivalent” or “equivalence” means: a)

If assessing the [goods OR services] of a Green Supplier, [goods OR services] that are [comparable OR identical or similar in all material respects] (including in terms of [scope,] complexity, specification, volume and quality [of performance], supporting technology, compliance with standards, and in terms of ancillary obligations such as delivery terms) to the [Goods OR Services] under this agreement. If assessing the pricing of a Green Supplier, pricing for equivalent [goods OR services] that is [within the lower quartile OR less than or equal to the mean price over a previous 12-month period] of the pricing for [Goods OR Services] under this agreement.

Climate Contract Playbook Edition 3

Termination for Greener Supplier 1.1

Without affecting any other right or remedy available to it, the Customer may: 1.1.1

serve written notice ( “Notice of Greener Supplier” ) to the Supplier that the Customer has identified a third party supplier (the “Greener Supplier” ) that is able to provide [goods / services] at least equivalent to the [Goods / Services], except that the Green Supplier’s equivalent [Goods / Services] achieve: 1.1.1.1 lower greenhouse gas emissions relating to the production or delivery of the goods and services, as measured in accordance with [the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard, Revised Edition 2015]; or

1.1.1.2

reduced environmental impact or increased sustainability outcomes, as measured in accordance with Appropriate standard for measuring environmental impacts or sustainability outcomes depending on the areas of concern to the business][, or ; or];

1.1.1.3 [other], in each case as compared to the Supplier’s Green Baseline.

1.1.2

The extent to which a Greener Supplier exceeds the Supplier’s Green Baseline (using the measures described in this clause) is the “Green Improvement”. The Notice of Greener Supplier must reasonably demonstrate that the Greener Supplier’s alternative [goods/services] are at least equivalent to those of the Supplier (including written confirmation by the Customer of overall price equivalence) and set out the Green Improvement. The Supplier shall, within [30] days of the Notice of Greener Supplier notify the Customer whether it is able to achieve the Green Improvement [on terms no worse for the Customer than those set out in the Notice of Greener Supplier and] within [NUMBER] months of the Notice of Greener Supplier. If:- 1.1.3.1 Supplier is able to demonstrate to the Customer’s reasonable satisfaction that it is able to match the Green Improvement within that period, the parties shall use all reasonable endeavours acting in good faith to agree within a further 30 days the amended terms on which the [Goods/Services] shall be provided incorporating the Green Improvement. Once an amendment is agreed, the relevant specifications of the [Goods/Services] will be deemed to incorporate a requirement to comply with the Green Improvement (and the Green Baseline will be replaced by the Green Improvement from the date of that amendment); or

1.1.3

1.1.3.2

the Supplier; 1.1.3.2.1 does not respond to the Notice of Greener Supplier within the required period; or 1.1.3.2.2 is unable to demonstrate to the Customer’s reasonable

satisfaction that it is able to at least match the Green Improvement within the required period [on terms as good for the Customer as those set out in the Notice of Greener Supplier],

1.1.4

The Customer may terminate this agreement by giving the Supplier not less than [NUMBER] months’ notice. Other than the agreed consideration for [Goods/Services] provided in accordance with the agreement before the date of termination, and despite any conflicting provisions in this agreement, no payments will become due to the Supplier as a result of termination under this clause.

Climate Contract Playbook Edition 3

[Annie’s clause]

The Origin Story

Child’s name

Annie’s clause

Full name

Green Termination Provision (short form)

Practice Area / Sector

Commercial

Not being able to move to greener suppliers to achieve net zero or other sustainability targets because of the contractual consequences in doing so.

Issue

A clause that allows a right of termination for a customer so that they can pivot to a greener supplier to meet their sustainability, climate or other environmental objectives. See also Agatha’s Clause. Many businesses sign long term supply or other business relationships in order to achieve certainty and value. However, once tied in it is often difficult to terminate without financial consequence. This becomes a problem if a business or organisation has stated a net zero target or declared a climate change emergency and the incumbent counterparty is either a high carbon user or not aligned with a customer’s objectives. If a supplier is “greenwashing” and this becomes publicly acknowledged, then this will reflect on the customer and becomes a reputational issue as well. The clause will allow a customer the ability to move suppliers in order to achieve its environmental aims. This should increase the likelihood of achieving net zero and other environmental targets that are set. It should also mean that the incumbent supplier will seek to ensure that it improves its carbon footprint and sustainability to ensure the contract is not terminated. The key stakeholders that you think need to be engaged to deliver this Impact 1. Procurement teams 2. Contract managers 3. In house lawyers 4. Sustainability managers 5. Precedent and know how providers 6. Professional support lawyers 7. Private practice firms The proposed amendments will mean that a contract can be terminated in a narrow set of environmental circumstances. The requirement of good faith and reasonableness may help to ensure that the clause is only used to meet climate goals and not for commercial convenience. Can be added to the standard termination clause or standalone. This clause does not specifically deal with payments or other consequences that may apply on termination. Users of this clause will need to check the agreement carefully and ensure that the exercise of this clause does not trigger, for example, the payment of minimum purchases, cancellation fees or capital expenditure reimbursement. See [Agatha’s clause] above for an example clause that does address this issue (the final sub-clause).

Solution

Context

Impact

Stakeholders

Application

Notes for users

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Green Termination

1.1

Without affecting any other right or remedy available to it, the Customer may terminate this agreement by giving [1 month OR [NUMBER] month’s] written notice to the other party: (a) if the Customer, [acting in good faith OR having made a reasonable comparison of the Supplier and other available suppliers], has decided to switch to an alternate supplier to achieve a reduction in the carbon footprint or emissions attributable to the Customer as a result of the Supplier’s performance of the agreement, provided: • the potential reduction is [supported by reasonable evidence and is] at least [PERCENTAGE]% less than the carbon footprint or emissions relating to this agreement at the time of the comparison [(with that calculation meeting the requirements of [INSERT CARBON MEASUREMENT METHODOLOGY USED BY THE CUSTOMER])]; [and] • the proposed obligations of the alternate supplier are at least as onerous as those of the Supplier under this agreement; [and]

• [the proposed price of the alternate supplier is not significantly different to the price of the Supplier in aggregate over an equivalent period;]

(b) if the Supplier’s environmental practices or negative environmental impacts may bring the Customer’s reputation materially into disrepute as a result of conflicting with the Customer’s published [net zero/carbon reduction] targets from time to time; or (c) if the Supplier acts persistently and materially in such a manner as [to reasonably justify the opinion that its business operations or other conduct] is inconsistent with good environmental practice and policy [, as exemplified in [INSERT INDUSTRY ACCEPTED GUIDANCE OR STANDARD]]; or (d) if the Supplier fails within [30] days to respond fully to a request for information made by the Customer to allow the Customer to assess the carbon footprint, emissions, environmental practices and policies of the Supplier that relate to activity under this agreement.

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[Teddy’s clause]

The Origin Story

Child’s name

Teddy’s clause

Full name

Supplier Environmental Threshold Obligations

Practice Area / Sector

Commercial

Lack of legally enforceable environmental improvement standard in mainstream supply contracts, particularly in government procurement contracts.

Issue

Insert at purchase warranties for environmental performance and continuous improvement obligations. This will build in long term environmental improvements and transparency into supply agreements.

Solution

Currently the carbon costs of producing goods or delivering services are not internalised to the contract and therefore there is no incentive to reduce carbon emissions. Government is unable to use its own procurement levers to decarbonise the economy. Development of a wider market for new carbon reducing technologies, as well as accreditation/audit companies. Auditable transparency of an organisation’s environmental impact, emissions and supply chain. Ultimately to filter down from Government, and to/through local authorities and the private sector contractual obligations to achieve the net zero target(s).

Context

Impact

1. Public sector procurers 2. Trade (standards) bodies 3. Contractors 4. Investors 5. Precedent and know how providers 6. Professional Support lawyers 7. Private practice firms

Stakeholders

From the recitals, to contract terms and conditions and remedies, supply contracts will become a vehicle for setting environmental performance and helping drive the transition to net zero emissions.

Application

The incentives on a Supplier to comply with the requirements may be enhanced by varying clause 3 such that the Supplier must publicly disclose the emissions reductions and reports to an external public-interest third party such as CDP (formerly the Carbon Disclosure Project https://www.cdp.net/en). Users may also wish to use this clause in conjunction with green liquidated damages in [Jessica’s Clause] as a remedy for non-compliance.

Notes for users

Climate Contract Playbook Edition 3

Recital The parties acknowledge that the UK Government has committed to bring all greenhouse gas emissions to net zero by 2050 pursuant to the Climate Change Act 2008 (2050 Amendment) Order 2019. The parties have undertaken assessments of their respective carbon emissions and [the supplier][the parties] have undertaken an assessment of the carbon footprint of [the product/service] to be supplied pursuant to this contract.

At Purchase Warranty Add these definitions:

“ Carbon Footprint ”: the amount of [carbon dioxide equivalent emissions] that will be released into the atmosphere as a result of the [manufacture/supply/use] of [the Product/Service/Business Operation/ Project] [determined in accordance with international carbon reporting practice, being the accepted practice from time to time in relation to reporting for the purposes of the protocols to the United Nations Framework Convention on Climate Change]. As a Condition of this Agreement the Supplier Warrants that 1.1 it has undertaken an assessment of the Carbon Footprint;

1.2

[so far as it is aware,] the Carbon Footprint projected to be incurred as set out in [the Schedule] is true and accurate as at the date of this Agreement.

The Supplier Undertakes:- 2.1

to develop and implement a plan of continuous improvement with the objective of reducing the Carbon Footprint [throughout the [Contract Term]] [by [set reduction target] [per Contract Year]] [and shall provide a copy of that plan to the Purchaser on request]

2.2

to re-assess the Carbon Footprint every [one][three] [Contract Years];

2.3

to provide the Purchaser with a written confirmation of the results of each assessment within one month of the completion of each assessment under clause [2.2]; The Supplier shall at the Purchaser’s request arrange for [the Carbon Trust] to undertake an independent assessment and verification of the Carbon Footprint and make a copy of the results of that assessment and verification available to the Purchaser as soon as reasonably practicable after receipt [(but no more than once in any period of [ ] Contract Years)].

[Note on Remedies – consider mechanism akin to liquidated damages in Jessica’s Clause]

Climate Contract Playbook Edition 3

[Jessica’s clause]

The Origin Story

Child’s name

Jessica’s clause

Carbon contract clauses for environmental performance, and associated incentives and remedies

Full name

Practice Area / Sector

Commercial

While the climate and environmental impact of goods or services is increasingly important to business customers (including to meet their own greenhouse gas (GHG) targets), this is not being captured in their supply agreements. If a breach of contract causes or contributes to the customer to miss its GHG targets, this has negative climate impacts and may be hard to quantify and evidence the loss caused to the injured party in missing in their GHG targets. So, in effect, there may be no remedy available to the customer. Additionally, most contractual remedies (other than those triggering termination and suspension rights) are pecuniary in nature - there is no standard practice of alternative remedies or consideration given to options which are not designed to improve the financial position of the injured party. 1. Include climate considerations in standard contract drafting. 2. Include climate metrics for performance in all contracts. 3. Provide a mechanism akin to liquidated damages for breaches with negative climate impacts, in the form of a mandatory donation to appropriate non-profit organisation. This provides an alternative to pure cash compensation. Currently the carbon costs of producing goods or delivering services are not usually specified in contracts and, therefore, there is no incentive to reduce carbon emissions.

Issue

Solution

Context

Cascading environmental clauses which provide a remedy for breaches that impact a purchaser’s GHG targets and therefore that cause negative climate impacts should increase the speed of transition to net zero.

Impact

1. Public sector procurers 2. Trade (standards) bodies 3. Contractors 4. Investors 5. Precedent and know how providers 6. Professional Support lawyers 7. Law firms

Stakeholders

The supplier warrants it will meet certain targets for the climate and environmental impacts of delivering the goods or services under the agreement. If breached, the supplier must pay a climate remediation fee to a selected environmental charity.

Application

Climate Contract Playbook Edition 3

Users to consider the legitimate interest of the supplier to ensure the Climate Remediation Fee is not unenforceable as a penalty. This is envisaged to be used by a larger corporate purchaser. Users may wish to use a bid document clause format to address the issue of incentivising higher estimates, e.g. ‘Climate Part 36 offer’ ‘Green Part 36 Offer’. Users may wish to instead use softer incentives such as rights of first refusal. An example would be a ‘climate option’, where the Purchaser has option to pay Supplier to enact carbon reducing changes in systems, at cost of Supplier, or at a discount. The Purchaser is then able to lower its own emissions profile and Purchaser incentivised not to deviate from climate behaviour standards; if it does then it can still reduce its carbon footprint with what amounts to financial assistance from the Purchaser. The climate warranties may be used in M&A transaction documents.

Notes for users

Recital [Note: Agreement to contain recital below in addition to the other recitals relevant to the agreement.]. The parties acknowledge that performance of this agreement by the parties is expected to have climate and ecological impacts as detailed in this agreement.

Climate and Ecological Impacts Under this Agreement 1.1

The parties acknowledge that the performance of this agreement will result in certain climate [and ecological] impacts, including the emission of greenhouse gases. For the purpose of this agreement, the parties agree that the quantity of greenhouse gas emissions related to this agreement will be quantified first in the Initial Emissions Report and then in subsequent Annual Emissions Reports. Each party agrees to use all reasonable endeavours, and co-operate in good faith with the other party and its contractors, to minimise as far as reasonably practicable the quantity of greenhouse gas emissions related to this agreement as set in accordance with clause 2.1.

1.2

Climate Reporting and Warranties [Note: The parties should agree a mechanism for measuring their climate and environmental impacts under this agreement. The warranties below should be adjusted accordingly. These could also be used as warranties in M&A transaction documents.]

2.1

The Supplier agrees to: 2.1.1

collect sufficient data, and analyse that data as required, to populate the Initial Emissions Report and the Annual Emissions Reports; provide the Customer with the Initial Emissions Report within [twelve (12)] months after the start date of this agreement; provide an Annual Emissions Report no later than forty (40) Business Days after the applicable Emissions Report Date; [and]

2.1.2

2.1.3

Climate Contract Playbook Edition 3

2.1.4

measure and calculate its Projected Total Emissions and Actual Total Emissions in accordance with the GHG Reporting Standard, and ensure that they are verified each year by an Independent Third Party before being provided to the Customer; [and] [insert other climate performance metric as relevant to the performance of this Agreement]. It will provide the reports required under clause 3.1 within the required period and as specified in clause 3.1. The Initial Emissions Report and all Annual Emissions Reports provided to the Customer are in all material respects complete, accurate and not misleading. The Actual Total Emissions during an Emissions Reporting Period will be less than the Actual Total Emissions of the previous Emissions Reporting Period. It will not commit any Climate Breach during the term of the agreement.

2.1.5

2.2

The Supplier warrants and agrees that: 2.2.1

2.2.2

2.2.3

2.2.4

Climate Remediation Fee 3.1

Without prejudice to any other claims, rights or remedies under this agreement, the parties agree that, in respect of any breach of the warranties set out in clause 3.2, damages payable by the Supplier to the Customer would not be an appropriate remedy in the wider context of damage to the climate, the environment and the Customer’s reputation (all of which the Supplier accepts for the purpose of this agreement as being losses incurred by the Customer). Without prejudice to the Customer’s right to damages, the Supplier agrees to pay the Climate Remediation Fee as set out in this clause 4. The parties agree that any Climate Remediation Fee payable under this agreement to provide compensation for damage caused by the Supplier’s Climate Breach or breach of clause 3.2 is reasonable and proportionate to the legitimate interests of the Customer in mitigating, setting off, counteracting, and repairing that damage (and preventing future damage), in part reflecting its public commitments to [reduce greenhouse gas emissions]. Each Party agrees that it has been properly advised regarding the negotiation of this agreement, and in particular regarding the inclusion of the Climate Remediation Fee as a remedy for Climate Breaches and breaches of clause 3.2. If the Customer identifies or suspects a Climate Breach or breach of clause 3.2, the Customer may serve a Climate Remediation Notice on the Supplier at any time within twenty (20) Business Days of [the occurrence of such breach / becoming aware of such breach], whichever is later. Upon receipt of a Climate Remediation Notice, the Supplier will promptly investigate the matter and in respect of any Climate Breach or breach of clause 3.2 pay the applicable Climate Remediation Fee to the Appointed Beneficiary within fifteen (15) Business Days of receipt of the notice.

3.2

3.3

3.4

Climate Contract Playbook Edition 3

Definitions 4.1

“ Actual Total Emissions ” means the Total Emissions that were actually emitted over the relevant Emissions Reporting Period, as verified by an Independent Third Party; “ Annual Emissions Report ” means a written report setting out the Actual Total Emissions for the relevant Emissions Reporting Period, and the Projected Total Emissions for the next Emissions Reporting Period; “ Appointed Beneficiary ” means the beneficiary of the Climate Remediation Fee, to be chosen from the Beneficiary List by the Customer and nominated in writing in the relevant Climate Remediation Notice; “ Beneficiary List ” means the [ideal position – a list of reputable NGOs supporting environmental improvement UK and globally managed by reputable independent third party; in the absence of such a list, the parties may wish to choose a shortlist of their preferred charitable partners / NGO beneficiaries]; “ Business Day ” means any day other than a Saturday, Sunday or any other day which is a public holiday in England;

4.2

4.3

4.4

4.5

“ Climate Breach ” means any of the following events: 4.6.1

4.6

in an Annual Emissions Report, the Actual Total Emissions exceed the Projected Total Emissions by more than [Total Emissions per calendar year / per month / per Unit / per Emissions Reporting Period] or [X%][Xt/CO2e]]; [the Supplier fails properly to measure its Total Emissions [in the relevant Emissions Reporting Period]]; [the Supplier’s fails to have its Total Emissions [in respect of the relevant Emissions Reporting Period] verified by an Independent Third Party;] [where the Supplier has agreed to achieve certification under [insert relevant sustainability / climate / carbon industry standard] by a particular date, the Supplier fails to achieve that certification by that date and afterwards maintain that certification during the term of the agreement; or]

4.6.2

4.6.3

4.6.4

4.6.5

[insert failure to achieve other specified climate performance metric];

“ Climate Remediation Fee ” means: 4.7.1

4.7

[an amount equal to [£X] for each [percentage point / Xt/CO2e] that the Actual Total Emissions stated in a given Annual Emissions Report exceed the Projected Total Emissions set out in the previous Annual Emissions Report (or the Initial Emissions Report, in the case of the first Annual Emissions Report); and] in respect of any Climate Breach or breach of any of the warranties set out in clause 3.2, but not covered by another element of the Climate Remediation Fee, [£[X]] [ and an additional sum of £[x] for each [day] that the breach continues [up to a maximum of £[x]];

4.7.2

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