Within the pluralistic governance toolbox used to produce positive outcomes on climate change and the achievement of sustainable development more generally, contracts are often overlooked as a legal solution. This is because moralistic reasoning in contract law is often met with suspicion by common law scholars, and ‘freedom of contract’ is said to prevail so that parties will always opt to contract out of default rules that will increase their costs. English common law remains rooted in classical assumptions of autonomy, individualism, and objectivity in contracts. These traditionalist notions of the common law seek to exclude external normative agendas based on social justice, collective action and responsibility. This sort of laissez-faire contract law has remained extremely resilient to any attempts at considering wider Environmental, Social and Governance (ESG) challenges, due to formalistic and minimalistic perceptions that the courts should not be involved in micro-regulation.
However, a suite of new EU ‘Fit for 55’ legislation and a number of developments in green finance and supply chain regulation, are increasingly depending on contract law for adequate enforcement between private parties. At the same time, a growing wave of activism in the form of climate litigation is highlighting a myriad of new risks facing private entities that do not take sustainable commitments seriously. While green regulations require contractual implementation, private parties also need contract law to adequately protect their interests in meeting climate targets and undertaking sustainable due diligence. Private actors cannot be incentivised to take up certain agendas without contractual risk management. Thus far, the common law is yet to resolve a number of problems, including two worthy of detailed comment: 1) contractual remedies for breach of sustainability provisions; and 2) the issue of third parties and networks of contracts.
Contractual remedies are reactive rather than proactive and the main contractual remedy available to an innocent party is damages. The damages arising from non-compliance with a sustainability provision in a contract are generally non-pecuniary and might only take the form of reputational damage. These are hard to quantify and reasonably foresee, particularly where reputational losses may only arise in the future. Contractual breaches may trigger environmental sanctions and in extreme circumstances, severe ecological disturbances, in which case there is more at stake than the ordinary commercial consequences of breach. In this regard, English law is not well suited to ‘anticipating’ breach as the doctrine requires a high evidentiary burden to establish an inference that the other party will fail to perform (Gulf Agri Trade FZCO v Aston Agro Industrial AG [2008] EWHC 1252). Some authors have suggested that English law adopt a doctrine of adequate assurance such as the one seen in the American Uniform Commercial Code (UCC) (Beheshti, 2018). This would allow parties to ‘demand adequate assurance of due performance’ when ‘reasonable grounds for insecurity arise with respect to the performance of either party’ (Section 2-609 of the UCC). In some contexts, progress on this has been made. In relation to charterparties, BICMO (a drafting association for shipowners) has dealt with potential deviations from performance in meeting a carbon emission standard by way of an ‘advance warning mechanism’. If at any time, shared data suggests that one of the parties is to deviate from agreed performance, advance warning will be given, and the performance must be rectified.
As an alternative to the remedy of damages, parties may attempt to rely on specific performance or injunctive relief. However, such remedies are not readily available where damages are found to be adequate. The reality is that most existing environmental covenants are not treated as conditions of which a breach would be repudiatory. Although Priyanka Shipping Limited v Glory Bulk Carriers PTE Limited [2019] EWHC 2804 confirms that injunctions can be available for non-repudiatory breaches, the interest protected by a negative covenant in that case (i.e. restraint of further fixtures) was purely related to market efficacy. The court was unwilling to grant damages in addition to an injunction as, ‘the claimant needs to establish that a loss has been incurred, in the sense that he is in a less favourable situation, either economically or in some other respect, than he would have been in if the contract had been performed’ (para 95). Proving such loss is challenging in an environmental context. Moreover, based on the discussion of Wrotham Park damages in Priyanka, it seems even less likely that negotiating damages would be available for the interests protected by a sustainability clause.
In the supply chain context, the doctrine of privity of contract makes managing the risks associated with third parties difficult, particularly in relation to downstream pollution in the supply chain or what are termed ‘scope three’ emissions. The case of Begum v Maran (UK) Ltd [2021] 3 WLUK 162 highlights that certain contractual provisions to control subsequent contractual relationships for green performance are at risk of being completely unenforceable. Furthermore, this case raises the possibility of extending a tortious duty of care to upstream participants in supply chains on the basis of ‘creating a source of danger’ in a human rights context.
In an attempt to overcome this limitation of ordinary contracts for the achievement of climate targets and sustainable performance, The Chancery Lane Project (TCLP) – a voluntary association of lawyers for climate drafting – have created a number of tools for supplier due diligence. The Responsible Contracting Project (RCP) has also created a toolkit for the incorporation of responsible principles into supply chain contracting. These drafting tools include innovative ways of incorporating mutual commitments, remediating adverse human rights impacts related to contractual performance, and informal negotiations in good faith.
Both initiatives, the RCP and TCLP have attempted to construe often times vague ambitions into enforceable terms. These new clauses are presenting pioneering ways to harden new cooperative norms, implement advance notice mechanisms, introduce declassification events for loan products and model sophisticated data-sharing commitments enabled by new technologies. In particular, the risks associated with greenwashing and other forms of climate litigation are highlighting a new set of obligations that should be considered by private actors within all vehicles of economic exchange – i.e. contracts. These clauses illustrate that freedom of contract should not be seen in juxtaposition to sustainability objectives but can further party interests. To maximise the potential this initiative offers, the common law will need to play catch up. Calls for the modernisation of contract law have included the suggestion of legislative intervention or, alternatively, the adoption of international instruments that seek to lay the foundation for sustainability norms in contractual performance. What seems clear is that contract law is no longer immune to the issues of climate change and sustainable development.
Dr Pia Rebelo is an admitted attorney from South Africa and a lecturer in private law. She obtained her LLB and LLM at the University of Cape Town and completed her PhD at the City Law School, City, University of London. Her research interests are focused on the contractual mechanisms employed to facilitate and incentivise a green shipping transition. She has published work on green finance frameworks, green supply chain finance, climate clauses, climate litigation, and contractual solutions for energy efficiency.
