Climate Clauses in Contracts

Climate change provisions are finding their way into legal documents, and it is not only activists who are causing the trend.

Climate risk is a relevant, modern day issue that demands our attention even without an overriding intention of changing behaviour.

Even in the ordinary course of events, legal advice for property clients will encounter the need for such clauses.

Force majeure

A typical force majeure clause will identify events considered beyond the control of the parties and, where the contractual terms cannot be met because of those events, it may enable cancellation of the contract. Often such a clause will refer to “acts of God”, and “unforeseeable events” or “matters beyond the reasonable control of the parties”.

Changing times mean this language might be understood differently now to how it was even five years ago. In this Anthropocene era, where humanity now impacts weather and ecosystems, what can be truly described as an “act of God” or an “unforeseeable event”?

Historically acts of God have been understood to be one off events that happen independent of humanity. In 2002 the House of Lords, in deciding a tortious matter, considered the meaning of “act of God”. Lord Hobhouse reflected on the long-held view that “act of God” describes something that:

- involves no human agency

- is not realistically possible to guard against

- is due directly and exclusively to natural causes; and

- could not have been prevented by any amount of reasonably expected foresight, plans or care.

Arguably, not one of these indicators applies to sea level rise or to storm surges or flooding caused through global warming.

In July this year we saw horrendous flooding in Germany. “It is the intensity and the length of these events [that] science tells us, is a clear indication of climate change” says Ursula von der Leyen, the president of the European Commission. In the same month, the US was fighting fires and drought "Climate change is driving a dangerous confluence of extreme heat and prolonged drought. We're seeing wildfires of greater intensity that move with more speed," said President Biden.

Where humans contribute to the conditions that cause the harm, has there been an act of God?

What if a party to the contract contributed to the likelihood of such harm themselves, if they built their property in an area that was expected to be subject to sea level rise or flooding for example?

The day I wrote this paper I listened to the Mayor of the Buller District being interviewed on RNZ about the flooding that that had occurred there only days previously. What, asked the interviewer ought any purchaser of a property in the flooded area to have known of the likelihood of floods? Given the frequency of these types of events is it appropriate that public funds be used to rebuild homes in these areas that are known to flood? A same question can be asked of contracting parties facing the responsibility for rectifying damage

It is worth carefully considering the wording of the force majeure clause to make certain it addresses what you really expect it to, including the impact of supply disruption through drought, hurricanes, fires, disruption of transport, unsafe working conditions or changes in climate legislation throughout the world.

Once the wording is clear and specifically addresses the circumstances the parties expect, address who should bear the risk of these climate change outcomes. Is it fair that one party should shoulder the risk or is it more appropriately shared?

The Chancery Lane Project brings together lawyers and others from throughout the world. They collaborate and freely provide model clauses and contracts that address climate risk. The vision of the project is “a world where every contract and law enables solutions to climate change.”

The website is a rich resource. https://chancerylaneproject.org/

You may find the clauses do not perfectly fit the way you draft your clauses, or the language we use in New Zealand, but the collaboration of more than 700 legal brains provides access to issues that are relevant, and to ideas about how matters can be addressed. From there, you can make the clauses fit your own needs.

Lawyers within the project have drafted a clause that draws a distinction between climate change events and force majeure events. It recognizes that “neither party should bear the entire risk of a climate change event [or pandemic] occurring”. The clause then sets out a system for sharing the problem, including addressing wasting embedded carbon emissions.

This provision might address more than you or your builder client, or your joint venture client or your lessor want to address. Nonetheless it offers a useful starting point for considering the issues.

Terms of engagement

What does your firm’s letter of engagement say about the part that climate risk plays in the advice given? Is there anything in the standard instructions from the banks that expects enquiry into climate risk? An obligation to report on matters affecting value perhaps.

It is likely the topic is not specifically addressed in either document but consider this.

Both asset value and insurability face threat from climate change activity, whether that is because of severe weather or changes in societal behaviour. Legal risk associated with climate change arises not only through the direct impact of weather change. Litigation risk is real. So too is unexpected regulatory change that can render assets and plans obsolete overnight. Does your client expect you to address each of these?

Consider the answer to that question when it is being asked of you in five or 10 years’ time. Our actions and the advice that we provide in 2021 will be judged through a different lens in the not-too-distant future. To be certain that you and your clients are on the same wavelength when it comes to the extent climate change risk will be ignored, include a specific reference to it in your engagement letter.

“Our advice will not, unless specifically requested in writing, examine any aspect of climate change risk associated with your (purchase of the property, purchase of the business, negotiation of the construction contract, completion of this joint venture, finalization of this lease or these loan documents, the drafting of your power of attorney, the creation of this company constitution….).”

Frankly, you would be best to add:

“This exemption does not in any manner, suggest the absence of such risk. Our view is that the matter ought to be addressed.”

Boilerplate provisions

If a client does encourage you to consider climate change issues in the drafting of an agreement, consider how that might impact boilerplate provisions, i.e. those clauses at the end of the document that deal with assignment, waivers, notice, disputes and the like. There is room for these provisions to address climate action too. If minimizing carbon emissions is important (and remember MBIE’s Building for Climate Change Programme and the Government’s sustainable procurement objective), these boilerplate clauses should be imbued with that recognition. They should support the sustainability targets of the parties. If not, outcomes that will be acceptable contractually, will fly in the face of those expectations.

Consider the likely results from a dispute resolution process that does not account for climate action, or assignment provisions that allow assignment to others who do not support climate action.

Private Clients

It is easy to think that climate action has little impact on those who practice in trust and estate work. Here are a few ideas about how it might.

Both a memorandum of wishes and a will can provide direction about the use of funds and the criteria for decision-making. Consider including in each of these documents a request to trustees that climate issues and net zero targets are incorporated into decision-making, that climate risk is analyzed prior to the investment of funds, that funds are only used to support enterprises with net zero targets, that homes or vehicles purchased by the fund are analysed in terms of their carbon footprint.

People making the decision about whether to account for climate action in their private lives will not be hamstrung by the business decisions of their employers, shareholders, or stakeholders. That may make it easier for them to make such decisions.

Would you, as a trustee company be willing to embed provisions in the constitution that direct decisions to be made in a way that reduces harm to the environment and to society? Imagine if every lawyer required that as a pre-requisite to becoming a trustee.

Why is it up to lawyers?

Lawyers are in a position of significant influence when it comes to implementing climate action.

As trusted advisers, they can legitimately raise new and important, but often controversial, issues for proper debate. Discussing them in the confidential context of legal and business requirements can take the heat out of the debate. It can enable an informed decision. Nor are lawyers thought of as radical either, but often seen as significantly more conservative than their clients. If conservative lawyers understand that the issues warrant consideration, clients will in general take that view seriously.

Contractual terms have lasting impact. First the debate about whether to use them is something useful of itself. It addresses risk. It highlights issues. It clarifies thinking.

Once used, contractual terms create cogent, binding, black and white standards that survive the years. They dictate decisions to be made years later, sometimes far into the future. Conversely, without addressing climate change, fundamental considerations will be omitted from decision making for years to come.

A version of his article first appeared in The Property Lawyer and is published with the consent of the NZ Law Society, Property Law Section.

© Debra Dorrington 2021.

(2021). Retrieved from The Chancery Lane Project: https://chancerylaneproject.org/

Eddy, M., & Ewing, J. (2021, July 17). Flooding in Western Europe. Retrieved from New York Times: https://www.nytimes.com/2021/07/16/world/europe/climate-change-germany-flooding.html

Ministry of Business Innovation and Employment. (2020). Building for Climate Change:Transforming the Building and Construction Sector to reduce emissions and improve climate resilience. MBIE.

Nugent v Smith, 1 CPD 423 (1876).

The Sustainability Consortium; HSBC. (2020). Improving Supply Chain Resilience to Manage Climate Change Risks.

Transco plc v Stockport Metropolitan Borough Council [2003], UKHL 61 (House of Lords).