No Encumbrances - Emissions Annex Provision

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EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions

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No Encumbrances in a Nutshell

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(d)(vii) No Encumbrances

In respect of each delivery of Allowances, Delivering Party shall deliver Allowances, free and clear of all liens, security interests, claims and encumbrances or any interest in or to them by any person (the “No Encumbrance Obligation”). Where a party is in breach of the No Encumbrance Obligation, the following shall apply:

(1) This Agreement and all other Transactions agreed by the parties under this Agreement shall continue unaffected.
(2) Without prejudice to any defences available to Delivering Party (including, but not limited to, any defences of statutes of limitation or similar), following written notice of that breach from Receiving Party to Delivering Party (irrespective of how long after the relevant Delivery Date such notice is provided) and subject to Part (d)(vii)(4) below, Receiving Party shall:
(A) determine the Encumbrance Loss Amount arising from that breach either on the date such notice is deemed to be received or as soon as reasonably practicable thereafter; and
(B) shall notify Delivering Party of such Encumbrance Loss Amount due, including detailed support for its calculation.
Receiving Party is not required to enter into replacement transactions in order to determine the Encumbrance Loss Amount.
(3) By no later than the third (3rd) Business Day after the later of (i) receipt of a valid invoice in connection with such Encumbrance Loss Amount and (ii) receipt of the above-mentioned notice including detailed support of Receiving Party’s calculation of the Encumbrance Loss Amount, Delivering Party shall pay the Encumbrance Loss Amount to Receiving Party, which amount shall bear interest at the Default Rate. Upon payment of the Encumbrance Loss Amount by Delivering Party, the parties shall have no further obligations in respect of that EU Emissions Allowance Transaction and that breach. Receiving Party acknowledges that its exclusive remedies in respect of such breach are those set out in this Part(d)(vii)(No Encumbrances).
(4) Where a breach of the No Encumbrances Obligation is caused by the transfer of an Affected Allowance, Delivering Party shall be liable for the Encumbrance Loss Amount if, at the date it first acquired, received or purchased such Affected Allowance, it was not acting in good faith; otherwise, Delivering Party shall only be liable for the Encumbrance Loss Amount (without prejudice to any other defences available to Delivering Party including, but not limited to, any defences of statutes of limitation or similar), if:
(A) Receiving Party, whether or not the holder of such Affected Allowance, who is subject to a claim of the Original Affected Party, has, in order to resist or avoid any Encumbrance Loss Amount from arising, used its best endeavours to defend such a claim in respect of that Affected Allowance (including, if available, by relying on Article 40 of the Registries Regulation or any equivalent legal principle under applicable national law) and was unsuccessful (other than for reasons of its own lack of good faith); or
(B) Receiving Party, whether or not the holder of such Affected Allowance, who acted in good faith in respect of its purchase of such Affected Allowance and who is subject to a claim of a third party (other than the Original Affected Party) in respect of that Affected Allowance, has used all reasonable endeavours to mitigate the Encumbrance Loss Amount.


See our natty emissions comparison table between the IETA, EFET and ISDA versions of emissions trading docs

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Pro tip: for tons of information about EU ETS and EU financial services regulation see Michał Głowacki’s magnificent website.

Emissions trading documentation
ISDA: EU AnatomyEU Wikitext EU Nutshell (premium) • UK AnatomyUK Wikitext (to be merged into EU Anatomy)
IETA: IETA Master AgreementIETA WikitextIETA Nutshell (premium)
EFET: EFET Allowances AppendixEFET Allowances WikitextEFET Nutshell (premium)



The absence of encumbrances — which was a matter of concern, in the early days of the emissions trading world, while birth pangs nascent fraud still ricocheted and lapped across the carbon soup of the primordial EU Emissions Trading Scheme — is covered fulsomely, consistently — if not a little defensively — in all the emissions master trading documents.


Here is a comparison of ISDA vs IETA and, while you’re at it, comparison IETA v EFET. Oh, go on, here is the comparison of ISDA v EFET too. Don’t say I don’t spoil you.

We also have a special section about Unauthorised Transfers (being ISDA Section (d)(vii)(4), IETA Clause 5.4(d) and EFET Clause 6.3(d)) which goes into all the wailing and gnashing of teeth that goes with breaches of the No Encumbrances Obligation brought about specifically by theft.



There are times when you wonder whether the crack drafting squad™ for first conceived of this — we think it was IETA’s, but you never know — didn’t fall through some wormhole into a parallel, more paranoid, universe, when drafting their hypotheticals. What, honestly, is going on here? Take a crumb comfort from the fact that the drafting is more or less the same which ever master agreement form you are using.

What a shower. There will seldom come a time where a nutshell version of a clause would come in more handy, readers. If only you subscribed to the premium version of the JC you would have one. It is partly a case of shambolic conceptual organisation, partly ropey drafting, but this clause makes an omnishambles of a fairly straightforward concept.

You might struggle to believe it from reading the clause, but what happens is this: if Delivering Party delivers Allowances in fragrant disregard of the fact that some random has a claim on them, and Receiving Party finds out — presumably by means of an angry letter from said random — Receiving Party can send Delivering Party a notice, calculate its loss (which we suppose would be the market value of any Allowances it has to account to said angry, letter-writing random) and send an invoice. Delivering Party has three Banking Days to pay, with interest. Once paid, that’s it, everyone moves on. Though there is an odd caveat that this procedure is without prejudice to any defences Delivering Party might have, including ones based on limitation periods — which makes us think the responsible crack drafting squad™ had some morbid fear of calumnies buried deep in ancient history coming back to bite them.

Note: contractual limitation periods run from the point where the cause of action arises, not when you reasonably could know you have suffered a loss.

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  • The JC’s famous Nutshell summary of this clause
Template:Emissions No Encumbrances gen

See also