Contractual mitigation strategies for the solar sector as governments target alleged forced labour

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The US WRO, implemented earlier this year, has targeted Chinese polysilicon provider Hoshine and its subsidiaries, however other parties could be added to the order at short notice. Image: Luke Price/Flickr.

Action by Western governments targeting possible human rights abuses in supply chains is gathering pace. Recent and potential future developments in this area could cause significant disruptions for companies involved in sourcing, importing, and using solar panels (including developers of solar facilities). Companies involved in solar projects should thus consider implementing contractual safeguards to hedge against potential risks arising from such actions.

The US WRO and other measures

Government action targeting alleged forced labour practices in the Xinjiang Uyghur Autonomous Region of China, and forced labour more generally, has escalated in recent months and is expected to continue to do so, with solar supply chains caught in the crosshairs.

In June 2021, for example, US Customs and Border Protection (CBP) issued a Withhold Release Order (WRO) prohibiting the importation into the United States of silica-based products made by Hoshine Silicon Industry Co. or any of its subsidiaries, as well as materials and goods, including polysilicon, derived from or produced using those products. Further WROs targeting other silica or polysilicon producers in the region, or even a region-wide ban, may be imposed in the future. The US Government has also imposed a range of sanctions and export controls on Chinese companies involved in the production of solar panel inputs.  

On 13 July 2021, several US agencies issued an updated version of a Xinjiang Supply Chain Business Advisory (originally published in June 2020) warning that businesses with ties to Xinjiang “could run a high risk of violating US law” and highlighting various legal risks for companies that do not exit supply chains, ventures, and investments connected to the region.

The US has not been alone in taking action to respond to the alleged abuses in Xinjiang. In January 2021, for example, the Canadian and UK governments made coordinated announcements regarding their respective responses to the situation in Xinjiang. Among other measures, the Canadian government announced its intentions to enforce a forced labour import ban introduced in July 2020 and the UK government committed to strengthen the UK Modern Slavery Act and tighten public procurement exclusion requirements.  

There have also been calls in the EU, UK, and Australia to introduce measures prohibiting the importation of goods produced using forced labour. Such measures would, if introduced, be in addition to existing and anticipated steps in Western countries focused on human rights risks in supply chains, including modern slavery reporting laws in the UK and Australia, a recently-passed supply chain due diligence law in Germany, an anticipated proposal for an EU human rights due diligence law, and human rights sanctions regimes that have been deployed in the UK and EU.

Contracting to mitigate risks

Against this fast-evolving backdrop of legislative and policy developments, companies involved in sourcing solar panels or inputs would be well advised to consider how they may address potential legal risks. While covenants, representations, and warranties are not a complete solution, they can be an important part of a company’s broader strategy to mitigate risks associated with the legal developments discussed above.

For supply contracts governed by English law, it is important to appreciate that English law generally holds contracting parties to the bargain that they have struck and allocates risk accordingly. Unlike many civil law systems, English law has no general doctrine of supervening unforeseen circumstances which provides relief (so-called “hardship” doctrines). The doctrine of contractual frustration, however, can in certain circumstances terminate a contract and require the reimbursement of any moneys already paid.  The application of the doctrine is unfortunately not particularly easy to predict.  For example, it may not apply to the imposition of an import ban if it is determined that one of the contracting parties took on the risk of complying with all import requirements. 

The vagaries of the doctrine of frustration – particularly in the context of international transactions – led to parties including express force majeure clauses in their contracts. These clauses excuse a party from liability for non-performance of a contract to the extent that – and for so long as – performance is prevented by a matter outside that party’s control. However, these clauses take many forms and are often heavily negotiated; sometimes the foreseeability of an event precludes a party from relying on the clause, and sometimes it does not. 

In addition, whether an affected party could have prevented the impact of an event may also be considered in determining whether force majeure applies. In any event, the immediate remedy provided by a force majeure clause is typically simply to leave the contract in suspense; force majeure triggering the termination of a contract must be expressly provided for, along with the conditions (e.g. time elapsed) enabling termination. Moreover, Incoterms 2020 does not deal with the imposition of import prohibitions, force majeure, or hardship but leaves these matters to be dealt with separately by the parties. 

To help overcome these issues, a purchaser or importer may wish to consider including the following in supply agreements or other relevant documentation with foreign manufacturers:

  • Representations and warranties from the supplier as to the absence of human rights violations in its own operations and its supply chains.
  • An undertaking from the supplier to exercise (and procure that its suppliers exercise) good labour practices in the manufacture and delivery of goods.
  • Clauses that clearly allocate risks related to legal action or supply chain disruptions arising from forced labour allegations.  For example, importers may wish to seek reimbursement for any purchased items that cannot be imported into the United States (or any other country imposing similar import bans), as well as any costs associated with storing, destroying, or re-exporting the goods. 
  • Termination rights where authorities in an importing country allege breaches of forced labour-related commitments. 
  • Expressly making an inability to import or use solar panels due to an allegation by the government of a destination country that there is credible evidence of forced labour in the supply chain as a force majeure event on which the purchaser or importer may rely, though in the case of robust termination rights such a clause may not be needed.

Such contractual provisions can help to mitigate financial risks and incentivise manufacturers to conduct appropriate diligence of their operations and supply chains.

Authors

Graham Vinter, chair project finance practice group, Covington & Burling LLP

Ursula Owczarkowski, vice-chair international project development and finance practice, Covington & Burling LLP

Sarah Bishop, special counsel, Covington & Burling LLP

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