HCR Law Events

25 May 2023

Are your trade contracts climate-compliant?

The 2030 Agenda for Sustainable Development, launched by the UN in September 2015, defines international trade as a means to facilitate the “promotion of sustainable development”.  Here we look at some of the issues you might address considering the impact your international trade contracts have on the environment.

The degree of mandatory regulations differs from jurisdiction to jurisdiction, but there are some regulations that are internationally binding. The 1997 Kyoto Agreement imposed legally binding obligations on the parties to reduce their greenhouse gas emissions by an average of 5% in 2008-2012 compared to their levels in 1990. This was followed in 2015 by the Paris Agreement which binds 196 parties and requires each one to submit their national climate action plans on a yearly basis.

Sustainability clauses

Clauses that target sustainability can take many forms. Some of the most common provisions in international contracts include:

  1. Requirements for parties to have specific environmental management systems
  2. Compliance with specific environmental laws or regulations
  3. Requirements for environmental assurances regarding supply chains

Many commercial clauses have been suggested by The Chancery Lane Project (TCLP). The TCLP is a group of lawyers covering multiple sectors and jurisdictions aiming to target climate change in contracts and legislation. Their clauses are notably given a child’s name to bring focus to the next generation. Clauses you may wish to incorporate in your international contracts include:

  1. Kaia’s clause – including an NDA or confidentiality agreement clause requiring discussions on climate change and sustainability
  2. Hanley’s clause – Heads of terms must incorporate the environmental goals of the parties
  3. Matthew’s clause – if a party has a right to receive interest for late payment, these interest payments will be donated to a green cause.

These might sound like pointless box-ticking, but the point is to ensure environmental issues don’t get lost during the discussions about delivery, payment and liability.  Businesspeople can be forgiven for focussing on the short-term issues that keep their businesses running day to day.  These clauses help them remember the long-term issues too.

Well known businesses are now incorporating sustainability clauses into their supply chains.  For example, Vodafone has incorporated a number of TLCP clauses into their supply contracts including Frank’s clause (which provides that a company and its founder(s) must run the business in a responsible, sustainable way) and Dottie’s clause (providing warranties that the parties have complied with applicable environmental laws). Natwest bank now requires its suppliers to improve their sustainability score. Failure to do so may allow Natwest to terminate the supply agreement.

Naturally, each international trade contract is different. Corporations will need to consider the practicalities of compliance with these clauses, particularly with cross border transactions, and ensure they are consistent with the wider contract, as well as the commercial purpose of the agreement.

Net zero targets

Net zero targets are not standard in international trade contracts, and are currently only voluntary for UK companies, but recent years have seen more international businesses incorporating these clauses into their contracts.

A net zero target refers to a pledge to balance any emissions by absorbing an equivalent amount from the atmosphere. The TCLP has produced a range of net zero clauses for international contracts, in line with the principles of the Paris Agreement. Parties entering international trade contracts may wish to consider incorporating net zero clauses such as requiring a supplier to use renewable energy sources or providing that applicable law be interpreted in a manner that is consistent with the Paris Agreement.

How does this affect you?

Of course, the way we draft international trade contracts ultimately has no effect at all unless we do carry out our good intentions, but these suggestions could help you create a binding contractual platform to increase the likelihood that both parties to the agreement behave in as climate-friendly a way as possible.

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About the Author
Nicolas Groffman, Partner, Head of International

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