Climate Contract Playbook Edition 3
17
[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
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