As mentioned in the last newsletter, the CDM sector in the People’s Republic of China (PRC) has seen a steep decline in secondary market prices, which have fallen below €8. The result is that many ERPAs are already out of the money before they start delivering, and purchasers are looking for ways to bail out.

Other than trying to slow down the validation and verification process, purchasers have two main ways of trying to mitigate losses. Negotiating a reduction in price with the seller may be feasible as purchasers hold a strong bargaining position because of the difficulty sellers will have finding other purchasers. The other option is to terminate the ERPA.

As PRC companies are generally less likely to take matters to dispute resolution, there is scope for purchasers to take a fairly robust stance when pursuing either of these options. If purchasers seek to renegotiate prices or terminate the ERPA they will, in both instances, need to have a firm grasp of the potential termination rights, areas of potential breach by the seller, key dates and notice requirements. There will usually be four main grounds for terminating an ERPA: non-satisfaction of Conditions Precedent, breach of ongoing obligations, failure to deliver on the transfer date or an outright transfer failure. Moreover, any decision to terminate an ERPA should be approached with caution, as wrongful termination may constitute an intentional breach, giving rise to potential liability.

With the large gap between primary and secondary market prices and a limited arbitration risk, terminating an ERPA may seem like an agreeable outcome. However, there are reputational risks which should be considered. The authorities have full visibility of purchaser/seller relationships as all renegotiations and terminations need to be reported to the National Development and Reform Commission (NDRC). While the NDRC has not blacklisted any purchasers yet, the possibility has not been completely excluded. Although purchasers remain in a strong position while market prices are low, it may be difficult for purchasers that have walked away from ERPAs to re-enter the market if prices begin to pick up.