|Specific Issues to Negotiate
in a IJI Contract
Which Country's Laws Apply
In designing a IJI project, would-be partners need to determine upfront
which country's laws should apply and incorporate specific dispute resolution language
into the contract. In most cases, the laws of the country having the most at stake (i.e.,
financial investments) will apply. There are some circumstances under which host country
law may be most appropriate. For example, disputes may need to be resolved in the host
country, and potential witnesses are probably located there. In addition, enforcement of
the law is often limited by the legal environment of the host country. That is, if a U.S.
party should need to make a claim in the host country, judgments will likely be executed
there. Depending on the complexity of the project and the level of risk involved, parties
may agree to refer any disagreements to a neutral third party, who would be called upon to
mediate. Partners in the RUSAFOR project, for instance, agreed that the laws of Russia
would apply to the project, but that any disputes would be subjected to the jurisdiction
of the courts of Oregon State. A handful of organizations specialize in dispute
resolution. One such body is the American Arbitration Association (AAA) (see note 2), a
not-for-profit, public service organization with offices in major cities around the U.S.
Among other things, AAA provides arbitration of international commercial cases. AAA also
provides guidance on writing dispute resolution clauses. The International Chamber of
Commerce's Court of Arbitration in New York City also provides arbitration services (see
note 3). While dispute resolution provisions can prove invaluable a few years down the
road, they can also add to upfront project costs. This is another reason why parties
should agree to as much as possible in the early stages of project development.
Because of the many unknowns involved in developing a IJI project,
including changes in the international attitude toward the threat of global warming,
political vulnerabilities associated with some developing countries, and natural
disasters, developers should consider mechanisms for managing risk, including financial,
technological, and political risks.
IJI participants may wish to consider purchasing insurance to cover
unexpected eventualities. Government-backed international investors, such as the Overseas
Private Investment Corporation (OPIC) insure Iong-term U.S. investments abroad. At this
time, however, OPIC only offers political risk insurance. It covers losses resulting from
currency inconvertibility, loss of investment due to expropriation, nationalization or
confiscation by a foreign government, and loss of income or assets due to war, political
insurrection, and/or terrorism. OPIC investment insurance would therefore not cover losses
resulting from natural disasters or such "unofficial" activities as destruction
of a forest by local loggers or farmers.
Project developers may be able to protect themselves by shifting
responsibility for the project's success to those actually implementing the project. This
can be done by including in the contract a penalty for failure to perform.- For example,
one could demand repayment of money invested (plus interest) if the project fails. The
disadvantage of this type of approach is that developing economies are not always able to
pay large sums of money. Another way of putting the onus on the project implementor would
be to include language guaranteeing that if the project fails, the host country will
provide an alternate opportunity for equivalent expected greenhouse gas benefits. For
example, the contract could contain a clause stating that if a forest in a land-use
project is cut down, the host country government will make another parcel of land
available to the U.S. partner for afforestation.
Similar risk minimization effects can be achieved through the use of
incentives. By attributing to the host country part of the credit for emissions reduction,
investors can provide an incentive to induce the host country to protect and sustain the
project independently. Developers of the RUSAFOR project assigned carbon offsets on a
50/50 basis, thereby ensuring that the Russian partner would have an interest in
maintaining the offset over time. In many cases, involving the host country as an active
participant in the project can provide some measure of project security. Past project
developers have emphasized the importance of obtaining the support of the local community
to ensure long-term success of an overseas venture.
While it may be difficult to obtain comprehensive protection of a
project from the risk of complete failure it may be possible to insure individual elements
of the project. For example, seedlings purchased for afforestation projects often come
with a guarantee from the nursery to cover replacement should the seedlings not survive
the first several months after transplantation. Project developers can also purchase cargo
insurance to cover the transfer equipment from the U.S. to the foreign country. Some large
brokerage firms, such as the Roanoke Companies, Alexander and Alexander, or Marsh and
Mclennan, specialize in this type of coverage (see note 4).
There are other creative approaches to managing risk as well. Developers
planning projects in the same country, for example, may wish to diversify risk by pooling
their projects in such a way that if one project fails, the developer will still receive
the benefits arising out of the other successful projects. However, the specifics of these
arrangements can be quite complex and will require some legal expertise and creativity.
Many contracts also contain force majeure clauses, which allow for termination or
suspension of a contract in the event of extraordinary circumstances, such as a natural
disaster, war, terrorism, governmental actions, labor strikes, or other unforeseen
eventualities. These clauses limit the liability of the party executing the force majeure.
However, not all aspects of risk can be managed contractually. The most
important thing for potential project developers to bear in mind is that they need to
fully understand what they are getting into. All projects involve some element of risk,
and the best way to minimize it is to do extensive research beforehand. Likewise, it is
important to listen carefully to the foreign partners to fully understand their interests
and expectations. A successful project is one that meets the needs of all parties;
establishing these at the outset will help reduce the chances of misunderstandings and
disputes later on.
Assignment of Greenhouse Gas Reductions/Sequestration Benefits
One area which most participants will want to treat by contracts is the
assignment of greenhouse gas reduction or sequestration benefits among parties. While at
first glance assignment of such benefits may seem fairly straightforward, it is a topic
deserving thoughtful consideration by all participants. At issue is the fact that from now
until the end of the pilot phase, no international credits are being offered for
greenhouse gas emissions reductions. However. this may change in the post-pilot phase, and
the value of greenhouse gas reductions may be high. For this reason it is important that
project developers reach agreement on greenhouse gas apportionment and include language in
the contract, so that there is no dispute later on. Project developers should also
document all their consultations with respect to future value of greenhouse gas credits.
Another option for dealing with a reassessment of greenhouse gas value is to draw up a
"changing values" contract, in which terms are established that take into
account dynamic situations and allow parties to reevaluate the terms of their contract
after a mutually agreed upon period of years. One way of dealing potentially dynamic
circumstances would be to include language indicating the potential for values to change
over time and how parties will address such changes. For example, if one participant has
agreed to contribute dollars in exchange for a percentage share of the greenhouse gas
reductions, it may be desirable to insert minimum levels of reductions to protect the
interest of such partners. If these levels are not achieved, then both parties could have
the option to cancel the agreement, in which case neither party shall have further
obligations under the contract.
In another scenario, participants may anticipate there will be a
greenhouse gas credit trading system in the future. If this is the case, the partners may
wish to establish a target price per ton of carbon dioxide annually over the life of the
project. Then, if the trading price is above or below this target for any given year,
contract provisions can allow for readjustment of the parties' obligations and/or the
extent to which they receive ownership of the reductions.
Yet another approach to dealing with the possibility of changing
greenhouse gas values may be to develop agreements with appropriate levels of government
(e.g., national, provincial, and municipal) in the host country to elicit a guarantee that
greenhouse gas reductions will not be taxed, especially as their value goes up.
Assignment of emissions reduction benefits may be established on the
basis of financial contribution or some ex ante target price per ton of greenhouse gas
reduced or sequestered. However, project participants have wide latitude in assigning
benefits. For example, there is a proportional allocation, e.g., 50 percent to each of the
parties. This arrangement assigns equal risk to both parties. Alternatively, some
agreements may allocate the first several thousand tons to one party, and all subsequent
tons to another. This provides a near-term guarantee that the first party will receive its
emissions reductions and shifts the risk of underperformance to the second party. Other
arrangements may simply assign all greenhouse gas reduction benefits to be assigned to one
party. Ensuring Project Survival over the Long Term. As mentioned earlier, IJI contracts
must incorporate mechanisms that ensure that the project will be able to continue once the
proposer's initial work has been accomplished. Not only is it important to ensure
continued reduction or sequestration of greenhouse gases, but it is also important to
protect investor assets abroad. Contracts should therefore contain language that
guarantees performance. For example, if the project fails, who will take over ownership?
These issues are most appropriately considered early in the contracting process.
The issue of project success is further complicated by the long-term
nature of IJI contracts and the fact the international regulatory environment may change
over time. Projects must be designed to deal with this uncertainty. There are several
possible ways of doing this. One might be to design the project in such a way that it is
in everyone's best interest to keep the project alive, that is, it should be a project
that is good in and of itself, even if no international consensus on IJI evolves. One way
of doing this would be to build local incentives into the project, so that local people
will be motivated to keep the project going indefinitely. In a forestry project, the
project could be designed in such a way that the local inhabitants will not want to cut
the trees before the time intended by the IJI project. For example, Belize law says that
forests must be preserved forever. Hence, strong incentives exist for Belizeans to engage
in long-term forestry projects, irrespective of international pressure to reduce or
Another way of responding to the uncertain future of the greenhouse gas
market is the use of "option contracts," which hedge on the future value of a
commodity (in this case, greenhouse gases) by allowing investors to participate for a
relatively small fee and giving them an option to renew the contract every five or ten
years or so, effectively recalibrating the value of the commodity'. However, this can be
complicated, since it is difficult to predict the future value of greenhouse gases.
Other proposers try to ensure long-term viability of a project by
entering into an arrangement with a host government or some other secure local entity,
such as an NGO, that is charged with overseeing the project. This body would guarantee
that the project is protected over many years. In this situation, the developer puts trust
in the local institution and must, therefore, fully investigate the stability of this
entity and whether it has the resources necessary to perform the agreed-upon tasks.
Another important aspect of the IJI process is project monitoring and
verification. Monitoring involves the periodic collection and analysis of data on the
project's effects; it is usually conducted by the project developer himself, although some
IJI participants may wish to engage outside parties to perform monitoring. Some developers
may also consider hiring a third party with special expertise in the area of data
collection and analysis to design a monitoring regime for the project at its commencement.
Verification occurs when a third party is hired to measure project
effects. The third party may consist of the USIJI Evaluation Panel. a USIJI designee, or
another party selected by the project developer. This independent audit, as described
elsewhere in this book, will ensure that data, procedures, and methodology being used are
adequate for the project's goals.
When developing contracts for monitoring and/or verification, project
developers may select an external auditor who will be a part of the project from inception
on through final implementation, since monitoring and verification of greenhouse gas
impacts essentially begin with the project design and initial estimation of effects. Those
who are involved in original estimates of carbon impacts will have a better understanding
of what needs to be monitored over the long term. Important considerations in designing
monitoring and/or verification contracts include:
- Schedule (when should monitoring occur and how often.
- Frequency likely will depend on the type of project)
- Methodology and data collection procedures (what should be monitored and
- Reporting arrangements
- Funding/cost arrangements (what will be billed and paid for)
Although, as recommended above, it may be beneficial to have the
verification party involved early in the project, such an arrangement is not always
feasible, since in some cases, as with a forestry project, verification procedures will
not commence for many years into the future. Consequently, it may be difficult to design
contracts appropriate for such timeframes. Land Ownership/Management. Some joint
implementation projects will involve the purchase of land in a foreign country. In some
cases, land will be purchased from the host country government; in other cases land will
be bought directly from farmers or other local inhabitants. A central element of the
Ecoland Project in Costa Rica, for example, was the purchase of 2,000-3,200 hectares of
privately held tropical forest. Legal arrangements needed to be made for the purchase of
land, logging concessions, and the transfer of title. Depending on the type of project,
some contracting issues related to land use include leases/easements; land
management/preservation activities; restrictions on use of timber and/or slash Cliffris;
and replanting activities in case of loss by fire, disease, or insects. Land-use contracts
provide the USIJI Evaluation Panel the reassurance that sequestration activities can be
sustained well into the future.
Energy. Energy-related IJI contracts may call for Power Purchase
Agreements (PPA) and/or Engineering, Procurement, and Construction (EPC) contracts between
the developer and a host country entity. Although these contracts are not unique to the
IJI process, they are important indicators of the project's stage of development.
A Power Purchase Agreement is usually a Iong-term contract for the sale
and purchase of capacity and/or energy from a power producer to a purchasing utility. In
the case of IJI projects, the purchasing utility is often a national entity. In most
instances, the PPA will be not differ significantly from similar agreements negotiated
between domestic partners in the United States. The main difference, according to past IJI
participants, is that PPAs in developing countries tend to be broader and less specific
than those in the United States, owing to a less mature power market in developing
An EPC contract typically provides guarantees covering completion,
performance, electricity output, and emissions levels. These contracts can also encompass
elements such as project design, contract price, payment schedule, completion schedule,
performance tests and guarantees, final acceptance, force majeure, warranties,
subcontractors, limitations on liability, termination, and dispute resolution clauses.
Like PPAs, EPC contracts associated with IJI usually resemble similar contracts between
two U.S. parties. For both types of projects, past project developers stress the
importance of having good local counsel on hand during negotiations.
Agreements with Host Country Governments
In the course of their activities, many USIJI participants will
doubtless have occasion to negotiate with representatives of the host country government
to facilitate project development. Agreements can be signed covering such issues as tariff
relief? relaxation of restrictions on local ownership, local content requirements, tax
relief, property rights, and other matters. Once again, a local advisor will be a useful
resource in helping to navigate the local government.
A Memorandum of Understanding (MoU) establishes a formal framework for
collaboration between two parties and signifies a willingness on the part of both to
collaborate on some specified objective. An MoU does not specify a particular technical
project on which collaboration will occur, nor does it indicate other modalities of
cooperation, such as technical agencies involved, management, or financial agencies.
Rather, it is a statement of intent which sets the stage for future projects. In some
cases, the United States government can assist project developers by signing a broad
umbrella agreement with the host country. For example, the United States Department of
Energy has Memoranda of Understanding in place with the government of Costa Rica, which
has led to a more favorable environment for IJI projects within that country. In addition,
a similar agreement has been entered into with the government of Chile, which should
facilitate the IJI process there as well. Other MoUs may be signed with other governments
in the near future. Also under development is a regional MoU between the United States and
a consortium of foreign governments, such as the collective governments of Central
2. The American Arbitration Association's main office is in New York
City. The telephone number there is (212) 4844000. AAA also has offices located in 36
other cities around the United States.
3. The International Chamber of Commerce Arbitration Courrt can be
reached at (212) 354-4480.
4. Phone numbers for these organizations are as follows: the Roanoke
Companies (708) 490-9540 or (800) 422-9944; Alexander and Alexander (202) 296-6440; Marsh
and Mclennan (202) 828-7900.
5. The U.S. Carnet program also provides duty and VAT-exemption on
goods, such as test equipment or construction tools that are taken abroad on a temporary
basis. The carnet, valid in fifty countries, is in effect a passport for merchandise, and
it exempts the U.S. importer from duties and taxes while the goods are in the foreign
country. Carnets can be issued through the U.S. Council for International Business or
through some insurance brokers.
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