Emissions trading - the law applicable to the contract in the absence of choice
Wednesday, 05 May 2010 15:21


It seems rather improbable that parties to the IETA agreement don’t make choice as regards the jurisdiction applicable to the contract in respect of the sale of emission greenhouse gas allowances. This is because the IETA Master Agreement (ETMA v. 3.0) is governed by and is to be construed in accordance with English law unless otherwise expressly provided for in the Part 1 of the Schedule 2 (Elections) to the Master Agreement (clause 14.7).

 

But there are also trades where other contract documentation is applied, and this documentation sometimes is restricted to, for instance, two pages only (without any master agreement). It is also theoretically possible (and sometimes occurs in practice) that there is no documentation at all – only transfer in the registry (the agreement is concluded orally and not confirmed in writing).

 

The question may arise in the said situations as to the law applicable to the contract.

 

The Regulation No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) is helpful in these ambiguities and the findings on jurisdiction are the first problems, which are to be resolved in any legal analysis relating to such contract.

 

Where the parties don’t exercise their freedom of choice (expressly or clearly demonstrated by the terms of the contract or the circumstances of the case) as regards the law applicable to the whole or to part only of the contract (at any time), according to the Article 4(1) of the said Regulation, a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence.

 

I take the view that, for the purposes of the said Regulation, EUAs, ERUs and CERs should be qualified as “goods”. It should be noted, however, that this question may raise some doubts taking into account immaterial character of emission allowances. For such a qualification doesn’t matter, of course, that on the ground of VAT Directive, transfer of allowances is treated as a provision of services. But regardless of whether emission allowances are considered goods or services – it would not change much in the matter of jurisdiction because a contract for the provision of services, under the Regulation, is governed by the law of the country where the service provider has his habitual residence.

 

When establishing the law applicable to the emission trading contract it is also useful to recall that  the Article 19 of Rome I defines “habitual residence” as being the place of central administration in the case of companies and other corporate or unincorporated bodies.

Where the contract is concluded in the course of the operations of a branch, agency or any other establishment or performance under the contract is the responsibility of a branch, agency or other establishment, the place where that branch or agency or establishment is located shall be the place of habitual residence. For a natural person acting in the course of a business, the habitual residence is his or her principal place of business

 

In the context of the future auctions of EUAs it is also important to mention that according to the Regulation a contract for the sale of goods by auction shall be governed by the law of the country where the auction takes place, if such a place can be determined and a “contract concluded within a multilateral system which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments, as defined by Article 4(1), point (17) of Directive 2004/39/EC, in accordance with non-discretionary rules and governed by a single law, shall be governed by that law”.

 

The law applicable to a contract by virtue of the Regulation shall govern in particular:

(a) interpretation;

(b) performance;

(c) within the limits of the powers conferred on the court by its procedural law, the consequences of a total or partial breach of obligations, including the assessment of damages in so far as it is governed by rules of law;

(d) the various ways of extinguishing obligations, and prescription and limitation of actions;

(e) the consequences of nullity of the contract.

 

The Regulation applies to contracts concluded after 17 December 2009.

 

Above-described provisions can be treated as a general direction of interpretation only, because some “escape clauses” are included in the Regulation and there are also in place multiple exceptions to the rules in question.

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