Climate Contract Playbook Edition 3
37
[Iris’ clause]
The Origin Story
Child’s name
Iris’ clause
Full name
Climate Contract Risk Sharing (ex Force Majeure)
Practice Area / Sector
Commercial, Public Procurement
Contracting parties will not want to take the risk of known and foreseeable events such as global pandemics and climate change. Such events and related consequences will be difficult (perhaps impossible) and expensive to insure against 12 . The COVID-19 global pandemic has shown that relying on current contractual risk allocation can lead to adverse environmental consequences and add to uncertainty. Establish a concept of ‘Climate Risk Sharing’ in supply contracts. Use 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. 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. The COVID-19 global pandemic has shown many commercial lawyers and their clients that relying on Force Majeure clauses to avoid obligations and preserve cash flows is not certain and leads to unintended consequences such as planes flying without passengers or the dumping of stock following contract cancellations. These outcomes were clearly not envisaged. This, combined with the inability to invoke normal contractual remedies, has led to greater uncertainty on cash flows. In turn, this has led the UK government to publish guidance on responsible contractual behaviour 13 . Lawyers will, quite rightly, seek to protect against these risks in the future and will likely seek to carve out pandemic and climate change impacts from any prescribed list of force majeure events, as terror attacks have been excluded previously. Therefore, balancing risk between client and contractual counterparty is going to be an ongoing imperative, which contracts of the future should provide for. 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 • ensure that if parties are affected by force majeure events, they work together to minimise the impact on the climate and the environment.
Issue
Solution
Context
Impact
12 https://www.ft.com/content/92518d19-ce35-4af3-90f4-64cb00f8e2f5 13 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/883737/_Covid-19_and_Responsible_ Contractual_Behaviour__web_final___7_May_.pdf
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