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

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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
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Page 6: AcknowledgmentsA joint project betw
Page 10 and 11: Legal costs make up a significant,
Page 12 and 13: individual or entity - a sellers’
Page 14 and 15: prior, and informed consent by all
Page 18 and 19: in the agreement (see Box 11 - Defa
Page 20 and 21: qualified to perform validation and
Page 22 and 23: wrong from a regulatory perspective
Page 24 and 25: (d) A failure to deliver payment wh
Page 26 and 27: a court of law, but is binding on t
Page 28 and 29: (6) to time is to Eastern Standard
Page 30 and 31: Wrapping Up: Signaturesand AnnexesS
Page 33 and 34: Works CitedCERSPA Initiative. Certi

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

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