Contracting for Forest Carbon : Elements of a Model ... - Forest Trends

Contracting for Forest Carbon:Elements of a Model Forest Carbon Purchase Agreementi

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Contracting for Forest Carbon:Elements of a Model Forest Carbon Purchase AgreementSlayde HawkinsMichelle NowlinDaniel RibeiroRyan StoaRyke LongestJim SalzmanLegal Advisor & Policy Analyst, Katoomba Group – Forest TrendsSupervising Attorney & Senior Lecturing Fellow,Duke Environmental Law & Policy ClinicAssociate In Research, Duke Environmental Law & Policy ClinicAssociate in Research, Duke Environmental Law & Policy ClinicDirector & Senior Lecturing Fellow,Duke Environmental Law & Policy ClinicSamuel F. Mordecai Professor of Law and Nicolas Institute Professor ofEnvironmental Policy, Duke UniversityDecember 2010iii

Table of ContentsIntroduction ....................................................................................................................... 1Introducing the Transaction and the Parties ......................................................................... 3Title, Introduction, and Recitals ................................................................................................... 3Parties ........................................................................................................................................... 3The Body of the Agreement: Rights and Responsibilities ....................................................... 4The Project ................................................................................................................................... 4Delivery ........................................................................................................................................ 6Price and Payment ........................................................................................................................ 6Taxes ............................................................................................................................................ 8Representations............................................................................................................................. 9Validation and Verification ......................................................................................................... 11Default and Remedies ................................................................................................................. 13Force Majeure ......................................................................................................................... 13Failure to Make or Accept Delivery......................................................................................... 14Event of Default ..................................................................................................................... 15Remedies ................................................................................................................................ 16Dispute Settlement ..................................................................................................................... 17Miscellaneous ............................................................................................................................. 18Interpretation & Definitions ....................................................................................................... 19Interpretation ......................................................................................................................... 19Definitions ............................................................................................................................. 20Wrapping Up: Signatures and Annexes .............................................................................. 22Signatures ................................................................................................................................... 22Annexes ...................................................................................................................................... 22Conclusion ....................................................................................................................... 23Additional Resources ......................................................................................................... 23Works Cited ..................................................................................................................... 25v

AcknowledgmentsA joint project between Forest Trends - Katoomba Group and the Duke Environmental Law and PolicyClinic, this report draws from and complements various other publications. The sample agreement used inthis report is based upon templates developed by others, specifically:• the CERSPA document, available at www.cerspa.com,• the International Emissions Trading Association Emissions Trading Master Agreement for the EUScheme, available at http://www.ieta.org/ieta/www/pages/getfile.php?docID=194,• and template contracts for ecosystem services transactions developed by Mark Ellis-Jones of CAREInternational, available at www.katoombagroup.org/legal_contracts.As part of a suite of publications on carbon markets and transactions, this report complements other ForestTrends publications, including the annual State of the Voluntary Carbon Market and State of the Forest CarbonMarkets reports, and how-to manuals, such as: Getting Started with Payments for Ecosystem Services and theforthcoming Step-by-Step Guide to Forest Carbon Projects. We urge readers to refer to these publications foradditional information and guidance.We are grateful to Tauna Szymanski, Michael Jenkins, Johannes Ebeling, Sissel Waage, Jacob Olander, andAnne Thiel, for reviewing drafts and providing suggestions.Copyright and Disclaimer© 2010 Forest Trends and the Katoomba GroupThis report and the featured sample agreement are meant to provide a general introduction to contracting forforest carbon credits and are not intended to be legal advice. The sample contract clauses are illustrative only,and should not be used without significant additions and customization, as relevant to the particularcircumstances of the transaction.Duke Environmental Law and Policy Clinic, Forest Trends, and the Katoomba Group (and their respectiveaffiliates, officers, directors, partners and employees) do not make any representations or warranties as to theaccuracy, suitability or content of this report or the sample agreement and have no liability or responsibilityfor any damages or losses resulting out of their use in the individual case in any jurisdiction. It is the soleresponsibility of the reader to ensure that the information in this report is accurate, applicable to, and suitablein his or her particular situation before making any decision based upon this information.Use of this report, or the sample clauses contained herein, does not create an attorney-client relationshipbetween any person and the Duke Environmental Law and Policy Clinic, Forest Trends or the KatoombaGroup. It is strongly recommended that the reader consult with a lawyer to determine whether specificinformation is relevant to the reader’s particular situation, and to seek appropriate legal and professionaladvice before entering into any transaction.vi

IntroductionForest carbon has the potential to play animportant role in climate mitigation. Scientistsassert that deforestation and degradationaccount for 15% to 20% of CO 2 emissions. 1Other reports, including The Stern Review, TheEliasch Review, and research by McKinsey andCompany, support the halting of deforestationas a critical and cost-effective means of reducingglobal greenhouse gas (GHG) emissions. 2Forest carbon payments – payments forrestoring or planting forest, or for preventingforest degradation or deforestation – can help toprevent and reverse forest loss. However, forestcarbon transactions today raise manychallenging issues for participants, includingdifficult legal questions. Despite almost twentyyears of transacting forest carbon, and morethan 67.8 million tons of carbon dioxidetransacted, 3 transaction costs and legal feesremain significant and unpredictable.In addition, the nature of forest carbon marketsis such that buyers and sellers are likely to be onunequal footing in terms of their financialresources and commercial experience. Forestcarbon sellers tend to be landowners and mayhave little experience with commercialtransactions, whereas forest carbon buyers aregenerally economically sophisticated companiesand carbon brokers.1Solomon, S. et al. 2007; van der Werf, G. et al.2009; Rogner, H. & Dadi Zhou et al. 2007.2Stern, N. 2006; Eliasch, J. 2008; Enkvist, P. et al.2007.3Hamilton, K. et al. 2010.Box 1. Types of Forest Carbon ProjectsDifferent activities can form the basis of a forestcarbon project, including:• Afforestation – planting and raising trees inareas that were not forested in recenthistory.• Reforestation – planting and raising forestin areas that were forested in recent history.• Improved forest management (IFM) –engaging in land management activities thatenhance carbon stocks in forest.• Reducing emissions from deforestationand degradation (REDD) – protectingexisting forests from degradation ordeforestation that would otherwise occur,thereby avoiding carbon emissions.• REDD+ or REDD++ – according to theUnited Nations REDD Program, “REDD+goes beyond deforestation and forestdegradation and includes the role ofconservation, sustainable management offorests, and enhancement of forest carbonstocks.” 4 REDD++ refers to a broader suiteof land-use activities, including things likeagriculture, and land management.In order to lower legal costs of forest carbontransactions and help to level the playing fieldbetween buyers and sellers, this documentguides the reader through a sample forest carbonemission reductions purchase agreement(ERPA). The discussion outlines issues that ariseduring pre-negotiation, negotiation, andcontracting, while sample contract clausesillustrate the discussion and provide examples ofrelevant contractual language.4UN-REDD Programme 2010.Contracting for Forest Carbon | 1

Legal costs make up a significant, and oftenoverlooked, share of forest carbon transactioncosts. By providing readers – whether sellers,buyers, lawyers, or other stakeholders – with anunderstanding of forest carbon legal issues, aswell as a basic familiarity with contractuallanguage, this document can help to reducethese costs.Box 2. Emission Reductions and VerifiedEmission ReductionsEmission reductions (ERs) represent net carbon(or CO2 equivalent) emission reductions oradditional carbon storage, in tons, due to aforest carbon project.Successful validation and verification ofemission reductions to an external standard –for example, the Voluntary Carbon Standard –transforms ERs into verified emission reductions(VERs), a marketable commodity.The sample agreement in this documentinvolves multiple sellers, represented in theagreement by a single individual, and a forwardpurchase of VERs on the voluntary carbonmarket. “Forward” refers to the fact that partiesagree to the purchase and sale of VERs that havenot yet been created.A forward emission reductions purchaseagreement is by no means the only way tostructure investments in forest carbon projects.Another option is to use private equity financingto give the investor some rights to eventualrevenues, and possibly a degree of control overproject activities, in return for early-stageinvestment. At the other end of the projectcycle, a buyer may make a “spot” purchase ofVERs that have already been generated andissued, virtually eliminating the buyer’s exposureto project risks and allowing the seller to ask fora higher price per VER. Different investmentand purchase options involve trade-offs betweenprice, risk, level of control, and other factors.This document discusses a forward sale of VERsas opposed to some other investment orpurchase agreement for several reasons. First, theforward sale tends to be an attractive option forforest carbon sellers that need up-frontfinancing, help with project costs, and/orsharing of project risks with an investor orbuyer. Second, an emission reductions purchaseagreement can be relatively standardized, yetremain customizable for specific transactions,making it well-suited for use in a guidancedocument such as this one. Third, forwardpurchase agreements raise forest-carbon-specificissues related to project activities, advancepayments, default and remedies clauses, andother issues, in a way that spot purchaseagreements, for example, do not. This type ofagreement therefore provides a good frameworkfor discussing negotiation and contracting issuesthat are in some way unique or specific to forestcarbon.While the authors have made every effort toensure that the information provided is relevantto forest carbon project participants generally,different issues will arise in every case. Readerstherefore should not rely upon the informationprovided here for legal advice, but should seekout experienced legal support appropriate totheir particular circumstances.Contracting for Forest Carbon | 2

Introducing the Transactionand the PartiesTitle, Introduction, and RecitalsThe forest carbon agreement will have a title,which should be simple but descriptive but neednot include the names of the parties. Theintroduction follows, in the form of a shortparagraph identifying the parties and the date ofthe agreement. The principal, legal, or registeredaddresses of the parties are generally listed here.The date of the contract should ideally be thedate of signing for the last party to sign theagreement.Next come the recitals, which include anybackground information that the parties think isrelevant. Recitals may include a description ofthe goals of the agreement along withbackground information about the project, theparties, and any relevant agreements betweenthe parties or any party and one or more thirdparties. The recitals should not contain anybinding obligations.The introductory part of the agreement endswith a lead-in sentence indicating that “theparties agree as follows,” as shown in Box 1.Box 1. Sample Beginning of an AgreementFOREST CARBON EMISSIONREDUCTIONS PURCHASEAGREEMENTThis forest carbon emission reductions purchaseagreement is dated , and isbetween Seller Representative Assn., a Braziliannon-profit association (the “SellerRepresentative”), and Investor Corp., aDelaware corporation (the “Buyer”).RECITALSThe Seller Representative and participatingmembers of the Ecosystem Service ProviderCommunity (“Participating Landholders”) areparty to an agreement dated ,concerning the authority of the SellerRepresentative to represent the ParticipatingLandholders with respect to forest carbontransactions on land under the control of theParticipating Landholders.Participating Landholders wish to undertakeland management activities in order to reduceemissions from deforestation and degradationand enhance carbon sequestration in forestsunder their control (the “Project”).The Buyer wishes to pay ParticipatingLandholders for the right to claim credit foremission reductions or additional sequestrationgenerated by the land management activities ofParticipating Landholders.The parties therefore agree as follows:PartiesIn its simplest form, a purchase agreement isbetween two parties: a buyer and a seller. Aforest carbon purchase transaction, however,may involve multiple sellers – perhaps evenwhole communities – and multiple buyers.Generally speaking, the more parties areinvolved, the higher the administrative andtransaction costs will be. The additional cost,and potential risk, can and should be mitigatedby the use of one or more intermediary entitiesto: (1) represent the sellers as a collective unit innegotiating with third parties, including buyers,(2) oversee project development andgovernance, and (3) manage collection anddisbursement of revenues.Where multiple sellers are involved, sellersshould ideally agree to be represented by a singleContracting for Forest Carbon | 3

individual or entity – a sellers’ representative –who will be authorized to negotiate with buyersand any third parties involved in the project onbehalf of the sellers as a group. Differentjurisdictions are likely to have distinct legalrequirements for authorizing a third party to acton behalf of sellers. Accordingly, sellers will haveto consult local counsel to ensure compliancewith the law.Potential buyers will verify the capacity andauthority of the sellers’ representative as part ofthe due diligence process, in order to avoidpotential disputes over authorization that candisrupt project activities. Buyers may also needassurances that they are dealing with a valid,authorized entity so as not to violate antimoney-laundering laws in their home country.The sellers’ representative may also be entrustedwith leading project development and design, aswell as project governance once the project is upand running. The sample agreement assumesthat the project is already underway. Therefore,it deals with project governance but not projectdevelopment.Good, transparent project governance, withrobust procedures in place to resolve disputesand facilitate participatory collective decisionmaking,can be expected to reduce the cost tosellers of administering the project and tocontribute to the project’s success. Projectgovernance provisions should be agreed on byall sellers in advance, and entrusted to a singleindividual or entity to ensure that they arecarried out as agreed.In addition, the sellers’ representative may beauthorized to collect revenues from buyers anddisburse funds to sellers according to agreedprocedures. Alternatively, this role may begranted to a separate entity – a trust fund, forexample – that will be in charge of fundsmanagement.Procedures for seller representation, projectgovernance, and funds management must beagreed in advance between all sellers, the sellers’representative and any other participatingentities, and outlined in one or more writtenagreements. For the sake of simplicity, thesample purchase agreement described in thisdocument assumes that the sellers’ representativeis properly authorized in a single agreement withall sellers to both negotiate on behalf of thesellers (“Participating Landholders” in thesample agreement), as well as to oversee projectgovernance and manage project funds.On the buyer side, the sample purchaseagreement considers a single buyer. It isrecommended that sellers execute a separatepurchase agreement with each buyer.In some cases, the government may participatein forest carbon projects as a buyer or a seller.Such government involvement will raise uniqueissues that are not addressed in this documentbut will be essential to address in thedevelopment of successful agreements.The Body of the Agreement:Rights and ResponsibilitiesThe ProjectForest carbon sellers can generate net emissionreductions by: (1) reducing forest emissionsfrom deforestation and degradation and (2)increasing the amount of carbon stored inforests via reforestation, restoration, orimproved forest management.Emission reductions, however, do not becomereadily marketable commodities until they arevalidated and verified to an external standardand become verified emission reductions (VER).In theory, any VER that is verified to a certainstandard is equivalent to any other VER verifiedto that standard, regardless of how it wascreated. This approach provides the basis fortrading VER on carbon markets. In practicehowever, VERs will sell for different pricesContracting for Forest Carbon | 4

depending upon where the project is located andother circumstances. For example, a VER from acommunity-based forest carbon project can besold at a higher price than a VER from a projectthat reduces methane emissions from landfills.VER may either be sold after they are created –in a ‘spot’ sale – or they may be sold ahead oftime in a ‘forward’ sale. The spot price for VERis substantially higher than the forward price,because the buyer bears no project risk. On theother hand, sellers may prefer forward sales,which provide up-front funding for projectactivities. In a forward purchase agreement,project activities are a central concern: the sellerpromises to diligently perform activities in orderto maximize the chance that the project willultimately create credits.Due to the desirability (and often necessity) of aforward sale from a seller’s point of view, interms of providing funds for projectdevelopment and sharing project risks, thisdocument focuses on a forward sale of VERs.Project activities therefore appear at thebeginning of the body of the agreement.Box 2. Sample Clauses Dealing with ForestCarbon Project ActivitiesArticle 1.Activities.Sale and Purchase; Project1.1 Sale and Purchase. The SellerRepresentative agrees to sell and the Buyeragrees to purchase verified emission reductions(“VERs”) subject to and in accordance with theterms of this agreement.1.2 Project Activities. ParticipatingLandholders shall manage their land and forestin order to decrease greenhouse gas emissionsfrom deforestation and degradation and increasecarbon sequestration (“Project Activities”) inaccordance with the project plan in annex 1 (the“Project Plan”).1.3 Project Area. The land on which theProject Activities will occur (the “ProjectArea”) is the area that is described in annex 2.1.4 Mitigation of Risk. ParticipatingLandholders shall manage the Project Area toreduce the risk of forest loss due to fire,insects, or plant disease as provided in theProject Plan.1.5 Project Governance. The SellerRepresentative shall oversee governance of theProject and shall ensure compliance with theproject governance procedures in the ProjectPlan.1.6 Effective Date, Term. This agreementtakes effect upon execution by both parties(the “Effective Date”) and remains in effectuntil delivery of all VERs covered by thisagreement or the earlier termination of thisagreement in accordance with its terms.In the forest carbon context, there is a realdanger that a forest fire, insect infestation, orplant disease outbreak could cause the release ofstored carbon and destroy the transaction.Clause 1.4 assures the buyer that thelandholders will take certain actions to mitigatethe risk of forest fire, insect infestation, or plantdisease outbreak, as specified in the Project Plan.This clause is important because the landholderscan mitigate such risks, but not eliminate thementirely. For example, sellers can plant mixedtree species, maintain distances between maturetrees, and clear dead brush, as appropriate to theforest ecosystem in which the project is situated.The project governance procedures referred toin clause 1.5 must be agreed among allparticipating landholders and the sellers’representative and should include protocol fordecision-making among participatinglandholders, distribution of revenues,transparency, and other project governancematters. Important goals of that documentinclude: assurance that there is ongoing free,Contracting for Forest Carbon | 5

prior, and informed consent by all participants;provision for a fair allocation of revenues; andan orderly division of responsibility amongparticipants.Project governance procedures should alsoprovide for how, if at all, new participatinglandholders may join the project after itcommences. Care should be taken to disallowparticipation by people who have gained rightsin land illegitimately, by coercion, or by force. Itwill also be important to adjust benefit-sharingappropriately if different landholders participatein project activities for different periods of time.DeliveryIn any purchase agreement, the seller isobligated to deliver purchased goods or servicesto the buyer. Since forest carbon sequestrationoccurs over long periods of time, delivery ofVERs will often occur over a 15-30 year periodfrom the start of project activities.The sample agreement illustrates one commondelivery arrangement for a forward carbonpurchase, that is regular deliveries of all or aportion of the VERs generated by the project forthe duration of the agreement. This approachrecognizes fundamental uncertainties in thetiming and amount of VERs that will begenerated by a forest carbon project.Delivery of VERs generally occurs over anelectronic registry that tracks transfers of VERand helps to ensure that no double-counting ofemission reductions occurs. Responsibility foropening and maintaining a registry account, andpaying transfer or other fees, should be allocatedin the agreement.Box 3. Sample Delivery ClauseArticle 2. Delivery of Verified EmissionReductions.2.1 Delivery and Acceptance. On June 1, 2012and each June 1 thereafter (the “DeliveryDate”) through June 1, 2026 (the “AgreementTerm”), the Seller Representative shall deliver,and the Buyer shall accept, all of the VERsissued to the Project during the preceding yearfrom June 1 to May 31, inclusive (each suchdelivery and acceptance, a “Transaction”).2.2 Registry. The Seller Representative shalldeliver VERs on the Markit VCS Registry orsuch other registry as is agreed in writingbetween the parties (the “Registry”).2.3 Costs. Each party shall pay its own costs ofopening and maintaining a registry account.The Buyer shall pay all transfer and other feesassessed by the Registry.2.4 No Encumbrance. The Seller Representativeshall not create or permit to exist any claim orencumbrance over the Emission Reductions orthe VER that are the subject of this agreement.Price and PaymentThe buyer’s primary obligation is to makepayments in return for VERs from projectactivities. In turn, the seller must transfer alllegal rights in the VERs to the buyer. Thistransfer of rights is meant to ensure that theseller cannot re-sell the same VER to a differentbuyer. It also provides security for the seller,because rights in the VER are only transferredonce full payment occurs (see Box 4, clause 3.8).One of the most difficult aspects of forestcarbon transactions involves the question of upfrontpayments. An emission reductionspurchase agreement, like the sample agreement,anticipates that most of the payment is dueupon delivery of VER. However, many forestcarbon sellers, and small-scale sellers inparticular, need payment up front – in the formContracting for Forest Carbon | 6

of advance payments – in order to fund projectactivities.Because the buyer bears more risk by paying inadvance, he or she is likely to require adiscounted price and/or an increase in controlover project activities if advance payments areused.In terms of the price for VERs, the parties mayuse a fixed price or they may tie the price to anindex that accounts for price fluctuations overtime. A fixed price is more commonly used.The downside of using a fixed price is that theparties cannot be sure until VERs are issuedwhether they made a good deal, relative to thespot price for VERs. The parties can limit thisuncertainty by providing that the seller willshare in profits when the spot price rises above,or in losses when the spot price falls below, a setthreshold. This helps to reduce or eliminate theincentive for one party to break the contract dueto a wide discrepancy between the spot priceand the contract price.Alternatively the parties can maintain theirrelative position at all times by using an indexedprice, which takes price fluctuation into accountby tying the price of VERs to an external indexsuch as the Bloomberg New Energy FinanceVoluntary Carbon Index. The downside of anindexed price is that there is uncertain pricinguntil VERs are issued, which creates significantrisk for both parties. If an indexed price is used,a minimum price (a floor) and/or a maximumprice (a ceiling) may be used to limit priceuncertainty.Regardless of how the price is determined, thesellers must release all claims to VERs whenpayment is delivered for those VERs, and notbefore. Doing so establishes a sort of lien onVERs that is released only by full payment.Box 4. Sample Price and Payment ClausesArticle 3. Payments.3.1 Price. The Contract Price is U.S. $5 perVER delivered under this agreement.3.2 Statement. As soon as practicable after theDelivery Date for a Transaction, the SellerRepresentative shall send to the Buyer a writtenstatement (the "Statement") showing for suchTransaction:(a) the quantity of VERs delivered;(b) the Contract Price;(c) the date of delivery;(d) any amount owing from one party tothe other;(e) the net amount payable from one partyto the other after taking into account all of theabove (the “Statement Amount”); and(f) any applicable amount payable underclause 4.1 (VAT Taxes) as a result of transfersunder this agreement.3.3 Failure to Issue Statement. If the SellerRepresentative fails to issue a Statement inaccordance with clause 3.2 (Statement), then theBuyer may issue that Statement to the SellerRepresentative and, once issued, that Statementshall be treated as a Statement issued by theSeller for the purposes of this agreement. Failureto issue a Statement does not affect the rightsand obligations of the parties under thisagreement and is not an Event of Default as thatterm is defined in clause 9.1.3.4 Payment Due Date. The Payment DueDate is the fifth Banking Day after the later of:(i) the Delivery Date and (ii) the date on whichthe Statement is delivered to the buyer inaccordance with clause 3.2 (Statement).Contracting for Forest Carbon | 7

3.5 Payment Mechanics. On or before thePayment Due Date, the Buyer shall transfer theStatement Amount, plus any amounts payableto the Seller Representative under clause 4.1(VAT Taxes) and 4.2 (Other Taxes), in USDollars and by direct bank transfer or equivalenttransfer of immediately-available funds, into theaccount specified in Annex 3.3.6 Advance Payments. The Buyer shall makeadvance payments according to the AdvancePayment Schedule in Annex 3 (“AdvancePayments”). Advance Payments directly offsetthe Buyer’s payment liability for deliveredVERs.3.7 Sufficient Funds. The Buyer shall maintainsufficient funds to fulfill its obligations underthis agreement, and shall make audited financialreports available to the Seller Representativeupon the Seller Representative’s reasonablerequest.3.8 Transfer of Title. No property interest in theVERs will pass to the Buyer until delivery andpayment are complete in accordance with theterms of this agreement. Upon such completion,all rights, title and interest in and to the VERs,will transfer to the Buyer. Transfer of VERsdoes not transfer eligibility for tax credits orother direct third-party subsidies for theoperation of the Project.These sample price and payment clauses,however, represent only one simplified way ofdealing with the issues described above, and theyomit several additional issues entirely. Omittedissues, including the three discussed below, canadd substantial complexity if used.First, payments in-kind, in the form ofequipment, raw materials, technology, ortraining, may be desirable for both the buyerand the seller. The form, feasibility, andvaluation of in-kind payments depend entirelyupon the circumstances.Second, particularly where the project involvescomplex payouts to various sellers andsupporting entities, or significant prepayment bythe buyer, it is common to use an escrowaccount to transfer payments for VER from thebuyer to the seller. Procedures for disbursementof funds from the escrow account would beoutlined in a separate agreement between theaccount holder (a financial institution), andsellers and supporting entities, if applicable, andmust be in accordance with project governanceand benefit sharing arrangements.Third, if sellers are concerned about the risk thatthe buyer will not have the money to pay whenrequired, sellers can require the buyer tomaintain a letter of credit, or sufficient funds, orsome other form of performance assurance.However, performance assurance can beexpensive and may be hotly contested.TaxesThe agreement must address which party isresponsible for taxes assessed in connection withthe agreement. One common tax that must beaddressed is the value-added tax (VAT), which ischarged when a good or service is transferredand is based on the value of the good or service.The sample agreement provides that the buyer isresponsible for paying VAT. If VAT ischargeable to the sellers’ representative, then thebuyer must pay the sellers’ representative thevalue of the tax. Note that where a “ReverseCharge Rule” is part of the VAT law in thebuyer’s country, the buyer is responsible forcalculating and paying VAT directly to theforeign government entity that charges the taxand therefore need not pay the sellers’representative.Contracting for Forest Carbon | 8

Box 5. Sample VAT and Other Tax ClausesArticle 4.Taxes.4.1 VAT Taxes. All amounts referred to in thisagreement are exclusive of any value-added taxes(“VAT”) properly chargeable on goods orservices transferred under this agreement.(a) VAT applicability and treatment will bedetermined pursuant to the law of thejurisdiction where a transfer subject to VAT isdeemed to take place.(b) On the Payment Due Date, the Buyer shallpay to the Seller Representative an amountequal to the VAT, if any, properly chargeable inthe Seller Representative's jurisdiction fortransfers under this agreement; provided,however, that (i) such amount need not be paiduntil the Seller Representative provides theBuyer with a valid VAT invoice in relation tothat amount and, (ii) the Buyer is under noobligation to make any payment to the SellerRepresentative in respect of VAT which theBuyer must self-assess and pay under the“reverse charge” rule or any similar system in theBuyer's jurisdiction.(c) Each party shall, to the extent permitted bylaw, provide the other with any additional validVAT invoices as required for the purposes ofthis agreement and, to the extent required bylaw, shall correctly account for any VATproperly due in its jurisdiction.4.2 Other Taxes.(a) Subject to each party's obligations relatingto VAT, each party shall cause all royalties,taxes, duties and other sums (including anystamp duty, other documentary taxes, climatechange levy or other environmental tax or levy)legally payable by that party arising inconnection with this agreement to be paid.(b) In the event that the Seller Representative isrequired by law to pay any tax which is properlyfor the account of the Buyer, the Buyer shallpromptly indemnify or reimburse the SellerRepresentative in respect of such tax. In theevent that the Buyer is required by law to payany tax which is properly for the account of theSeller Representative, the Buyer may deduct theamount of any such tax from the sums due tothe Seller Representative under this agreementand the Seller Representative shall promptlyindemnify or reimburse the Buyer in respect ofany such tax not so deducted.In the sample agreement, taxes other than theVAT are allocated to the party to whom they areproperly chargeable. This is a simple solution,though many will prefer to negotiate a differentallocation of taxes and other costs.RepresentationsRepresentations are statements of fact that aremade by each party to an agreement in order toremove uncertainties and induce the other partyor parties to enter the transaction. For example,each party typically represents that it is legallyauthorized to enter into, and perform itsobligations under, an agreement.Representations should be limited to statementsof fact, and should not contain forward-lookingstatements or obligations (which are usuallyreferred to as “covenants” and dealt withseparately).In a project involving multiple sellers, the sellersmay want to represent that the project’sgovernance mechanisms facilitate full, prior, andinformed consent, enhance transparency orequity, or increase the likelihood of projectsuccess.If a party’s representations turn out not to havebeen true when made – known as a failure ofthat party’s representations – then the otherparty will have rights and remedies as specifiedContracting for Forest Carbon | 9

in the agreement (see Box 11 - Default and Box12 - Remedies).A partial list of general representations (made byeach party) appear in Box 8.Box 6. Sample General RepresentationsArticle 5.Representations.5.1 General Representations. Each partyrepresents that:(a) It is duly organized and validly existingunder the laws of the jurisdiction of itsorganization or incorporation, and, if relevantunder those laws, in good standing.(b) It has the power:(1) to execute this agreement and any otherdocumentation to which it is a party relating tothis agreement;(2) to deliver this agreement and anydocumentation relating to this agreement that itis required by this agreement to deliver; and(3) to perform its obligations under thisagreement,(c) All required authorizations have beenobtained and are in full force and effect.(d) Execution, delivery, and performance underthis agreement does not cause it to violate anyapplicable law, statute, contractual obligation, orcourt or government order.(e) Its obligations under this agreement arelegal, valid, and binding, and enforceable inaccordance with their respective terms, subjectto applicable creditors’ rights laws and toequitable principles of general application.(f) No Event of Default, as that term is definedin Article 9, or event that with notice or lapse oftime or both would constitute an Event ofDefault, has occurred with respect to it, and nosuch event would occur as a result of its enteringinto or performing its obligations under thisagreement.(g) No litigation, arbitration, or administrativeproceeding before any governmental entity ispending or, so far as it is aware, threatenedagainst it that would, if adversely determined,result in a material adverse change in itsfinancial condition or its ability to perform itsobligations under this agreement, or that islikely to affect the legality, validity, orenforceability against it of this agreement.(h) It has entered into this agreement after a fullopportunity to review its terms and conditions,it has a full understanding of these terms andconditions and their risks, and it is capable ofassuming those risks.(i) It is not relying upon any representations ofthe other party other than those expressly set outin this agreement, and the other party is notacting as a fiduciary or advisor for it.(j) All information that is identified as beingsubject to or connected with this agreement andthat it provides, or that is provided on its behalf,in writing to the other party is, as of the date itis provided, true, accurate, and complete inevery material respect.Forest carbon sellers may need to makeadditional representations to the effect thatsellers are legally entitled to sell VERs from theproject area under applicable local and nationallaw. Furthermore, if a sellers’ representative isused, it should represent that it was legallyappointed, after full and fair disclosure, by allparticipating landholders.Box 7. Sample Representations Made by theSellers’ Representative5.2 Seller Representative Representations. TheSeller Representative represents that:(a) Participating Landholders hold use rights inthe Project Area, as shown in the land use grantthat is attached at annex 4, that entitle them toperform, and receive revenue from, ProjectActivities.Contracting for Forest Carbon | 10

(b) As shown in the agreement between theSeller Representative and ParticipatingLandholders that is attached at annex 5, theSeller Representative is authorized by theunanimous, free, prior, and informed consent ofParticipating Landholders to act on behalf ofParticipating Landholders and to oversee projectgovernance and distribution of revenues asdescribed in the Project Plan.To show the buyer that sellers are legallyentitled to sell VER from their land, sellersmust, at a minimum, demonstrate that:• Sellers have a use right (statutory orcustomary) in the project area that permitsthem to perform project activities andexclude incompatible uses, for the fullduration required by the purchaseagreement and the certification standardsused.• Claiming and transferring credit foremission reductions within the project areais not contrary to applicable national orlocal law.If the land or natural resources belong to thegovernment, governmental approval may berequired for project activities to proceed.It may be good practice to specify thatparticipating landholders have held use rightsfor a minimum period of time before the projectbegan, indicating that they did not recentlyacquire rights in the project area by squatting orappropriation.The function of clause 5.2(a) in Box 9 is toassure buyers that the sellers’ representative hasthe free, prior, and informed consent of allparticipating landholders to (1) representparticipating landholders, (2) oversee projectgovernance, and (3) manage revenuedistribution. The sellers’ representative will needto attach proof of consent, which can be anagreement signed by all participatinglandholders and the sellers’ representative, to thepurchase agreement.Validation and VerificationUsing the Voluntary Carbon Standard oranother accepted standard or program forassessing the carbon benefits of a forest carbontransaction provides minimum requirementsand procedures for project validation andverification. Most standards, including theVoluntary Carbon Standard, additionallyprovide specific methodologies or protocols thatdescribe how the project and its net effects oncarbon emissions are to be assessed in specificcircumstances. For the sake of simplicity, thisdocument will use “standards” to refer tocarbon standards or programs and“methodologies” to refer to methodologies orprotocols under those standards.Generally, validation is an evaluation of theproject plan and associated documents todetermine whether the project is likely togenerate emission reductions that can satisfy therequirements of the chosen standard andmethodology. Monitoring refers to periodicassessments of whether the project isaccomplishing its goals. Verification refers to anex-post evaluation of whether emissionreductions were generated as planned.Even in the voluntary market, rigorous thirdparty validation and verification is likely to beextremely important to buyers. Where thirdparty validation and verification is used, thepurchase agreement must specify whichstandard, and which of the chosen standard’smethodologies, will be used. Alternatively, theagreement can describe the process by which astandard and methodology will be selected.In general, validation and verification must bedone by separate individuals or entities, each ofwhich must be approved to performaccreditation under the chosen standard. Due toboth the rigor required and the lack of peopleContracting for Forest Carbon | 11

qualified to perform validation and verification,the time and expense involved is significant andunexpected delays are common. These and othercosts and risks of validation and verificationmust be allocated in the purchase agreement.When VERs have been validated and verified toa certain standard, they are “issued” by thestandards organization and entered into acarbon credit registry that tracks the issuanceand ownership of VERs.Who will bear the costs of validation,verification, issuance, and registration is likely tobe a major issue in a purchase agreement.Assumption of some of these costs by the buyerprovides a major incentive for sellers to use aforward purchase agreement – rather thanselling for a higher price on the spot market at alater time.To account for changing circumstances, thepurchase agreement should contain a process forchanging the chosen standard and methodologyin order to allow the parties to adapt. Forexample, new national law or internationaltreaty may require or prefer a different standardfor regulatory compliance purposes, making theinitial standard unattractive to buyers.A common provision allows the buyer to changethe standard if it pays for re-accreditation to thenew standard as well as any “downside” for theseller(s). The downside would include thingslike the cost of unsold emission reductions if thenew standard required that more emissionreductions be held aside as a buffer.Box 8. Sample Validation and VerificationClauseArticle 6.Validation and Verification.6.1 Standards. The parties shall ensure that theEmission Reductions are validated and verifiedaccording to the Voluntary Carbon Standard(the “Carbon Standard”), and that the climate,community, and biodiversity benefits of theProject are validated and verified according tothe Climate, Community, and BiodiversityStandards (the “Co-Benefits Standard”).6.2 Responsible Party. The Seller Representativeshall submit all required materials anddocumentation for VER validation, verification,registration, and issuance (collectively,“Accreditation”) under the Carbon Standardand the Co-Benefits Standard and shall act asthe primary contact for Accreditation.6.3 Standard Selection. The Buyer shall selectthe individuals or entities to conductaccreditation as required by the CarbonStandard and the Co-Benefits Standard. TheBuyer may change the designated CarbonStandard up to two times for any reason, but theBuyer shall pay for re-Accreditation and anyadditional costs or lost revenue that the SellerRepresentative experiences because of re-Accreditation.6.4 Costs. The Buyer shall pay all costs ofAccreditation.6.5 Standard Availability. If the CarbonStandard becomes unavailable through no faultof the parties, the parties shall select areplacement Carbon Standard by mutualagreement, with any costs of re-Accreditation tobe paid one half by the Seller Representative andone half by the Buyer. If the Co-BenefitsStandard becomes unavailable through no faultof the parties, the parties may select areplacement Co-Benefits Standard by mutualagreement or may proceed with Accreditationunder the Carbon Standard alone.Contracting for Forest Carbon | 12

The sample agreement provides for the use ofthe Climate, Community, and Biodiversity(CCB) Standard in addition to the VoluntaryCarbon Standard, which is a commoncombination and approach. Accreditation underthe CCB provides a qualitative assessment of theproject’s social and environmental benefits –sometimes called “co-benefits.” Accreditation ofenvironmental and social co-benefits is notrequired. However, it can help to ensure thatcarbon benefits do not come at the expense ofother social or environmental goals, can increasethe price of VERs, and can be used to generatemore interest in the project.The project plan that is attached to theagreement should contain a thoroughassessment of the project area, which can serveas a baseline for monitoring and verifyingresults, though the chosen accreditationstandard will likely establish its own baselineduring the validation process.Default and RemediesThere are innumerable ways in which a forestcarbon project can go wrong, destroying all orpart of the value of the deal for one or moreparties. When this happens, parties often look tothe purchase agreement to see if another partycan be held responsible or if any of their lossesare recoverable. This reality underscores theimportance of contractual terms defining whatis, and is not, a violation of contractualobligations, and when and what remedies areavailable.The following sections discuss force majeure anda failure to make or accept a VER delivery,neither of which is generally considered to be aviolation of contractual terms, as well as thedefinition of default and remedies clauses.Force MajeureFirst, circumstances that interfere withcontractual performance but are wholly outsideof the control of the parties (so-called “forcemajeure”), such as natural disasters, wars, andthe like, do not generally cause either party to bein breach of the agreement. Force majeure maypermit one or more of the parties to terminatethe agreement, in which case the agreement mayor may not call for settling up of accountsbetween the parties.Box 9. Sample Force Majeure ClauseArticle 7.Force Majeure.7.1 Non-Liability. Neither party will be liablefor any loss or damage suffered or incurred bythe other party due to its failure to perform dueto war, riot, insurrection, civil unrest, martiallaw, national general strike, wildfire, insectinfestation, outbreak of plant disease, flood,earthquake, storm, accumulation of snow andice, epidemic, quarantine, radiation orradioactive contamination, or any othercircumstance beyond the control of parties(including a change of law) (each a “ForceMajeure Event”) provided that the nonperformingparty shows that:(a) Reasonable steps were taken under thecircumstances to minimize delay or damagescaused by foreseeable events;(b) All non-excused obligations weresubstantially fulfilled;(c) The other party was timely notified of theactual occurrence of the Force Majeure Event;and(d) If the non-performing party is the SellerRepresentative and the Force Majeure Event is awildfire, insect infestation, or outbreak of plantdisease, that the Participating Landholderssubstantially performed the risk mitigationmeasures referred to in clause 1.4.A change of law, which the sample agreementtreats as a force majeure event, is generallyaddressed separately (and much moreextensively). The complexity is meant toaccount for the wide range of things that can goContracting for Forest Carbon | 13

wrong from a regulatory perspective. Forexample:• The host government could impose anobligation on participating landholders toreduce their net carbon emissions,destroying the “additionality” of any carbonreductions.• The government in the buyer’s jurisdictioncould implement a mandatory greenhousegas emission reduction law that covers thebuyer but does not recognize offsets, or doesnot recognize the project’s emissionreductions.• The host government could withdraw theparticipating landholders’ rights to sell, orcould appropriate the land or the carbon.• New tax laws in either the seller’s or thebuyer’s jurisdiction could destroy the valueof the transaction.Each of these eventualities could have drasticconsequences for a forest carbon buyer and/orseller. As a result, “change of law” clauses areoften highly complex and heavily negotiated,based on specific circumstances and risks in theseller’s and buyer’s countries and the relativebargaining power of the parties. The sampleagreement classifies a change in law as a forcemajeure event not to minimize these issues, butto avoid delving into a complex set of contractprovisions that are extremely context-dependent.Failure to Make or Accept DeliveryUnder a long-term forest carbon contract,delivery of VER is likely to happen ininstallments, as provided in the sampleagreement. Parties may want to include specificlanguage on what happens if a seller fails tomake, or a buyer fails to accept, a single delivery.Generally, this type of failure does not cause abreach of the whole agreement, but simplytriggers damages for the undelivered installment.If no, or fewer than expected, VERs are issued,then this would not be considered to cause afailure to make delivery under the sampleagreement. Because the contract calls fordelivery of all VERs generated and issued duringa given period of time, a failure to make oraccept delivery can only occur if VERs aregenerated and issued, yet delivery fails to occur.Damages (in monetary fees) for an undeliveredinstallment are meant to remove any incentivefor either party to violate its delivery obligationsbecause it can get a better deal on the spotmarket or elsewhere. These damages are notusually designed as a punishment, but are meantto make the other party “whole” in terms ofputting that party in the position that it wouldhave been in, had VERs been delivered oraccepted as promised.If a seller fails to deliver VERs, it would typicallyhave to pay the buyer’s replacement cost, or thepositive cost, if any, of replacement VER abovethe agreed contract price. In other words, thebuyer will pay the contract price and no more forthe credits that it expected to receive, even if theprice of replacement VER is higher. If the priceof replacement VER is lower than the contractprice, then the seller will not owe damages.Conversely, if a buyer fails to accept delivery, itwould have to pay the seller’s replacement cost –the negative difference, if any, between thecontract price and the price that the seller is ableto get from a replacement buyer. In otherwords, the seller will get no less than the contractprice for its credits. If the price that areplacement buyer is willing to pay is higherthan the contract price, then the buyer will notowe damages.Damages also generally include interest thataccrues from the delivery date, as well as costsand fees owed by the performing party due tothe non-performance.Contracting for Forest Carbon | 14

Box 10. Sample Clauses for Delivery FailureArticle 8.Delivery.Failure to Make or AcceptA failure to make or accept delivery of VERs isnot an Event of Default, as that term is definedin clause 9.1, and does not cause or permittermination of this agreement. A party that owesdamages under clause 8.1 or 8.2 shall pay thosedamages no later than 10 Banking Days afterthe date on which that party receives notice ofdelivery failure.8.1 Failure to Make Delivery. If the SellerRepresentative fails to make delivery of VERs asprovided in clause 2.1, the Seller Representativeshall pay the Buyer the positive difference, if any(the “Buyer’s Replacement Cost”), between (1)the price the Buyer, acting in a commerciallyreasonable manner, does or would pay in anarm's length transaction for an equivalentquantity of equivalent VERs to replace theVERs that were not delivered (the “DefaultQuantity”), and (2) the Contract Pricemultiplied by the Default Quantity, plus(a) interest on the Buyer’s ReplacementCost at an annual rate equal to LIBOR plus 3%compounded monthly from and including theDelivery Date to but excluding the datepayment is made, plus(b) the amount of reasonable costs andexpenses that the Buyer incurs in respect of theDefault Quantity (including, withoutlimitation, broker fees, commissions and legalfees).8.2 Failure to Accept Delivery. If the Buyer failsto accept delivery of VERs as provided in clause2.1, the Buyer shall pay the Seller Representativefor the positive difference, if any (the “SellerRepresentative’s Replacement Cost”), between(1) the Contract Price multiplied by the DefaultQuantity and (2) the price the SellerRepresentative, acting in a commerciallyreasonable manner, does or would receive in anarm's length transaction for the DefaultQuantity, plus(a) interest on the Seller Representative’sReplacement Cost at an annual rate equal toLIBOR plus 3% compounded monthly fromand including the Delivery Date to butexcluding the date payment is made, plus(b) the amount of reasonable costs andexpenses that the Seller Representative incurs inrespect of the Default Quantity (including,without limitation, broker fees, commissionsand legal fees, but not including the amount, ifany, payable in respect of excess emissionspenalties).Event of DefaultForest carbon agreements must define an “eventof default.” An event of default is a breach of, asopposed to a minor or de minimis deviationfrom, contractual obligations.Box 11. Sample Default ClauseArticle 9.Event of Default.9.1 Definition. Each of the following is an“Event of Default” on the part of the Buyer orthe Seller Representative:(a) Dissolution, liquidation, insolvency, orbankruptcy;(b) Material breach of a representation orany material term of this agreement;(c) Knowingly or negligently providinginformation that is materially false or misleadingto the other party;Contracting for Forest Carbon | 15

(d) A failure to deliver payment when due.9.2 Successive failures to deliver VERs asprovided in clause 2.1 for three consecutiveyears is an additional Event of Default on thepart of the Seller Representative.9.3 Successive failures to accept delivery ofVERs as provided in clause 2.1 for threeconsecutive years is an additional Event ofDefault on the part of the Buyer.In contrast with the simple language in thesample agreement at 9.1(a), bankruptcy defaultprovisions are often very long, complicated, andheavily negotiated. The complexity is to prevententities that are reorganizing, merging, or beingpurchased from evading contractual obligations.Detailed bankruptcy provisions are likely to berequired in the forest carbon context as themarket matures and expands and small,independent carbon brokers (forest carbonbuyers, often) may be acquired by largercommercial entities.In terms of simple failure to perform under theagreement, any failure by the buyer to pay isgenerally treated as a default (though a shortgrace period may be provided), where a failureby the seller to deliver one or more installmentsdoes not generally rise to that level. Compareclause 8.1 to clause 9.1(d) in the sampleagreement.RemediesIt is important to define an event of defaultprecisely, because if an event of default occurs,contractual remedies become available to thenon-defaulting party. However, a “cure period”may be provided for the defaulting party to fixthe problem without triggering the remediesprovision.Contractual remedies may be the only recourseavailable, or the non-breaching party may alsobe able to seek recovery in a court of law. Theagreement may also provide for differentremedies, depending on the severity orwillfulness of the breach, or other circumstances.If in-kind payments are used in the form ofequipment, then the parties might considerrepossession as a remedy for default by thesellers’ representative. However, care should betaken before imposing monetary damages orrepossession on small-scale and communitybasedsellers, for whom they could bedevastating.Box 12. Sample Remedies ClauseArticle 10. Remedies.10.1 Default Notice. If either party becomesaware that an Event of Default has occurred onthe part of the other party, it shall promptlynotify the other party in writing of the Event ofDefault (the “Default Notice”).10.2 Cure Period. Unless an Event of Defaultis due to material breach of a representation, isintentional, or is the result of gross negligence,the defaulting party may cure the Event ofDefault within five Banking Days of delivery ofthe Default Notice, thereby precluding theavailability of remedies under this clause.10.3 Remedies. In the case of an Event ofDefault by the Seller Representative:(a) The Buyer is limited to the remediesexpressly provided in this agreement.(b) The Buyer may terminate thisagreement and, if the Event of Default isintentional or due to gross negligence on thepart of the Seller Representative, the SellerRepresentative shall return advance payments, ifany were made, and shall pay U.S. $in liquidated damages not later than 10Banking Days after the Seller Representativereceives the Default Notice.10.4 In the case of an Event of Default bythe Buyer:Contracting for Forest Carbon | 16

(a) The Seller Representative is limited tothe remedies expressly provided in thisagreement.(b) The Seller Representative mayterminate this agreement and, if the Event ofDefault or due to gross negligence on the part ofthe Buyer, the Buyer shall pay U.S. $in liquidated damages not later than 10Banking Days after the Buyer receives theDefault Notice.Dispute SettlementIn order to facilitate conflict resolution, theparties should define procedures for settlingdisputes under the purchase agreement, such ashow a certain term or phrase should beinterpreted or what the rights andresponsibilities of parties are under specificcircumstances.Most disputes are likely to be resolvedinformally, which the sample agreementformalizes in clause 11.1 (Box 15). Informaldiscussion is the least cost alternative for disputeresolution.Box 13. Sample Dispute Resolution ClauseArticle 11. Dispute Resolution.11.1 Informal Discussion. In the event adispute arises under, out of, or relating to theinterpretation, application, or performance ofthis agreement, the parties shall first attempt toresolve the dispute by discussion andnegotiation.11.2 Choice of Law. This agreement isgoverned by, and is to be construed inaccordance with, the laws of the United Statesand the State of New York, as applicable.Though the sample agreement does not do so,the agreement may allow or require mediationand/or arbitration if the parties fail to resolve thedispute by informal discussion. Both mediationand arbitration are forms of “alternative disputeresolution,” (ADR) because they provide analternative to resolving disputes in court. Inmediation, the parties submit their dispute to athird party that tries to help them find acompromise solution. In arbitration, one ormore persons – the arbitrators or arbitraltribunal – will evaluate the dispute and come toa decision, while remaining removed from thediscussion and settlement process between theparties.In mediation, the parties are bound to seek amutually-agreeable solution, although they arenot generally bound to an outcome. Inarbitration, the parties agree to present thematter to an arbitrator instead of going to court.The parties may or may not be bound tocomply with the outcome of arbitration, butagreements often provide for non-bindingmediation and binding arbitration.Binding arbitration under agreed protocols canprovide certainty in neutral forum forinternational parties. The Permanent Court ofArbitration is often used in internationalpurchase agreements, although other forms ofarbitration exists. Arbitration is non-public andcan be made confidential, which manycommercial entities prefer.Arbitration procedures can be varied to suit theneeds of the parties. For example:• Using “bracketed arbitration,” the partiesagree in advance to the range of values thatmay be awarded, e.g. where liability is notdisputed.• In “baseball arbitration,” the arbitrator mustrule for the party that has the mostreasonable position and may not split thedifference or decide on a compromiseposition.Other variations exist. In general, the outcomeof binding arbitration may not be challenged inContracting for Forest Carbon | 17

a court of law, but is binding on the parties andthe court.MiscellaneousToward the end of a forest carbon emissionreductions purchase agreement come“boilerplate” clauses – clauses that vary littlebetween similar agreements – and clausesaddressing miscellaneous matters.Box 14. Sample Miscellaneous ClausesArticle 12. Miscellaneous.12.1 Confidential Information. The partiesshall treat the terms of this agreement and allinformation specifically identified asconfidential under or in connection with theagreement (collectively, “ConfidentialInformation”) as confidential and may neitherdisclose Confidential Information nor use itother than for bona fide purposes connectedwith this agreement without the prior writtenconsent of the other party, except that consent isnot required for disclosure:(a) To directors or employees of a partyand persons professionally engaged by a party,any financial institution that is offering or mayoffer finance related to the Project, any intendedassignee of the rights and interests of a partyunder this agreement, if the person to whomConfidential Information is disclosed is requiredby the disclosing party to treat the ConfidentialInformation as confidential in favor of the otherparty on terms substantially the same as thoseset out in this clause 12.1; or(b) To the extent legally required byapplicable law, or by a governmental entity,agency or regulatory authority havingjurisdiction over the disclosing party; or(c) To the extent that the ConfidentialInformation is in or lawfully comes into thepublic domain other than by breach of thisclause 12.1.12.2 Assignment. Neither party shall assign ortransfer its rights or obligations under thisagreement to a third party without the priorwritten consent of the other party to thisagreement, such consent not to be unreasonablywithheld.Assignment clauses, like bankruptcy clauses,tend to vary widely. In the forest carboncontext, there are many start-up companies thatexpect to be acquired by other companies. Thesebuyers will want a permissive assignment clauseso that they are able to transfer their contractualrights and obligations at acquisition.Box 15. Sample Miscellaneous Clauses12.3 Waiver. Failure by either party toenforce any provision of this agreement is not awaiver of that provision or of any future breachof that provision, and in no way affects thatparty’s right to require performance under thisagreement thereafter.12.4 United Nations Convention on Contractsfor the International Sale of Goods and Contracts(Rights of Third Parties) Act. The UnitedNations Convention on Contracts for theInternational Sale of Goods and Contracts(Rights of Third Parties) Act does not apply tothis agreement.The United Nations Convention on Contractsfor the International Sale of Goods andContracts (CISG) is a treaty containing uniforminternational sales law that has been ratified bymost major trading countries in the world(except, as of November 2010, Brazil, Africa,India, and the United Kingdom). It isequivalent to the Uniform Commercial CodeArticle 2 (Sales) in the United States. Parties to acontract may opt out of application of theCISG, but they must do so explicitly.Contracting for Forest Carbon | 18

Box 16. Sample Miscellaneous ClausesContinued12.5 Entire Agreement. This agreement is theentire agreement between the parties concerningthe purchase and sale of VER and supersedesany prior agreements, understandings, orrepresentations with respect to the purchase andsale of VERs. Any modification of thisagreement must be in writing and signed byeach party.12.6 Severability. If any provision of thisagreement is held to be invalid, illegal,unenforceable, or in conflict with the law of anyjurisdiction, such holding will not affect thevalidity, legality, and enforceability of theremaining provisions.12.7 Notices. Any notice that is required orpermitted by this agreement must be in writing,in English, and must be delivered personally, bycourier, postal mail, email (with return receiptconfirmation), or facsimile to the addressprovided below:If to the Seller Representative:Address:Phone:Fax:Email:If to the Buyer:Address:Phone:Fax:Email:While the sample agreement provides thatnotice may be given by email, many agreementsprovide that notice is not effective until receivedby other means.Interpretation & DefinitionsContract language must be used precisely, assmall misunderstandings, mistakes, orinconsistencies can alter the rights andobligations of the parties. Two important partsof an agreement are therefore those explaininghow certain language is to be interpreted andoutlining terms that are used in the agreement.InterpretationThe interpretation section contains informationapplicable to large portions of the agreementabout how terms or headings should be treated.Because timing is important for things likedelivery and payment, it also generally includesinformation about how time and days (orcalendar days, business days, or banking days,whichever is used in the agreement) should bemeasured.Box 17. Sample Interpretation ClausesArticle 13. Interpretation.13.1 Capitalized Terms. Capitalized termsnot defined in the body of this agreement havethe meanings assigned to them in Article 14 .13.2 Interpretation.(a) Unless specifically stated otherwise, anyreference to:(1) any party includes that party'sexecutors, administrators, successors andpermitted assigns; and(2) the singular includes the plural andvice versa; and(3) the words “including”, “include” or“includes” when introducing an example do notlimit the meaning of the words to which theexample relates to that example or examples of asimilar kind; and(4) any law, statute, or internationalrule includes any amendment to, consolidation,re-enactment or replacement of such law,statute, or international rule.(5) a “clause," “article,” or "annex" is areference to a clause, article, or annex of thisagreement.Contracting for Forest Carbon | 19

(6) to time is to Eastern Standard orEastern Daylight Time, as applicable.(b) Headings are inserted for convenienceof reference only and do not affect theinterpretation of this agreement.(c) Unless otherwise specified, whereanything is to be done under this agreement:(1) by or not later than a Banking Dayor any period is to run to a Banking Day, suchthing may be done by, or such period is to runto, 17:00 hours on that Banking Day;(2) from or not earlier than a BankingDay or any period is to run from a BankingDay, such thing may be done or such period isto run from 09:00 hours on that Banking Day;(3) on a Banking Day, it is to betreated as having been done on the nextfollowing Banking Day if it is done after 17:00hours on that Banking Day.DefinitionsWords and phrases that have specific meaningin the context of the agreement are defined andhighlighted in context throughout theagreement. Defined terms are capitalized whenused in order to avoid confusion about when thecommon meaning, as opposed to the definedmeaning, is intended.A dedicated definitions section is usuallyincluded to provide more information aboutdefined terms, or to define technical terms thatare used – but not defined – in the agreement.The definitions section may appear first, toprovide context and background informationfor a reader of the agreement. However, thesample agreement puts the definitions section atthe end of the agreement. The ordering ofclauses within an agreement is largely a matterof preference.Box 18. Sample Definitions ClausesArticle 14. Definitions.14.1 Accreditation means validation andverification by an established standardsorganization, according to a published standard,that determines whether the Project is likely to,and actually does, yield claimed benefits.14.2 A Banking Day is any calendar dayother than:(a) A Saturday or Sunday;(b) Any official banking holiday in thecountry and locality specified in clause 11.2(Choice of Law).14.3 Buyer’s Replacement Cost has themeaning given in clause 8.1.14.4 Carbon Standard means the standardselected by the parties in accordance with clause6.1 that will be used to evaluate whether theProject is likely to, and actually does, yieldclaimed carbon benefits.14.5 Co-Benefits Standard means thepublished standard selected by the parties inclause 6.1 that will be used to evaluate whetherthe Project is likely to, and actually does, yieldclaimed social and environmental benefits.14.6 Confidential Information has themeaning given in clause 12.1.14.7 Contract Price is the price specified fordelivered VERs under this agreement.14.8 Default Notice means the notice, givento the defaulting party by the non-defaultingparty under clause 10.1, that a party is in defaultunder this agreement.14.9 A Delivery Date is the date each yearon which Delivery is to occur during theAgreement Term, as provided in clause 2.1.Contracting for Forest Carbon | 20

14.10 Emission Reductions mean the totalcarbon emission reductions that are attributableto Project Activities plus the total increasedcarbon sequestration that is attributable toProject Activities. Emission Reductions areexpressed in tons of CO2. Total carbonemission reductions and total increased carbonsequestration are calculated as provided in theProject Plan.14.11 Event of Default has the meaninggiven in clause 9.1.14.12 Force Majeure Event has the meaninggiven in clause 7.1.14.13 Participating Landholders mean theindividuals that have use rights in the ProjectArea and undertake Project Activities inaccordance with the Project Plan.14.14 A Payment Due Date is the date onwhich payment is due for a Transaction, asprovided in clause 3.4.14.15 The Project is the set of activities toreduce emissions from deforestation anddegradation and enhance carbon sequestrationdescribed in the Project Plan.14.16 Project Activities mean the activitiesoutlined in the Project Plan that ParticipatingLandholders and the Seller Representativeundertake in order to enhance carbonsequestration or reduce emissions fromdeforestation and degradation within the ProjectArea.14.17 The Project Area means the areadefined in annex 2.14.18 The Project Plan is the documentdescribing Project Activities that is attached asannex 1.14.19 The Registry means the VERtransaction platform agreed between the parties.14.20 Seller Representative’s ReplacementCost has the meaning given in clause 8.2.14.21 A Statement is an invoice, submittedpursuant to clause 3.2, covering money owed bythe Buyer to the Seller Representative inconnection with a Transaction.14.22 The Statement Amount is the netquantity of money owed in connection with aTransaction.14.23 A Transaction is a delivery andacceptance of VERs as described in clause 2.1.14.24 VAT are the value-added-taxes that areassessed on either party as a result of ProjectActivities.14.25 Verified Emission Reductions orVER mean Emission Reductions that have beenvalidated and verified as provided in clause 6.1.Contracting for Forest Carbon | 21

Wrapping Up: Signaturesand AnnexesSignaturesTo signify their understanding and mutualagreement, the parties must sign the agreement.A dedicated signatures page is generallyprovided for that purpose. In mostcircumstances, the agreement becomes effectivewhen the last party to sign the agreement signs.This is the date that should appear in theintroductory clause.Box 19. Sample signature block.The parties are signing this agreement on thedate stated in the introductory clause.By:By:SELLER REPRESENTATIVE ASSNNameTitleNameTitleINVESTOR CORPIf a party is an organization or entity, itssignature line should begin with “By”(shorthand for “By its duly authorizedsignatory”) to indicate that the signatory is notsigning in his or her personal capacity.• A description of the project area.• Payment account information and advancepayment schedule.• Land use grant showing that participatinglandholders have requisite rights in theproject area.• Agreement authorizing the sellers’representative to representsellers/participating landholders and tooversee project governance and benefitdistribution.The project plan is a very important part of thepurchase agreement. It describes what activitieswill be undertaken and by whom, how theproject will be governed, and how revenues willbe disbursed to participating landholders,among other things. A sound project planassures buyers that the project will be governedfairly and transparently, with equitable benefitsharing,and that the project is likely to generateVERs.A precise description of the legal boundaries ofthe project area, specification of the paymentaccount, and payment schedules, are similarlyincluded in an annex because they would beunwieldy in the body of the agreement.In comparison, the land grant and agreementwith the sellers’ representative do not properlybelong in the body of the agreement in any case.Rather, they are provided as evidence to thebuyer that certain legal rights and safeguardsexist.AnnexesImportant background information, templates,and information that would be unwieldy toinclude in the body of the agreement are oftenincluded as annexes or attachments to theagreement. In the sample agreement, thefollowing documents are attached to theagreement:• The project plan.Contracting for Forest Carbon | 22

ConclusionWhile they resemble typical purchaseagreements in many ways, forest carbonpurchase agreements are likely to have certainunique aspects. For example:• Where the agreement describes a forwardpurchase of VERs, robust project design andgovernance will be central to the contract.• Structuring payments may be challenging,particularly where advance payments areneeded or multiple sellers are involved.• Diverse risks must be allocated between theparties to a forward purchase agreement forforest carbon.Forest carbon sellers – particularly those withsmall-scale or community-based projects – maybe at a particular disadvantage. First, they mayhave little commercial or contracting experience,in which case particular care should be taken tomake sure that all parties understand theircontractual rights and obligations beforesigning. Second, they may have little or noability to absorb major costs or penalties duringthe course of the project. Where this is true,creative drafting must be used to ensure thatdefault and remedies clauses serve to effectivelydeter breach without imposing excessivepenalties on parties that cannot bear them.This document provides only one simplifiedpotential approach to these and other issues.Consulting other available purchase agreements,particularly ones that were written fortransacting in carbon credits, can give a sense ofalternate approaches and contractual language,as well as a sense of the range of options thatmay be negotiated.Additional ResourcesFor more information, see:• The Katoomba Group Online PESContract Toolkit:www.katoombagroup.org/legal, for links totemplate ERPA and other resources aboutlegal and contractual issues around forestcarbon and other payments for ecosystemservices.• CERSPA, at www.cerspa.org, for a welldraftedtemplate ERPA and guidancedocument, available in a number ofdifferent languages.• The International Emissions TradingAssociation’s Emissions Trading MasterAgreement for the EU Scheme, atwww.ieta.org/ieta/www/pages/getfile.php?docID=194. This document is a templateagreement that was developed to facilitatetrading in emission reductions betweenregulated entities in the EU ETS.The template agreements from CERSPA andIETA do not specifically concern forest carbon,but nevertheless contain useful guidance forcarbon contracting more generally.Contracting for Forest Carbon | 23

Works CitedCERSPA Initiative. Certified Emission Reductions Sale and Purchase Agreement. Version 2.www.cerspa.org.Ecosystem Marketplace. 2009. State of the Forest Carbon Markets. (www.ecosystemmarketplace.com)Eliasch, J. 2008. Climate Change: Financing Global Forests. London: Department of Energy & ClimateChange.(http://www.official-documents.gov.uk/document/other/9780108507632/9780108507632.pdf)Enkvist, P., T. Nauclér, and J. Rosander. A cost curve for greenhouse gas reduction. McKinsey Quarterly 1(2007): 35-45. (https://www.mckinseyquarterly.com/A_cost_curve_for_greenhouse_gas_reduction_1911).International Emissions Trading Association (2005). Emissions Trading Master Agreement for the EUScheme. Version 2.1. Washington, DC: IETA.Hamilton, K., M. Peters-Stanley & T. Marcello (2010). Building Bridges: State of the Voluntary CarbonMarkets 2010. Washington, DC: Ecosystem Marketplace.(http://moderncms.ecosystemmarketplace.com/repository/moderncms_documents/vcarbon_2010.2.pdf)Rogner, H. & D. Zhou et al. (2007). Introduction. In B. Metz, et al., eds. IPCC Climate Change 2007:Mitigation of Climate Change (pp. 95-116). Contribution of Working Group III to the FourthAssessment Report Of The Intergovernmental Panel On Climate Change. Cambridge: CambridgeUniversity Press. (http://www.ipcc.ch/publications_and_data/ar4/wg3/en/contents.html)Solomon, S. et al. (2007). Climate Change 2007: The Physical Science Basis. Contribution of WorkingGroup I to the Fourth Assessment Report Of The Intergovernmental Panel On Climate Change.Cambridge: Cambridge University Press.(http://www.ipcc.ch/publications_and_data/ar4/wg1/en/contents.html)Stern, N. (2006). The Stern Review: The Economics of Climate Change. London: Department of Energy &Climate Change. (http://www.hm-treasury.gov.uk/stern_review_report.htm)UN-REDD Programme. (2010). About REDD+. Retrieved November 10, 2010, from http://www.unredd.org/AboutREDD/tabid/582/Default.aspx.van der Werf G et al. CO2 emissions from forest loss. Nature Geoscience 2(2009):737-738.http://biology.duke.edu/jackson/ng09.pdf.Contracting for Forest Carbon | 25

The Family ofForest Trends InitiativesUsing innovative financing to promote theconservation of coastal and marine ecosystem servicesA global platform for transparent informationon ecosystem service payments and marketsBuilding capacity for local communities and governmentsto engage in emerging environmental marketsBusiness and Biodiversity Offsets Program, developing,testing and supporting best practice in biodiversity offsetsBuilding a market-based program to address water-quality(nitrogen) problems in the Chesapeake Bay and beyondForest Trade & FinanceBringing sustainability to trade and financialinvestments in the global market for forest productsKatoomba IncubatorLinking local producers and communitiesto ecosystem service marketsLearn more about our programs atwww.forest-trends.org