IETA Emissions Trading Master Agreement
A Jolly Contrarian owner’s manual™
Force Majeure and 13 in a Nutshell™
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Force Majeure and 13 in all its glory
” means the occurrence of any event or circumstance, beyond the control of the FM Affected Party
, that is not a Suspension Event
, and that could not, after using all reasonable efforts, be overcome and which makes it impossible for the FM Affected Party
to either (a) deliver the Period Traded Allowances
from any Holding Account
in any Registry
(or if one or more Delivering Party
's Holding Accounts
are specified, from such Delivering Party
's Holding Account
(s)) or (b) accept the Period Traded Allowances
into the Receiving Party
's Holding Account
(s), in accordance with the EU ETS
. The inability of a Party
to perform a relevant delivery or acceptance obligation as a result of it having insufficient Period Traded Allowances
in the relevant Holding Account
(whether caused by: the low or non-allocation of Allowances
from a Member State
, non-Member State
or Central Administrator
; the delay or failure of a Member State
or Central Administrator
to replace Allowances
for the subsequent Validity Period
; or the failure of that Party
to procure sufficient Allowances
to meet its delivery obligations) shall not constitute a Force Majeure
; provided, however, that this is not an exhaustive list of events which will not constitute a Force Majeure
and is provided for the avoidance of doubt
13 Force Majeure and Suspension Event
13.1 Force Majeure.
Upon the occurrence of a Force Majeure, either Party may notify the other Party in writing of the commencement of the Force Majeure. Where the notification is from the Party affected by the Force Majeure (the “FM Affected Party”), to the extent available to such Party, it should also provide details of the Force Majeure and a non-binding estimate of the extent and the expected duration of its inability to perform its obligations due to the Force Majeure.
The obligations of both Parties under this Agreement with respect to the Transaction(s) affected by the Force Majeure (the “FM Affected Transactions”) will be suspended for the duration of the Force Majeure. During the continuation of the Force Majeure, the FM Affected Party shall use all reasonable endeavors to overcome the Force Majeure. Upon the Force Majeure being overcome or it ceasing to subsist, both Parties will, as soon as reasonably practicable thereafter, resume full performance of their obligations under this Agreement with respect to the FM Affected Transactions (including, for the avoidance of doubt, any suspended obligations).
Where a Force Majeure (a) continues for a period of nine (9) Delivery Banking Days or (b) continues up until three (3) Delivery Banking Days prior to any Validity Period Reconciliation Deadline (if sooner), either Party may, by written notice to the other Party, terminate all (but not less than all) FM Affected Transactions.
13.2 Force Majeure Termination Payment. If an FM Affected Transaction is terminated in accordance with Clause 13.1 (Force Majeure and Suspension Event), the Parties’ corresponding Transfer and acceptance obligations shall be released and discharged and the Force Majeure termination payment to be made between the Parties (if any) shall be calculated in accordance with paragraph (a), (b) or (c) below, as selected by the Parties in Schedule 2 (‘‘Elections’’).
- 13.2(a) No Termination Payment. No Force Majeure termination payment shall be made between Parties; provided, however, that the obligation to pay any Unpaid Amounts shall survive the termination of the FM Affected Transaction.
- 13.2(b) Two-way Market Quotation Termination Payment. Both Parties shall go into the market and obtain three (3) mid-market quotations in the Termination Currency from third party dealers for a replacement Transaction for the same amount of Period Traded Allowances (without taking into account the current credit-worthiness of the Requesting Party or any existing Credit Support Document). Each Party will then calculate the average of the quotations it obtained and the amount payable shall be equal to (A) the sum of (I) one-half of the difference between the higher amount so determined (the Party determining the higher amount being “X”) and the lower amount so determined (the Party determining the lower amount being “Y”) and (II) any Unpaid Amounts owing to X less (B) any Unpaid Amounts owing to Y. If the resultant amount is a positive number, Y shall pay it to X; if it is a negative number, X shall pay the absolute value of such amount to Y. If three (3) mid- market quotations cannot be obtained, all quotations will be deemed to be zero.
- 13.2(c) Two-way Loss Termination Payment. Each Party will determine its Loss in respect of the FM Affected Transaction and an amount will be payable in the Termination Currency equal to one half of the difference between the Loss of the Party with the higher Loss (“X”) and the Loss of the Party with the lower Loss (“Y”). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of such amount to Y.
13.3 Where an event or circumstance that would otherwise constitute or give rise to an Event of Default also constitutes a Force Majeure or a Suspension Event, it is to be treated as Force Majeure or a Suspension Event and not as an Event of Default. Where an event or circumstance that would otherwise constitute a Force Majeure also constitutes a Suspension Event, it is to be treated as a Suspension Event and not as a Force Majeure.
13.4 Suspension Event.
- 13.4(a) Upon the occurrence of a Suspension Event, the Party affected by the Suspension Event shall, as soon as practicable by written notice, notify the other Party of the commencement of the Suspension Event. To the extent available to the Party affected by the Suspension Event, it shall also provide details of the Suspension Event including a non-binding estimate of the duration of its inability to perform its obligations due to the Suspension Event.
- 13.4(b) Where a Suspension Event occurs, the obligations of both Parties, which would otherwise be required to be performed with respect to the relevant Transaction, shall be suspended for the duration of the Suspension Event. Subject to paragraph (c) below, upon the Suspension Event ceasing to exist both Parties will resume full performance of their obligations under this Agreement in respect of the relevant Transaction (including for the avoidance of doubt any suspended obligations) as soon as possible but no later than the day that is ten (10) Delivery Banking Days thereafter or, if earlier, three (3) Delivery Banking Days prior to the End of Validity Period Reconciliation Deadline (such date being the “Delayed Delivery Date”). For the avoidance of doubt, where a Delivery Date is adjusted in accordance with this Clause 13.4(b), then the use of the term “Delivery Date” elsewhere in this Agreement shall be construed to be a reference to the Delayed Delivery Date.
- 13.4(c) In the event that Period Traded Allowances are Transferred to the Receiving Party on or before the Delayed Delivery Date following the occurrence of a Suspension Event as contemplated by sub-clause (a) above, the Receiving Party agrees to pay the Delivering Party the Contract Amount adjusted by the Cost of Carry Amount. For the avoidance of doubt, any adjustment of the Contract Amount will be identified in the relevant Statementsent to the Receiving Party.
- 13.4(d) Where a Suspension Event continues to exist on the Long Stop Date, Clause 13.2(a) (No Termination Payment) shall apply and the suspended Transaction shall be deemed an FM Affected Transaction and terminated as an FM Affected Transaction on the Long Stop Date.
Resources and Navigation
The same broad concept is dealt with as follows:
Functionally, the definitions of “Force Majeure” under Clause 7.1 the EFET Annex and Clause 13 of the IETA, and the definition of “Settlement Disruption Event” under (d)(i)(4) of the ISDA Emissions Annex are the same — here is a comparison between IETA and EFET, and here is a comparison between EFET and ISDA — so you do wonder whose idea it was to call it something different.
Let us speculate: the IETA was written first, is independent of the ISDA universe, and for reasons best known to IETA’s crack drafting squad™, they decided to call this a “Force Majeure”. Being an event beyond the reasonable control of the affected party there is some logic to this.
ISDA’s crack drafting squad™ was, as usual, late to the “novel asset class” party and, as it couldn’t find a spot, decided to park its tanks on IETA’s lawn, borrowing much of the technology wholesale but unable to call this event a Force Majeure because the ISDA Master Agreement already has a Force Majeure Event, this is quite different — for whatever reason, the timings are a lot longer — and that would confuse people even beyond ISDA’s tolerance for confusing people.
So ISDA’s crack drafting squad™ went with its product specific “stuff happens” label, “Settlement Disruption Event”. In any case, to make your lives easier, “Force Majeure - Emissions Annex Provision” redirects to Settlement Disruption Event. The JC’s nice like that.
The differences are to account for the architecture and nomenclature of the different master agreements, though the IETA has a conflict clause favouring Suspension Event over Force Majeure/Settlement Disruption Event, which the EFET does not.
You will recognise “Suspension Event” from the IETA Master Agreement and the ISDA EU Emissions Annex, and “Force Majeure” from the IETA Master Agreement and the EFET Allowances Appendix, and indirectly in the ISDA EU Emissions Annex, where it goes by the name of “Settlement Disruption Event”, but is largely the same.
As per the overview, Force Majeure is substantially the same idea as “Settlement Disruption Event” in the ISDA EU Emissions Annex.
It is an event that, in each format:
- Is beyond the “affected party’s” reasonable control (having taking “all reasonable steps” to control it)
- Renders the delivery impossible to perform, acknowledging that this might be a problem at either end
- It excludes simply not having enough Allowances in your account, even if that is a result of some failure by a responsible official agency to issue Allowances in your account (as part of your annual allocation) or to replace stale allowances with fresh ones
- The hierarchy of Events of Default, Suspension Events and Force Majeure/Settlement Disruption Events is also the same.
It is interesting to compare, across all three of the emissions trading documentation suites, the differences and similarities when it comes to resolving an unquenchable Force Majeure.
- Notification: All are the same: either party can notify a Force Majeure. If the affected party is the one who calls it — but, curiously, not if it isn’t, which sets up some odd incentives, but hey — it must use reasonable endeavours to overcome a situation that is, by definition, beyond its control.
- Longstop date: all have variations of a longstop of no later than 9 Delivery Business Days after the scheduled Delivery Date, or earlier should a Reconciliation Deadline intervene. ISDA and EFET also throw in an End of Phase Reconciliation Deadline. Which is nice.
- Consequences of hitting the longstop: All of the agreements opt for the “then I woke up and it was all a dream” method of closeout — Force Majeure Termination Payment, at least as an option. They allow the alternative option for a Payment on Termination: ISDA goes for an Early Termination Date as if an Illegality Termination Event, with no Waiting Period, had occurred. EFET and IETA both try to reconstruct something like the termination methodology of a 1992 ISDA, descending into all that ugliness of “Market Quotation” and “Loss”.
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