Contractual Mitigation Strategies for the Solar Sector as Governments Target Alleged Forced Labor


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The US WRO, implemented earlier this year, has targeted Chinese polysilicon supplier Hoshine and its subsidiaries, but more parts may be added to the order in the near term. Image: Luke Price / Flickr.

Western governments’ action targeting possible human rights violations in supply chains is accelerating. Recent and potential future developments in this area could cause significant disruption for companies involved in the supply, import and use of solar panels (including developers of solar installations). Companies involved in solar projects should therefore consider putting in place contractual guarantees to protect themselves against the potential risks resulting from such actions.

US WRO and other measures

Government action targeting alleged forced labor practices in China’s Xinjiang Uyghur Autonomous Region, and forced labor in general, has intensified in recent months and is expected to continue to do so, with solar supply chains targeted.

In June 2021, for example, the US Customs and Border Protection (CBP) issued a Restraint Order (WRO) prohibiting the importation into the United States of silica products manufactured by Hoshine Silicon Industry Co. or the one of its subsidiaries, as well as materials and commodities, including polysilicon, derived from or made from such 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 series of sanctions and export controls on Chinese companies involved in the production of solar panel inputs.

On July 13, 2021, several US agencies released an updated version of a Xinjiang Supply Chain Business Consulting (originally published June 2020) warning that companies with ties to Xinjiang “could be at high risk of violating US law” and highlighting various legal risks for companies that do not leave supply chains, businesses and investments linked to the region.

The United States has not been alone in taking action to respond to allegations of abuse in Xinjiang. In January 2021, for example, the Canadian and British governments made coordinated announcements regarding their respective responses to the situation in Xinjiang. Among other measures, the Canadian government has announced its intention to enforce a forced labor import ban introduced in July 2020 and the UK government has pledged to strengthen the UK Modern Slavery Act and tighten exclusion requirements for public markets.

The EU, UK and Australia also called for the introduction of measures banning the importation of goods produced using forced labor. Such measures, if introduced, would be in addition to existing and planned measures in Western countries focused on human rights risks in supply chains, including modern laws on reporting slavery in the UK and Australia, a recently passed supply chain due diligence law in Germany, an advance proposal for a European human rights due diligence law and related sanctions regimes rights that have been deployed in the UK and the EU.

Contract to mitigate risk

In this context of rapidly changing legislative and policy developments, companies involved in the supply of solar panels or inputs would be well advised to consider how they can manage potential legal risks. While covenants, representations and warranties are not a complete solution, they can be an important part of a company’s larger strategy to mitigate the risks associated with the legal developments described above.

For supply contracts governed by English law, it is important to understand that English law generally holds contracting parties to the contract they have entered into and allocates risk accordingly. Unlike many civil law systems, English law does not have a general doctrine of the occurrence of unforeseen circumstances which provides relief (so-called “trial” doctrines). However, the doctrine of contractual frustration may, in certain circumstances, terminate a contract and require repayment of any money 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 has taken the risk of complying with all import requirements.

The vagaries of the doctrine of frustration – particularly in the context of international transactions – have led the parties to include express force majeure clauses in their contracts. These clauses exempt part of its liability in the event of non-performance of a contract insofar as – and as long as – performance is prevented by a matter beyond the control of this party. However, these clauses take many forms and are often heavily negotiated; sometimes the foreseeability of an event prevents a party from invoking the clause, and sometimes not.

In addition, whether an affected party could have prevented the impact of an event may also be taken into account in determining whether force majeure applies. In any event, the immediate remedy provided for by a force majeure clause is generally simply to leave the contract in abeyance; force majeure triggering the termination of a contract must be expressly provided for, as well as the conditions (for example the elapsed time) allowing the termination. In addition, the Incoterms 2020 do not deal with the imposition of import bans, force majeure or difficulties, but leave these issues to be dealt with separately by the parties.

To help overcome these issues, a buyer or importer may consider including the following in supply agreements or other relevant documents with foreign manufacturers:

  • Supplier representations and warranties as to the absence of human rights violations in its own operations and supply chains.
  • A commitment by the supplier to exercise (and ensure that its suppliers apply) good labor practices in the manufacture and delivery of goods.
  • Clauses that clearly allocate risks associated with legal actions or supply chain disruptions resulting from allegations of forced labor. For example, importers can claim reimbursement for any item purchased that cannot be imported into the United States (or any other country with similar import bans), as well as any costs associated with storage, destruction or the re-export of the goods.
  • Rights of termination when the authorities of an importing country allege violations of obligations related to forced labor.
  • Expressly making it impossible to import or use solar panels due to a claim by the government of a destination country that there is credible evidence of forced labor in the supply chain as an occurrence force majeure on which the buyer or importer can rely, although in the case of strong termination rights, such a clause may not be necessary.

Such contractual arrangements can help mitigate financial risks and provide incentives for manufacturers to exercise due diligence in their operations and supply chains.

Authors

Graham Vinter, Chair of the Project Finance Practice Group, Covington & Burling LLP

Ursula Owczarkowski, Vice President of International Project Development and Financial Practice, Covington & Burling LLP

Sarah Bishop, Special Advisor, Covington & Burling LLP

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