[Introduction].It is a basic principle of a society governed by the rule of law that no one should profit from illegal and untrustworthy conduct. This case is a typical case of a dispute arising from carbon credit trading in a voluntary emission reduction market. In this case, Zhongzheng Forestry Company "sold one carbon and two goods", and after signing a transaction contract with Wandefulan Company, it signed a sales contract with an outsider on the subject matter of the transaction with a higher transaction**, and temporarily obtained more income by increasing the transaction**. However, the adjudication results of this case showed that Zhongzheng Forestry Company violated the principle of good faith and not only failed to make a profit, but should also compensate the non-breaching party for the losses caused.
Case IndexCivil Judgment of the People's Court of Binjiang District, Hangzhou City, Zhejiang Province (Case No.: (2022) Zhe 0108 Min Chu No. 4877).[Main Points of the Adjudication].Where one of the parties fails to perform its contractual obligations or performs its contractual obligations in a non-compliant manner, causing losses to the other party, the amount of compensation for losses shall be equivalent to the losses caused by the breach of contract, including the benefits that can be obtained after the performance of the contract, but shall not exceed the losses that may be caused by the breach of contract that the breaching party foresaw or should have foreseen at the time of entering into the contract. The average transactions** of the five forestry carbon sequestration projects of the same type in 2022 provided by Wonder Fulan Company could not fully and effectively prove the expected benefits that it could obtain after the performance of the agreement involved in the case, so this court determined that Zhongzheng Forestry Company should compensate Wonder Fulan Company for economic losses of 480,000 yuan based on various factors such as the performance of the agreement involved in the case, the loss of interest on capital occupation, and the circumstances of the transaction between Zhongzheng Forestry Company and the outsider involved in the case. [Basic Facts of the Case].On April 1, 2021, Wonder Fulan Company and Zhongzheng Forestry Company signed a "50,000 tons (VCUS) purchase agreement", and the two parties agreed on the transaction of 50,000 tons of VCUS for the Hubei Hongshan Forest Management Project: transactionThe unit price is 104 yuan tonsThe total transaction price is 520,000 yuan;The buyer pays the deposit within 7 working days after the contract is signed1040,000 yuan;The seller agrees to transfer 50,000 tons of VCUS to the buyer or the buyer's designated account before May 10, 2021 after the buyer pays the deposit, and the buyer shall pay the remaining balance 4160,000 yuan was transferred to the seller's bank account in the annex;The seller's failure to deliver 50,000 tons of VCUS according to the established delivery time or the buyer's failure to pay according to the established time shall be deemed to be in breach of contract and shall be treated as liquidated damages;Liquidated damages include the liquidated payment calculated according to 30% of the contract amount of the project and all expenses incurred by the non-breaching party in filing a lawsuit (including but not limited to litigation fees, travel expenses, lawyer fees, guarantee fees, execution fees, etc.). On April 8, 2021 and April 30, 2021, respectively, the deposit 10 stipulated in the agreement involved in the case was paid to Zhongzheng Forestry Company40,000 yuan and the final payment of 4160,000 yuan. On October 9, 2021, Zhongzheng Forestry Company signed the VCS Carbon Sink Sales Contract with the outsider and agreed on the outsiderAt a unit price of 20 yuan tonsPurchased 90,000 tons (including 50,000 tons) of VCUS from Hubei Hongshan Forest Management Project. The sale and purchase contract has been fulfilled. On April 6, 2022, the plaintiff and the defendant negotiated the performance of the 50,000 tons (VCUS) purchase agreement signed on April 1, 2021 through Tencent Meeting. (Note: This case involved two carbon emission reduction trading contracts, one of which was terminated by the plaintiff and the defendant after partial performance without dispute;This article only captures the part of the dispute between the parties).[Disputed Issues].If the holder of the International Certified Emission Reduction (VCUS) sells "one carbon and two sales", resulting in the termination of the contract due to the inability to perform, should the non-compliant party be compensated for the loss of profits?How to determine the loss of available benefits?[Judgment Result].The People's Court of Binjiang District, Hangzhou City, Zhejiang Province ruled that the "Purchase Agreement" signed by Beijing Wonder Fulan Technology and Zhejiang Zhongzheng Forestry Development Co., Ltd. shall be terminated on the effective date of this judgment, and Zhejiang Zhongzheng Forestry Development Co., Ltd. shall return the contract amount of 520,000 yuan to Beijing Wonder Fulan Technology Co., Ltd., pay liquidated damages of 104,000 yuan, attorney fees of 40,000 yuan, and compensate Beijing Wonder Fulan Technology Co., Ltd. for economic losses of 480,000 yuan. [Case Analysis].1. Background:The contract involved in the caseThe subject of the transactionvcusIntroductionThe voluntary carbon market is an important supplement to the mandatory carbon market, and unlike the mandatory carbon market, the main product traded in the voluntary carbon market is the emission reduction (carbon credit) issued by the voluntary emission reduction mechanism. There are three types of voluntary carbon market mechanisms: one is the domestic voluntary mechanism of each country, such as China's Certified Emission Reduction Mechanism (CCER);The second category is international carbon reduction mechanisms, including the Clean Development Mechanism (CDM) and the International Aviation Carbon Offsetting and Reduction Scheme (CORSIA);The third category is third-party independent voluntary emission reduction mechanisms, such as Certified Emission Reduction Standards (VCS), * Standards (GS), the US Carbon Registry (ACR), and the US Climate Action Reserve (CAR). The carbon emission reductions verified and issued through the above three types of mechanisms can be used as carbon credits for market circulation, and one unit of carbon credit is equivalent to one ton of carbon dioxide emissions. Among them, VCS is the voluntary emission reduction project mechanism with the largest trading volume and the most extensive application in the international market. In this case, the subject VCUS of the transaction between Beijing Wonder Fulan Technology*** and Zhejiang Zhongzheng Forestry Development*** was the carbon credit issued by the Verified Carbon Standard (VCS) mechanism. According to a study by the Guangdong Emissions Exchange, as of March 2023, VCS has 462 registered projects in China, with 7,824 carbon credits580,000 tons. In the voluntary emission reduction market, the ultimate demand side of carbon credits is mainly large enterprises, which use part of the carbon credits to offset their own carbon emissions in order to achieve carbon neutrality goals. In the mandatory emission reduction market, carbon allowances are standardized products with high transparency. However, in the voluntary emission reduction market, there is a huge gap between the carbon credits issued by different emission reduction mechanisms, even if the carbon credits issued by the same emission reduction mechanism, the project type, year, and the impact of the project on the ecological environment and biodiversity may affect the carbon credits. In addition, demand-side preferences also have a greater impact on carbon credits**. For example, on September 26, 2023, the transaction price of mangrove protection carbon sinks in Futian District, Shenzhen was as high as 485 yuan, a premium of 165 times, while the price of carbon allowances in the national carbon market on the same day was only 7606 yuan ton. 2. The loss of obtainable benefits falls within the scope of compensation for losses for breach of contractArticle 584 of the Civil Code of the People's Republic of China stipulates that "if one of the parties fails to perform its contractual obligations or the performance of its contractual obligations does not conform to the agreement, resulting in losses to the other party, the amount of compensation for the losses shall be equivalent to the losses caused by the breach of contract, including the benefits that can be obtained after the performance of the contract;provided, however, that it shall not exceed the losses that may be caused by the breach of contract that the breaching party foresaw or should have foreseen at the time of entering into the contract. According to the above provisions, if a party to a contract fails to perform its contractual obligations and causes losses to the other party, it shall be liable for compensation, and the scope of liability includes the benefits that can be obtained after the performance of the contract, that is, the loss of benefits. Specifically, in this case, Zhongzheng Forestry Company made it clear that it was unable to deliver the 50,000 tons of VCUS involved in the case, and should compensate for the losses caused to Wonder Fulan Company due to its refusal to perform the contract. 3. How to determine the loss of available benefits(1) The method of calculating the loss of available benefitsIn practice, the "benefits that can be obtained after the performance of the contract" are affected by factors such as the nature of the transaction and the purpose of the contract, and the determination of the loss of available benefits often becomes the focus of disputes. The Minutes of the 13th Judges' Conference of the Second Circuit Court of the Supreme People's Court in 2019 summarizes the calculation methods for compensation for the loss of available benefits in practice, including the difference method, the agreement method, the analogy method, the estimation method and the comprehensive discretion method. The so-called deficiency method compares the property status of the injured party at the time of the damage with the property status of the injured party after the proper performance of the contract, and the difference is the loss suffered by the non-breaching party, including the loss of available benefits. The law of agreement is a method in which the parties directly agree on the calculation of the amount of damages in the contract. The analogy method refers to the determination of the amount of compensation for the benefits that can be obtained by comparing the benefits that can be obtained by other units of the same or similar parties under similar conditions by the non-breaching party. The estimation method refers to the method of determining the amount of compensation according to the actual circumstances of the case when the court is unable to determine the amount of loss of profit that can be obtained. The comprehensive discretionary method is a method commonly used by courts in practice, which often makes a comprehensive judgment based on factors such as profits, the parties' respective fault factors, and the current economic situation. (2) The method used by the court to determine the loss of obtainable benefits in this caseJudging from the facts of this case, the purpose of Wonder Foran to purchase carbon credits is not to offset its own carbon emissions, but to resell them for profit. However, prior to the default, Wonder Fulan had not reached a trading agreement with a third party on the carbon credits involved in the case, so it was difficult to apply the difference method to determine the loss of profits. In this case, the parties did not expressly agree on the method of calculating the losses caused by the breach of contract in the transaction contract, so the law of agreement could not be applied to determine the losses. In addition, as mentioned above, the carbon credit of the voluntary emission reduction market is affected by many factors such as project type, year, buyer preference, etc., and the carbon credit transactions issued by different emission reduction mechanisms are very different, most of the transactions are determined by the buyer and seller through negotiation, there is no mature carbon credit value assessment method, and the transparency of the transaction is also low, so it is often difficult to apply the analogy method and estimation method to determine the loss of profits. In this case, although Wonderfulan provided an average of five transactions of the same type of forestry carbon sequestration project in 2022**, the court held that it was not sufficient to effectively prove the expected benefits that it could obtain after the performance of the agreement in question. In the end, the court adopted a comprehensive discretionary method, and determined that Zhongzheng Forestry Company should compensate Wandefulan Company for economic losses of 480,000 yuan based on various factors such as the performance of the agreement involved in the case, the loss of interest on the occupation of funds, and the circumstances of the transaction between Zhongzheng Forestry Company and the outsider. In this case, in this case, Zhongzheng Forestry Company successively signed two carbon credit sales contracts for the subject matter of the transaction, and the transaction price was 104 yuan ton, 20 yuan ton, for the 50,000 tons of VCUS involved in the case, the difference between the two transactions is 480,000 yuan (the amount of loss of profit finally determined by the court). (3) The allocation of the burden of proof for the loss of available benefitsThe notice of the Supreme People's Court on Several Issues Concerning the Trial of Civil and Commercial Contract Dispute Cases under the Current Situation (Fa Fa 2009 No. 40) stipulates that "when the people's court determines the loss of obtainable benefits, it shall reasonably allocate the burden of proof. The breaching party shall generally bear the burden of proof that the non-breaching party has not taken reasonable derogating measures resulting in the expansion of losses, the non-breaching party has obtained benefits due to the breach, and the non-breaching party is also negligent;The non-breaching party shall bear the burden of proof of the total loss of obtainable profits and necessary transaction costs suffered by the non-breaching party. For foreseeable losses, the non-breaching party may provide evidence, or the people's court may make a decision according to the specific circumstances. The Minutes of the 13th Judges' Conference of the Second Circuit Court of the Supreme People's Court in 2019 held that in the civil procedure for compensation for the loss of available benefits, the non-breaching party should bear the burden of proof for the legal elements and facts arising from the right to claim compensation for the loss of available benefits, including: (1) the breaching party has breached the contract;(2) The non-breaching party has a loss (amount) of obtainable benefits;and (3) there is a causal relationship between the loss suffered and the breach. It can be seen that in a dispute over the loss of obtainable benefits caused by breach of contract, the non-breaching party has a higher burden of proof for the claimed loss of obtainable benefits. It should not only provide evidence to prove the existence of a breach of contract by the breaching party, but also the amount of loss of available benefits and the causal relationship with the breach. In this case, Wonder Foran used the average transaction of five forestry carbon sequestration projects of the same type in 2022 as the main basis for calculating the loss of profits it could obtain, but the court held that it was not sufficient to effectively prove the expected benefits that it could obtain after the performance of the agreement in question. In the end, the court mainly referred to the ** involved in the transaction between Zhongzheng Forestry Company and an outsider to determine the plaintiff's loss of profits. [Case Enlightenment].At present, China has not formulated special laws, regulations or judicial interpretations for carbon credit trading disputes, and the court can only adjudicate such cases in accordance with the provisions of the Civil Code on contract disputes, but the particularity of the subject matter of the voluntary emission reduction market determines that carbon credit trading has its inherent risks, which is worth summarizing and studying. Through the analysis of this case, the author believes that the parties to carbon credit trading can take risk precautions from the following aspects:1. The transaction contract clearly stipulates the method of calculating the amount of compensation for losses arising from breach of contractArticle 585 of the Civil Code stipulates that "the parties may agree that when one party breaches the contract, it shall pay a certain amount of liquidated damages to the other party according to the circumstances of the breach, and may also agree on the method of calculating the amount of compensation for losses arising from the breach." According to the above provisions, the parties may not only agree on the calculation method of liquidated damages, but also on the calculation method of the amount of damages arising from the breach of contract. In practice, most parties to a contract attach more importance to the agreement on liquidated damages, but they tend to ignore the agreement on the calculation method of compensation for losses caused by breach of contract. As mentioned above, the non-breaching party has a higher burden of proof in disputes involving the loss of available benefits, but due to the opacity of the voluntary carbon market**, it is often difficult for the non-breaching party to provide evidence for the loss of obtainable benefits after the dispute arises. Therefore, if the calculation method of the obtainable benefits can be clearly stipulated in the transaction contract, the burden of proof on the non-breaching party in the litigation will be greatly reduced, and the court will avoid the court rejecting the claim that the obtainable benefits cannot be caused by the failure to present evidence. 2. Adhere to the principle of good faith in the performance of the contract and avoid the risk caused by breach of contractIt is a basic principle of a society governed by the rule of law that no one should profit from illegal and untrustworthy conduct. In this case, after signing the transaction contract with Wandefulan Company, Zhongzheng Forestry Company signed a sales contract with an outsider on the subject matter of the transaction with a higher transaction**, and temporarily obtained more income by increasing the transaction**. However, the results of the adjudication in this case show that if the principle of good faith is violated, not only can it not be profitable, but it should also compensate the non-breaching party for the losses caused. Zhongzheng Forestry Company should not only compensate the non-breaching party for economic losses of 480,000 yuan (equivalent to the difference between the two transactions), but also pay liquidated damages of 104,000 yuan, lawyer fees of 40,000 yuan, and bear the corresponding litigation costs. （Author:Founder is a lawyer at Beijing Longan (Hefei) Law Firm