Contract Law and Climate Change


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    Addressing climate change requires collaborative action from governments, businesses, and individuals. Contracts can regulate many of the obligations and interactions between and within all three of these groups, and play a pivotal role in addressing specific actions that can lead to the transition to net zero—the state in which greenhouse gases (GHG) emitted into the atmosphere are balanced by their removal from the atmosphere. For example, contracts can regulate the development and funding of green energy projects. Even contracts that are not directly related to climate change may also have a significant impact on (or be impacted by) greenhouse gas emissions or climate adaptation policies. These contracts may range from house sales to large corporate mergers and acquisitions.

    This section seeks to provide a high-level introduction to the possible impacts of climate change and related regulations on U.S. contract law. Although climate change, and the various policies and legislation implemented during the net zero transition, are unlikely to impact fundamental principles of U.S. contract law, they can nonetheless influence the drafting and negotiation of contractual provisions in agreements among governments, businesses, and individuals seeking to align with climate change-related policies and allocate climate-based risks. In the United States, the federal 45Q credit for carbon oxide sequestration is an example of how a federal government policy can incentivize businesses to pursue activities that reduce emissions while receiving economic incentives. These activities are regulated by sophisticated contracts that lay out the terms and conditions of the relationship between two or more parties involved in a carbon sequestration project. Furthermore, climate change is changing how parties think about risk and resolving disputes.

    Climate risks

    Climate change can manifest in the form of droughts, fires, floods, extreme weather, and resource scarcity, among others. Such events can have negative impacts on the parties’ performance obligations under a contract, ranging anywhere from delays in the performance of obligations to complete impossibility of performance. Exact impacts vary greatly depending on the relevant effect of climate change and the type of contract. These impacts can be broadly evaluated by considering two different types of climate risk—physical risks and net zero transition risks.[1]

    Physical risks stem from direct climate impacts like extreme weather events, and may have a significant effect on the performance of contracts. Relevant contracts might relate to the manufacturing or sale of products that may be negatively impacted by weather extremes, causing plant outages or the collapse of domestic and global logistics and/or demand, or relate to services that become more difficult to perform e.g., in unprecedented changes in temperatures. Parties will generally have considered these types of risks and agreed on a way of allocating said risk between them in a contract. Climate change is a risk multiplier because some of its effects can be completely unpredictable or unforeseeable, therefore, parties who underestimate any increases in physical risks due to climate change may suffer financial losses. Events caused or aggravated by climate change may lead to termination of contracts through force majeure (if contemplated in the contract) or the common law principle of frustration. This could happen if, for example, an extreme weather event destroys relevant property rendering the completion of a contract impossible. Some contracts, such as insurance contracts, are particularly exposed to these risks. Climate change can also cause global supply chain disruptions that make it difficult for parties to fulfil their contractual obligations.[2] Industry surveys confirm that climate change issues and environmental, social and governance (ESG) risks are already negatively impacting many mergers and acquisitions and driving more focused due diligences during project evaluation.[3]

    Net zero transition risks are caused by society’s response to climate change. Transition risks can impact parties’ willingness to contract, because some contracts may become more costly or difficult to enter into as a result of new climate compliance regulation. They can also impact existing contractual obligations. One way in which this can happen is through changes in asset value/valuation, which, if significant enough, may lead to defaults or stranded assets.[4] These value changes could be due to consumer or investor sentiment shifting towards renewable or sustainable alternatives. The broader global effort to address climate change, alongside physical risks, can also destabilize commodity prices.[5]

    Climate policies implemented at the federal, state, local, and tribal levels are also likely to affect the value of some goods and services. To illustrate, command-and-control regulation, such as technical bans or limits based on emerging climate policies (e.g., setting mandatory emissions levels), may make contractual obligations difficult or impossible to perform legally. Incentives to promote green industries may artificially and unsustainably reduce market prices. A significant shift in value variation can lead to contractual disputes[6] if a party to a contract seeks price revisions due to lower/higher production costs and/or sales price, as the case may be.

    The wide-ranging effects of climate change can negatively impact the performance of contracts. While many individuals and organizations are already ensuring that they consider climate impacts and related issues when drafting contracts, those that are not may be exposing themselves to risk. Drafting climate-aligned contracts and clauses can involve mitigating these risks, or going further and seizing climate opportunities.

    Contract Disputes

    As discussed above, climate change may impact a party’s ability to perform its obligations under a contract, or even alter the economic balance of the contract in a way that the contract no longer makes economic sense, all of which could give rise to disputes among the parties and claims for breach of contract. The forum for the resolution of disputes arising out of contracts largely depends on what was agreed to by the parties in the contract; some disputes may be referred to the jurisdiction of U.S. state or federal courts, or to an alternative dispute resolution mechanism, such as arbitration.

    The International Chamber of Commerce (ICC) Task Force on the Arbitration of Climate Change Related Disputes has acknowledged that international arbitration is a suitable forum for the resolution of climate change-related disputes.[7] In that regard, it notes that sectors impacted by the transition of energy, urban and infrastructure, land use, and industry systems account for the majority of arbitral awards issued by the ICC.

    The Hague Rules on Business and Human Rights Arbitration also provide guidance for resolving disputes in the context of the human rights impact of business activities—which extends to environmental and climate change-related issues.[8] As climate-related contractual disputes become more frequent, guidelines like the Hague Rules are likely to be considered alongside other U.S.-based dispute resolution mechanisms for the resolution of such disputes.[9]

    Climate Change Efforts

    The introduction of climate mitigation and adaptation efforts, including the Inflation Reduction Act, has created new products and services requiring contracts. For example, in the energy industry, contracts are needed to decommission non-renewable power plants, develop and operate carbon capture and sequestration facilitates, and for “funding, insuring, licensing, commissioning, plant construction, and dismantling/decommissioning or supply of renewable energy.”[10] Contracts are also needed for adaptation and mitigation efforts, such as for targeting the “adaptation of existing buildings and infrastructure to adapt to a warming climate, or new agriculture [and] forestry infrastructure to reduce greenhouse gas emissions from land use.”[11]

    Disclosure by Federal Contractors

    The Biden Administration has proposed a “Federal Supplier Climate Risks and Resilience Rule,” which would require federal contractors to publicly disclose greenhouse gas emissions and climate-related financial risks.[12] This rule is expected to impact about 86% of the emissions associated with the federal supply chain.[13]

    The rule would categorize contractors as “major” (those receiving more than $50 million in annual contracts) or “significant” (those receiving at least $7.5 million in annual contracts) and assign obligations based on a contractor’s category.[14]

    Significant contractors would need to disclose annually 1) “[d]irect greenhouse gas emissions from sources owned or controlled by the reporting entity” and 2) “[i]ndirect greenhouse gas emissions associated with generating electricity, steam, or heating and cooling when purchased or acquired for the reporting entity’s own consumption but [that] occur at sources owned or controlled by another entity.”[15]

    Major contractors would need to make the same disclosures annually and also “[d]isclose greenhouse gas emissions other than those [covered by the prior requirements] that result from operations of the reporting entity and that are from sources other than those owned or controlled by the entity.”[16] Further, they would need to develop and publicly post science-based targets for reducing GHG emissions, which must be validated and in line with reductions that the latest climate science deems necessary to meet the goals of the Paris Agreement.

    Climate Clauses

     “Climate clauses” specify commitments to climate action in contracts. For example, they might require disclosure of climate change-related issues when negotiating financing projects and encourage insurance coverage of climate risks, such as increasing insurance coverage by offering discounts if companies disclose and mitigate climate-related risks. Although U.S. law does not require use of such clauses, they are becoming increasingly popular among U.S. companies. For instance, in April 2021, Salesforce announced that it added binding commitments to its supply chain contracts to ensure that suppliers representing “60% of its suppliers by emissions covering purchased goods and services, capital goods, upstream transportation and distribution, waste generated in operations, and upstream leased assets will set science-based targets by 2024.”[17] This popularity may further increase if the proposed Federal Supplier Climate Risks and Resilience Rule is adopted.

    The “Climate Contract Playbook,” produced by the Chancery Lane Project, provides sample climate clauses for different sectors and practice areas to improve climate change implementation when negotiating and drafting contracts.[18] Covered areas include commercial supply agreements, real estate purchase agreements, mergers and acquisitions, project finance arrangements, procurements, transportation development, and many others. Practical Law U.S. has translated the clauses for use in U.S. jurisdictions.[19]

    Standards for climate clauses are also being developed through coordinated industry action. For example, sub-clause 4.18 of the International Federation of Consulting Engineers (FIDIC)’s “Red Book” sets an international standard for construction contracts that requires contractors to “take all reasonable steps to protect the environment (both on and off the [s]ite).”[20] This clause could be interpreted to include preventing emissions, as it specifies that environmental protection is not limited to the site itself, but some argue that it should go further and make specific reference to climate change.

    The inclusion of climate-related clauses, alongside increasing climate risks, may lead to more disputes where climate change is a key issue. Parties entering into contracts with these clauses should note that, as discussed above, arbitration is likely to play a key role in resolving these issues, and it is worth considering how any climate clauses interact with arbitration clauses in a contract.

    [1] For a more thorough evaluation of climate risks, see ‘The Global Risks Report‘ (The World Economic Forum, 30-44, 17th edition, 2022) <> accessed 24 April 2024.

    [2] Jacques Leslie, ‘How Climate Change Is Disrupting the Global Supply Chain (Yale Environment 360, 10 March 2022) <> accessed 24 April 2024.

    [3]M&A Trends Report: Climate Change and the Mergers and Acquisitions Landscape’ (Datasite Blogs, 13 December 2021) <–climate-change-and-the-mergers-and-acquisitions-landscape> accessed 24 April 2024.

    [4]Norton Rose Fulbright, What Are Climate Change and Sustainability Disputes?‘ (Thought Leadership, Issue 16, June 2021) <> accessed 24 April 2024.

    [5] Ibid.

    [6] See Sukma Dwi Andrina, ‘Green Technology Disputes in Stockholm‘ (The Arbitration Institute of the Stockholm Chamber of Commerce, August 2019) <> accessed 24 April 2024.

    [7] International Chamber of Commerce, ‘Resolving Climate Change Related Disputes Through Arbitration and ADR‘ (2019) <> accessed 24 April 2024.

    [8] Cleary Gottlieb, ‘The Launch of the Hague Rules on Business and Human Rights Arbitration‘ (Alert Memorandum, 29 January 2020) <> accessed 24 April 2024.

    [9] Ibid.

    [10] International Chamber of Commerce (2019).          

    [11] Ibid, p. 9.

    [12]Fact Sheet: Biden-⁠Harris Administration Proposes Plan to Protect Federal Supply Chain from Climate-Related Risks‘(The White House, 10 November 2022) <> accessed 24 April 2024.

    [13]Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk‘ (87 FR 68312, proposed 14 November 2022) <> accessed 24 April 2024.

    [14] Ibid.

    [15] Ibid.

    [16] Ibid.

    [17] Salesforce, ‘Salesforce Urges Suppliers to Reduce Carbon Emissions, Adds Climate to Contracts‘ (29 April 2021) <> accessed 24 April 2024.

    [18]Climate Clauses‘ (The Chancery Lane Project) <> accessed 24 April 2024.

    [19] The content of the Climate Contract Playbook is focused on UK law.

    [20] Christopher Seppälä,’The FIDIC Red Book Contract: An International Clause-by-Clause Commentary‘ (Kluwer Law International, 2019).