Contract risk to kill a Direct Action dud?

Contract risk to kill a Direct Action dud?

By Marcus Priest & Grant Parker

All proponents will also need to think carefully about the number of units they offer at auction and the proposed delivery schedule given the potential for the Commonwealth to terminate the contract for overly optimistic promises made before entering into the contract.

The core of the contract is the obligation of the seller to deliver the contracted quantity of carbon units at the scheduled time and the obligation of the buyer (the Commonwealth) to accept delivery and to promptly purchase and pay for them.

The contract provides some flexibility by allowing for the seller to deliver carbon units in advance of the scheduled date where notice is given 20 business days before the proposed delivery.

Details provided by the bidder before the auction – quantity of units to be delivered, price and delivery schedule – will automatically become terms of the contract.

One problem already evident with the standard form contract is the term – up to five years.   Some companies have already indicated that a five-year term contract is a disincentive to bidding given it is likely to be insufficient to secure investment for long-life assets.

However, the ERF contract provides for an extra requirement for the operation of the force majeure provision – that the proponent be unable to provide "make-good" units.

Proponents need to understand the terms of the contract and its implications before bidding – once a bidder is successful in the reverse auction it will enter into a contract and it will not be able to further negotiate its terms.

The first point to highlight from the way in which the draft contract defines the core obligation of the seller to deliver units is that it is not linked to the seller’s project.

Effectively, proponents hit by natural disaster are doubly penalised – through the loss of their project and through the obligation to purchase make-good units, which must be domestic Australian Carbon Credit Units and not international permits.

In relation to the "credibility" criteria the Government has indicated that a company's previous record of delivering contracted emission reductions – or more particularly failure to deliver – will be considered, along with commercial readiness of the technology or practice and the capacity of the project proponent to carry out the project.

To alleviate such concerns, the proponent will have the opportunity to renegotiate the delivery schedule but not beyond the term of the contract and the Commonwealth may also agree to reduce the number of units it is contracted to buy.

However, the substantive obligations of the contract – to deliver and purchase units – will only come into effect once certain conditions precedents have been met.

Read more here: Business Spectator

    

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