Remedies for Failure to Transfer or Accept - EFET Allowance Provision

2007 EFET General Agreement Version 2.1(a) (Power) A Jolly Contrarian owner’s manual™ 8 in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. 8 in all its glory 8 Remedies for Failure to Transfer or Accept. For purposes of Allowance Transactions, § 8 of the General Agreement is hereby deleted in its entirety and replaced with the following new § 8 (Remedies for Failure to Transfer or Accept): § 8.1 Failure to Transfer: (a) Two Business Days Grace Period. When the Seller fails to Transfer to the Buyer the Contract Quantity, in whole or in part, on a Delivery Date as required in accordance with the terms of an Allowance Transaction, and such failure is not excused by an event of Force Majeure, Suspension Event or the Buyer’s non-performance, the Seller may remedy such failure by Scheduling and Transferring such Contract Quantity (or undelivered portion thereof) to the Buyer on the second Delivery Business Day following the Delivery Date, provided that such day is not on or after the Reconciliation Deadline following the relevant Delivery Date, and further subject to the additional obligation of the Seller to pay the Buyer, as compensation for its late Transfer, interest calculated: (i) as follows for the two Delivery Business Day grace period; and (ii) as set forth in the applicable subpart of this § 8.1 for any longer period the Seller fails to deliver the Allowances thereafter. Interest for the two Delivery Business Day grace period shall accrue at the Interest Rate specified in § 13.5 (Default Interest) for the period from (and including) the Delivery Date to (but excluding) the second Delivery Business Day following the Delivery Date on the Total Contract Price of the undelivered Allowances, such Total Contract Price calculated as follows: the number of undelivered Allowances multiplied by a fraction determined by dividing the Total Contract Price by the Contract Quantity. (b) Buyer’s Cover Costs. In the event that the Seller fails to Transfer to the Buyer all or any portion of a Contract Quantity as required by § 8.1(a) (Two Business Days Grace Period) in accordance with the terms of an Allowance Transaction and the Buyer has not agreed to a Deferred Delivery Date as provided for in § 8.1(c) (Buyer’s Right to Waive Its Cover Costs), the Seller shall incur the obligation to pay the Buyer, as compensation for its failure to Transfer, an amount (hereinafter “Buyer’s Cover Costs”) equal to either: (i) if no EEP or EEP Equivalent is operative or applicable to the Allowance Transaction, the sum of: (A) the price, if any, in excess of the portion of the Total Contract Price applicable to the Allowances not Transferred to the Buyer by the Seller, which the Buyer, acting in a commercially reasonable manner either did, or would have been able to, pay to purchase or otherwise acquire in an arm’s length transaction from a third party or parties, a quantity of Allowances necessary to replace the Allowances not Transferred by the Seller; (B) such reasonable additional incidental costs as the Buyer incurred in attempting to make or making such replacement purchase of Allowances to the extent those costs and expenses are not recovered in § 8.1(b)(i)(A) above; and (C) interest accrued during the two Delivery Business Day grace period as provided in §8.1(a); plus interest, at the Interest Rate specified in § 13.5 (Default Interest), accrued from (and including) the Delivery Business Date following the Delivery Date, to (but excluding) the receipt by the Buyer of damages for the Seller’s failure to Transfer, such amount calculated using the following formula: Amount on which interest accrues = UA x [(RP – CP)] where: UA means undelivered Allowances, the total number of Allowances the Seller failed to deliver; RP means replacement price, the price the Buyer paid (or, if it could have procured replacement Allowances but did not do so, the first price which the Buyer would have been able to pay) for each replacement Allowance in the UA; and CP means the aggregate Contract Price that the Buyer would have been required to pay to the Seller for all undelivered Allowances comprising the UA had the Seller not defaulted on its delivery obligation; or (ii) if an EEP or EEP Equivalent has been made applicable to the Allowance Transaction and has arisen, and further subject to the fulfillment of all applicable requirements imposed in § 8.3 (EEP and EEP Equivalent), the amount calculated using the following formula: (A) the price at which the Buyer, using reasonable endeavours and in (an) arm’s length transaction(s), is or would be able to purchase, as soon as reasonably possible following the Reconciliation Deadline, replacement Allowances in the quantity of those not delivered to it by the Seller (such quantity reduced, if applicable, by the number of Allowances the Buyer was able to purchase prior to the Reconciliation Deadline as contemplated by § 8.1(b)(i), damages for the cost of which being recoverable pursuant to element (G) of this formula, herein below)(the net resulting number of Allowances corresponding to the, as applicable, EEP or EEP Equivalent, being referred to hereinafter as the “Undelivered EEP Amount” or “UEA”); (B) minus the price that the Buyer would have been required to pay the Seller for those Allowances comprising the UEA, had the Seller delivered those Allowances to the Buyer in accordance with the terms of the Allowance Transaction; (C) plus the amount of, as applicable, the EEP or EEP Equivalent on the UEA; (D) plus interest accrued during the two Delivery Business Day grace period, calculated as provided in § 8.1(a); (E) plus interest, at the Interest Rate specified in § 13.5 (Default Interest), accrued from (and including) the first date on which the Buyer would be able to purchase, following the Reconciliation Deadline, the UEA of next Compliance Year replacement Allowances, to (but excluding) the date of the Buyer’s receipt of damages for the Seller’s failure to Transfer, on the amount determined using the following formula: Amount on which interest accrues = UEA x (REP – CP) where: UEA has the meaning set forth above; REP means the Replacement EEP Price, which shall be the (per Allowance) price of next Compliance Year Allowances calculated pursuant to § 8.1(b)(ii)(A), above; and CP means the per Allowance Contract Price that the Buyer would have been required to pay to the Seller for each undelivered Allowances comprising the UEA had the Seller not defaulted on its delivery obligation; (F) plus such reasonable additional incidental costs as the Buyer incurred in, as applicable, both attempting unsuccessfully to make purchase of replacement Allowances in order to avoid the accrual of an EEP or EEP Equivalent, and in making replacement purchase(s) of next Compliance Year Allowances as described in § 8.1(b)(ii)(A), above; to the extent those costs and expenses are not recovered via § 8.1(b)(i)(A) above (which additional incidental damages, for the avoidance of doubt, may also include interest accrued at the Interest Rate specified in § 13.5 (Default Interest), from (and including) the date on which an EEP or EEP Equivalent is paid, to (but excluding) the receipt by the Buyer of damages for the Seller’s failure to Transfer); and (G) plus, if applicable, the Buyer’s Cover Costs incurred in replacing that portion of Allowances not Transferred to the Buyer by the Seller for which the Buyer did not incur an EEP or EEP Equivalent (and thus not comprising the UEA) (such portion of Allowances not Transferred being hereinafter referred to as the “Non-UEA”), calculated in accordance with the methodology set forth in § 8.1(b)(i), which methodology shall apply equally to this § 8(b)(ii)(G); (H) plus interest accrued on the value of the Non-UEA calculated in accordance with the methodology set forth in § 8.1(b)(i)(C), but in this context calculated on the amount of the Non-UEA, rather than the amount of the UA. provided, always, that in the event that the number calculated through application of elements (A) through (H) of the formula set forth immediately above in this § 8.1(b)(ii) results in a negative number, such number shall be deemed to be zero and no damages will be owed in respect of such elements of this damages formula. (c) Buyer’s Right to Waive Its Cover Costs. The Buyer shall be entitled to invoice the Seller for damages payable pursuant to § 8.1(b)(i) (Buyer’s Cover Costs) in accordance with the requirements of Payment Cycle B as defined in § 13.2 (Payment). However, the Buyer may alternatively, but shall be under no obligation to, defer the due date on the payment of such damages for a reasonable period of time (but in no event beyond the applicable Reconciliation Deadline) if the Seller has indicated to the Buyer an intent to attempt to cure its Transfer default within a period of time acceptable to the Buyer. (i) At any time prior to the due date applicable to the payment of damages due to the Buyer under §8.1(b), the Seller may offer to Transfer to the Buyer replacement Allowances on a new Delivery Date (the “Deferred Delivery Date”) for those it originally failed to Transfer. The Buyer may, but is not required to, agree to accept such Transfer of replacement Allowances in lieu of the damages it is entitled to recover under § 8.1(b), provided that in such case the Buyer shall be entitled to invoice the Seller for interest for the intervening period calculated as the sum of interest accrued during the two Delivery Business Day grace period as provided in § 8.1(a); plus interest, at the Interest Rate specified in § 13.5 (Default Interest), from (and including) the first Delivery Business Day following the Delivery Date, to (but excluding) the date of actual Transfer of the previously undelivered Allowance(s), accrued on the amount calculated in accordance with the formula set forth in § 8.1(b)(i)(C). (ii) If the Buyer agrees to accept the Seller’s offer for Transfer of replacement Allowances on a Deferred Delivery Date as provided above in subparagraph (i), but the Seller again defaults on its deferred Transfer obligation, the Buyer shall be entitled to invoice the Seller for an amount calculated in accordance with § 8.1(b) (Buyer’s Cover Costs) save that the amount it may so invoice the Seller shall account for both: (A) interest, (1) in the event that the Buyer is subsequently able to make a replacement purchase of Allowances, calculated as provided in § 8.1(b)(i)(C); or (2) in the event the Buyer is unable to make a replacement purchase of Allowances before the Reconciliation Deadline for the relevant Compliance Period, calculated as provided in §8.1(b)(ii)(D); and (B) any increase in the Buyer’s Cover Costs reflecting higher market prices pertaining to replacement Allowances on the Deferred Delivery Date when compared to those available in the market on the original Delivery Date. § 8.2 Failure to Accept: (a) Two Business Days Grace Period. When the Buyer fails to accept Transfer of a Contract Quantity in whole or in part on a Delivery Date as required in accordance with the terms of an Allowance Transaction, and such failure is not excused by an event of Force Majeure, Suspension Event or the Seller’s non-performance, the Seller shall afford the Buyer an opportunity to remedy its failure by again attempting to Schedule and Transfer such Contract Quantity (or undelivered portion thereof) to the Buyer on the second Delivery Business Day following the Delivery Date, provided that such day is not on or after the Reconciliation Deadline applicable to the undelivered Allowance(s), and further subject to the additional obligation of the Buyer to pay the Seller, as compensation for its failure to accept Transfer of the Allowances, interest calculated: (i) as follows for the two Delivery Business Day grace period; and (ii) as set forth in the applicable subpart of this § 8.2 for any longer period the Buyer fails to accept the Allowances thereafter. Interest for the two Delivery Business Day grace period shall accrue at the Interest Rate specified in § 13.5 (Default Interest) for the period from (and including) the Delivery Date to (but excluding) the second Delivery Business Day following the Delivery Date on the Total Contract Price of the Allowances not accepted by the Buyer, such Total Contract Price calculated as follows: the number of Allowances not accepted by the Buyer multiplied by a fraction determined by dividing the Total Contract Price by the Contract Quantity. (b) Seller’s Cover Costs. In the event that the Buyer fails to accept Transfer of all or any portion of a Contract Quantity as required by § 8.2(a) (Two Business Days Grace Period) in accordance with the terms of an Allowance Transaction and the Seller has not agreed to a Deferred Acceptance Date as provided for in § 8.2(c) (Seller’s Right to Waive Its Cover Costs), the Buyer shall incur the obligation to pay the Seller, as compensation for its failure to accept Transfer of the Allowances, an amount (hereinafter “Seller’s Cover Costs”) equal to the sum of: (i) the price, if any, less than the portion of the Total Contract Price applicable to the Allowances not accepted by the Buyer, which the Seller, acting in a commercially reasonable manner either did, or would have been able to, receive, in an arm’s length transaction with a third party or parties, from the resale of the Allowances not accepted by the Buyer; (ii) such reasonable additional incidental costs as the Seller incurred in attempting to make or making such resale of the Allowances; and (iii) interest accrued during the two Delivery Business Day grace period as provided in § 8.2(a); plus interest, at the Interest Rate specified in § 13.5 (Default Interest), accrued from (and including) the first Delivery Business Date following the Delivery Date, to (but excluding) the date of receipt by the Seller of damages for the Buyer’s failure to accept, such amount calculated using the following formula: Amount on which interest accrues = ANA x CP Where: ANA means Allowances not accepted, the total number of Allowances the Buyer failed to accept; and CP means the aggregate Contract Price that the Buyer would have been required to pay to the Seller for all Allowances not accepted by it. (c) Seller’s Right to Waive Its Cover Costs. The Seller shall be entitled to invoice the Buyer for damages payable pursuant to § 8.2(b) (Seller’s Cover Costs) in accordance with the requirements of Payment Cycle B as defined in § 13.2 (Payment). However, the Seller may alternatively, but shall be under no obligation to, defer the due date on the payment of such damages for a reasonable period of time (but in no event beyond the applicable Reconciliation Deadline) if the Buyer has indicated to the Seller its intent to attempt to cure its acceptance default within a period of time acceptable to the Seller. (i) At any time prior to the due date applicable to the payment of damages due to the Seller under §8.2(b), the Buyer may offer to accept Transfer from the Seller on a new Delivery Date (the “Deferred Acceptance Date”) of the Allowances it failed to accept Transfer of on the original Delivery Date. The Seller may, but is not required to, agree to attempt to again Transfer such replacement Allowances to the Buyer on the Deferred Acceptance Date. If it so agrees, the Seller, in lieu of the damages it is entitled to recover under § 8.2(b), shall be entitled to both Transfer and receive payment of the Contract Price for the Allowances on the Deferred Acceptance Date and to further invoice the Buyer for interest for the intervening period calculated as the sum of the interest accrued during the two Delivery Business Day grace period as provided in § 8.2(a) plus interest at the Interest Rate specified in § 13.5 (Default Interest), from (and including) the second Delivery Business Day following the Delivery Date to (but excluding) the date of actual acceptance of Transfer of the Allowance(s) previously not accepted, accrued on the amount calculated in accordance with the formula set forth in § 8.2(b)(iii). (ii) If the Seller agrees to the Buyer’s offer to accept Transfer of the Allowances on a Deferred Acceptance Date as provided above in subparagraph (i), but the Buyer again defaults on its acceptance of Transfer obligation, the Seller shall be entitled to invoice the Buyer for an amount calculated in accordance with § 8.2(b) (Seller’s Cover Costs) save that the amount it may so invoice the Buyer shall account for both: (A) interest, calculated as provided in § 8.2(b)(iii); and (B) any depreciation in the Seller’s Cover Costs reflecting lower prevailing market prices available for the resale of Allowances on the Deferred Acceptance Date when compared to those available in the market on the original Delivery Date. § 8.3 Excess Emissions Penalty (“EEP”) and EEP Equivalent: (a) Applicability. The Parties to any Allowance Transactions desiring to make EEP or EEP Equivalent inapplicable and inoperative to the calculation of the Buyer’s Cover Costs for any Allowance Transactions between them may do so either globally by specifying EEP or EEP Equivalent as not applying in Part II of this Allowances Appendix, or specifically, with respect to a particular Allowance Transaction, by so agreeing in the terms of that Allowance Transaction itself. (b) Excess Emissions Penalty. If EEP is applicable, the Buyer may invoice the Seller in the amount of an EEP it incurs as the result of the Seller’s failure to Transfer to it Allowances when required pursuant to the terms of an Allowance Transaction. (c) Excess Emissions Penalty Equivalent. If EEP Equivalent is applicable, the Buyer may invoice the Seller for an EEP Equivalent it incurs as the result of the Seller’s failure to Transfer to it Allowances when required pursuant to the terms of an Allowance Transaction. (d) Duty to Mitigate. The Seller’s obligation to pay the EEP or the EEP Equivalent is subject always to the Buyer’s overriding obligation to use commercially reasonable endeavours (including, without limitation, making use of any excess Allowances it may have available to it at the time, and/or procuring such Allowances as are available in the market) to satisfy its obligation to surrender the required number of Allowances necessary to avoid or otherwise mitigate its EEP or EEP Equivalent liability. For the avoidance of doubt, the Buyer’s duty to mitigate its EEP or EEP Equivalent exposure is limited to management of its Allowance portfolio and shall not impose upon it any further obligation regarding its operation of any installation with an obligation to surrender Allowances to a Relevant Authority. (e) Evidence of Commercially Reasonable Efforts. Upon request, the Buyer shall confirm to the Seller: (i) that it has incurred EEP or EEP Equivalent consequent upon the Seller’s failure to Transfer Allowances to it; (ii) the extent to which the requirement for the Buyer to pay the EEP or the EEP Equivalent results from the Seller’s failure to make such a Transfer; (iii) that it was unable to mitigate its EEP or EEP Equivalent exposure, and shall provide the Seller with evidence: (A) that the EEP or EEP Equivalent, as applicable, was incurred by it; (B) that such EEP or EEP Equivalent was incurred as a result of the Seller’s failure to perform its Transfer obligation; and (C) of its commercially reasonable endeavours to mitigate its exposure to such EEP or EEP Equivalent as it has invoiced to the Seller; provided, however, that should the Seller elect to challenge the Buyer in respect of any of the above matters, then the burden for demonstrating: (A) that such EEP or EEP Equivalent was not actually incurred by the Buyer; (B) that such EEP or EEP Equivalent was not incurred by the Buyer as a result of the Seller’s non-performance; and/or (C) the insufficiency, lack of thoroughness or unreasonableness of such endeavours shall be on the Seller and, if § 22.3 (Expert Determination) is specified as applying in Part II of this Allowances Appendix the process by which such challenge will be determined shall be in accordance with the procedures set forth in § 22.3 (Expert Determination). (f) Later Mitigation of Recovered EEP or EEP Equivalent. To the extent an initially assessed and recovered EEP is later reduced and/or fully or partly returned or credited to the Buyer by a Relevant Authority for any reason whatsoever, only such reduced and finally assessed EEP shall apply. EEP recovered by the Buyer in the form of damages under this § 8 which are later reduced or returned to such Buyer shall be returned upon demand to the Seller who paid such damages, and the Buyer shall provide the Seller with prompt notification of any such reduction or return. Similarly, in the event the Seller has made the Buyer whole for an EEP Equivalent, and all or any portion of the underlying EEP or EEP Equivalent upon which the Seller’s EEP Equivalent payment was based is later returned to the Buyer by its resale customer, the Buyer shall return an equivalent amount of its own EEP Equivalent payment to the Seller. § 8.4 Amounts Payable. Amounts that are due according to this § 8 shall be invoiced and paid in accordance with Payment Cycle B as defined in § 13.2 (Payment). § 8.5 Remedies for Failure to Transfer or Accept after Cessation of Suspension Event (a) Where the Buyer fails to accept Transfer from the Seller of the Contract Quantity in whole or in part on a Delayed Delivery Date and such failure is not excused by an event of Force Majeure, another Suspension Event or the Seller’s non-performance, the Seller’s Cover Costs shall consist of the sum of the following elements: (i) the Seller’s Cover Costs as provided in § 8.2(b) of this Allowances Appendix; (ii) an amount (the “Default Cost of Carry Amount”) calculated at the Default Cost of Carry Rate for the Default Cost of Carry Calculation Period multiplied by the product of the Contract Price and the number of Allowances not Transferred or accepted for the relevant Allowance Transaction, divided by three hundred and sixty (360). Such Default Cost of Carry Amount shall be identified in the relevant invoice; and (iii) interest on the Default Cost of Carry Amount accrued from (and including) the Delivery Business Day following the Default Cost of Carry Calculation Period, to (but excluding) the receipt by the Seller of damages for the Buyer’s failure to accept Transfer, calculated at the Interest Rate specified in § 13.5 (Default Interest) of the Agreement. (b) Where Seller fails to Transfer to the Buyer the Contract Quantity in whole or in part on a Delayed Delivery Date and such failure is not excused by an event of Force Majeure, another Suspension Event or the Buyer’s non-performance, Buyer’s Cover Costs shall consist of the aggregate of the following elements: (i) Buyer’s Cover Costs, as provided in either: (a) § 8.1(b)(i) of this Allowances Appendix; or, (b) where an EEP or EEP Equivalent has been made applicable to an Allowance Transaction and has arisen, § 8.1(b)(ii) of this Allowance Appendix; in either case, reduced by (ii) the Default Cost of Carry Amount; provided, always, that in the event that the number resulting from application of the applicable formula set forth immediately above in either § 8.5(a) or § 8.5(b) results in a negative number, such number shall be deemed to be zero and no damages will be owed. edit Comparison See our natty emissions comparison table between the IETA, EFET and ISDA versions of emissions trading docs Resources and Navigation Index: Click ᐅ to expand: EFET Allowance Annex - Premium Emissions Emissions trading documentation ISDA: EU Anatomy • EU Wikitext • EU Nutshell (premium) • UK Anatomy • UK Wikitext (to be merged into EU Anatomy) IETA: IETA Master Agreement • IETA Wikitext • IETA Nutshell (premium) EFET: EFET Allowances Appendix • EFET Allowances Wikitext • EFET Nutshell (premium) Premium version of this page

Overview

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Just what happens if, without excuse, a Delivering Party fails to deliver, or a Receiving Party fails to accept delivery of, Allowances is a key part of any self-respecting emission allowances trading document. Though each Carbon Squad approaches it in its own charmingly idiosyncratic way, the good ninjas of ISDA, EFET and IETA broadly get to the same place. Broadly.

The provisions are these:
ISDA: Sections (d)(ii) (Failure to Deliver)
EFET: Clause 8.5 (Remedies for Failure to Transfer or Accept after Cessation of Suspension Event)
IETA: Clause 12 (Transfer or Acceptance Failure)

Summary

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When your Transaction gets to its end game, there are — absent unforeseen external events beyond the parties’ reasonable control, like Force Majeure, Suspension Events and Illegality — if the Delivering Party, or for that matter, the Receiving Party, just hasn’t come up with the required “goods” by the required time, how do things play out?

Each of the Master Agreements does things its own way, and as you might expect, the respective literature plays like a Myers Briggs assessment of the organisation’s personality.

How the Trading Agreements deal with Failure to Transfer or Accept

Component	ISDA	EFET	IETA
Cure Period to remedy	Yes: Final Delivery Date (2 days hence)	yes, through 2 day grace period	Yes: to Final Delivery Date (2 days hence)
EEP/No EEP alternatives	Yes	Yes	Yes
Replacement Costs	Delivering Party’s Replacement Cost/Receiving Party’s Replacement Cost	Buyer’s Cover Costs/Seller’s Cover Costs	Delivering Party’s Replacement Cost/Receiving Party’s Replacement Costs
No EPP Replacement Cost calculation	Example	Min [0, Price Increase on Failed Allowances + Transaction Costs + Accrued Interest]	Example
EPP Replacement Cost calculation	Example	Example	Example
Interest accrual basis	Example	Confusing. There are different accrual rates for the grace period and the default period, and interest seems to accrue during the grace period on the whole value of the undelivered Allowances, not just any price differential against the Traded Price.	Example
Example	Example	Example	Example
Example	Example	Example	Example
Example	Example	Example	Example
Example	Example	Example	Example

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• The JC’s famous Nutshell™ summary of this clause

Template:M premium EFET Allowance Annex 8

See also

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