Simple steps to making your contracts more sustainable

Article

Climate considerations are increasingly becoming an important factor in commercial decisions. Although lawmakers’ input continues to fall short in comparison to the urgency highlighted during the recent COP26 as well as in the most recent IPCC report, consumers and activists become all the more vocal regarding their expectations. Integrating sustainability into your operations and across the supply chain is therefore no longer a mere matter of morality; instead, it is accompanied by considerations of reputation, (financial) risk, customer satisfaction, investor attraction, and so on.

When it comes to writing more sustainable contracts, there are a lot of traditional legal tools and clauses that can be adapted to serve a more sustainable objective. Sustainable contracting is however complicated by the difficulty of measuring targets or standards. The negotiation process inherent to sustainable contracting is therefore fundamental to drafting a sustainable contract that sets attainable standards that are objectively measurable.

 These are the simple steps you can take to make your contracts more sustainable:

1. Green Termination Clauses

A major issue for organisations who have specified certain environmental commitments is that issues along their supply chain may cause them to violate these commitments. Moreover, (supplier) contracts are often drafted in a way that unilateral termination is unlikely to take place without you having to compensate the other party in some form. In other words, you will be stuck in an unsustainable contract unless you pay. During the drafting process, you can prevent this issue from arising altogether. You can include a straightforward green exit clause into your agreement, which would allow you to terminate the contract without incurring any liability when certain situations arise.

Events triggering a green termination clause which you should consider includes a situation where you are able to find an alternative, greener supplier which offers the same or similar products/services but in a more sustainable way.

 In this case, a green termination clause will allow you to move to the different supplier without you having to incur fees and/or liability. To make the clause more balanced, the supplier can be given the opportunity to match the sustainability standards of the alternative supplier. You can also set a limit on the frequency with which the clause may be exercised. This clause will ensure continuous improvement within the supply chain, as your suppliers will be encouraged to meet trends and standards in the industry.

2. Representations and Warranties

Another great way of integrating a climate-focus into your contracts is to include greener representations and warranties. A representation included in a contract is a statement of fact made by either party, or both parties, which is true on the date of the agreement. A warranty is a promise of indemnity if the assertion is false.

 By including clauses of this kind, you are setting up a framework for accountability. By being open to liability, parties will be less inclined to misrepresent their current sustainability practices. It will also help you to assess your suppliers’ climate change risks.

Examples of representations and warranties to add to a contract include:

  • A warranty that the supplier’s carbon footprint as disclosed to you and detailed elsewhere in the agreement is true and accurate.
  • A warranty that the supplier’s actions and commitments in relation to the environment are undertaken in good faith.
  • Warranties related to the Sustainable Development Goals.

3. Targets, Reporting, and (Material) Breaches

By including a set of clear, attainable, and measurable environmental targets where possible in the contract, you can link these to certain consequences when breached. However, in the absence of clear and objective standards, it is difficult and costly to measure climate impact targets. Especially for smaller companies, it may therefore be more realistic to include obligations on the supplier with regard to any of the following: reporting, information, remediation mechanisms for victims, and so on. More stringent obligations could include a commitment to increase energy efficient sources by x% a year, or reduce waste and pollution by x% a year.

 These obligations should come with audit rights, meaning that an independent party should be able to verify any documentation and reporting by the supplier.

 Any breaches of the obligations can be linked to a green termination clause or a remediation clause (see number 4 below). Either way, you are holding your supplier to a certain set of standards, and you give yourself an out should the supplier consistently fail to live up to your expectations and agreement.

4. Remedies

So far, we have discussed green termination as a remedy for breaches of sustainability terms in a contract. However, there are also alternatives to consider.

If the supplier’s breach of its contract with you leads to you missing your environmental commitments or GHG targets, this is difficult to quantify in terms of financial damages. As an alternative, you can consider specifying an alternative form of remedy for these situations. For example, the remedy for breaching any green clause of the contract will require the breaching party to make a mandatory donation to a non-profit organisation to be specified in the contract. Another example is for the breaching party having to plant a predetermined number of trees. 

5. Environmental Commitments in Recitals

 Recitals are often included in contracts to set out the background to the legal relationship between the parties. They are often very useful in constructing the intention of the parties at the time of entering into the contract. Including environmental commitments in the recitals sets the tone for the remainder of the contract and thereby strengthens the steps discussed above.

For example, recitals to be incorporated could include statements that the contract will be an instrument that sets certain environmental targets or a net-zero commitment.

Overall, there are many steps you can take to make your contracts more sustainable. Although greener contracting does require some out of the box thinking at times, you already have the legal tools at hand to improve the contracts. A great resource if you’re interested in reading more on green contracting is the Chancery Lane Project

Feel free to contact LoudLaw if you are in need of assistance making your contract(s) greener and more future-focused!