No Encumbrances - EFET Allowance Provision

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2007 EFET General Agreement
Version 2.1(a) (Power)

A Jolly Contrarian owner’s manual™

No Encumbrances in a Nutshell

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No Encumbrances in all its glory

§ 6.3 No Encumbrances. In respect of each Allowance Transaction and at each Delivery Date, the Seller shall Transfer to the Buyer at the Delivery Point, Allowances free and clear of any liens, security interests, encumbrances or similar adverse claims by any person (the “No Encumbrance Obligation”). Where a Party is in breach of the No Encumbrance Obligation, the following shall apply:
(a) The General Agreement and all other Individual Contracts agreed by the Parties under this General Agreement shall continue unaffected; and
(b) Without prejudice to any defences available to the Seller (including, but not limited to, any defences of statutes of limitation or similar), following written notice of that breach from the Buyer to the Seller (irrespective of how long after the relevant Delivery Date such notice is provided) and subject to §6.3(d) below:
(i) the Buyer shall determine the Encumbrance Loss arising from that breach (the “Encumbrance Loss Amount”) either on the date such notice is deemed to be received or as soon as reasonably practicable thereafter; and
(ii) shall notify the Seller of such Encumbrance Loss Amount due, including detailed support for its calculation.
The Buyer is not required to enter into replacement Individual Contracts in order to determine the Encumbrance Loss Amount.
(c) 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 of detailed support of the Buyer's calculation of the Encumbrance Loss Amount, the Seller shall pay the Encumbrance Loss Amount to the Buyer, which amount shall bear interest in accordance with § 13.5 (Default Interest). Upon payment of the Encumbrance Loss Amount by the Seller, the Parties shall have no further obligations in respect of that Individual Contract and that breach. The Buyer acknowledges that its exclusive remedies in respect of such breach are those set out in this § 6.3.
(d) Where a breach of the No Encumbrances Obligation is caused by the Transfer of an Affected Allowance, the Seller 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, the Seller shall only be liable for the Encumbrance Loss Amount (without prejudice to any other defences available to the Seller including, but not limited to, any defences of statutes of limitation or similar), if:
(i) the Buyer, 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
(ii) the Buyer, 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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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