Zero Carbon Holdings, LLC v. Aspiration Partners, Inc.

The federal district court for the Southern District of New York ruled that a failure by plaintiff companies to deliver 3.6 million carbon credits to the defendant company constituted an “Event of Default” under an agreement requiring one of the plaintiffs to deliver credits issued by a carbon credit registry and generated by one of two approved projects in Brazil in exchange for a $29.5 million prepayment. The plaintiff companies invest in carbon credit projects, and the defendant company “sources, invests in, and monitors carbon removal projects around the world and curates a large portfolio of carbon credits that it then resells.” The approved projects involved reducing emissions compared to a baseline of otherwise planned deforestation and forest degradation on large privately owned farmable properties in Brazil. The projects confronted delays, including delays related to overlaps with public park areas, threats by persons understood to be illegal loggers, and lack of access to the land due to social and political unrest related to the 2022 presidential election in Brazil. The court rejected the plaintiffs’ claim that they did not have an obligation to deliver carbon credits because the registry had not issued any carbon credits, which the plaintiffs unsuccessfully argued was a condition precedent to the obligation to deliver credits. The court also was not persuaded by the plaintiffs’ contentions that they were relieved from performance under the doctrines of impossibility and impracticability, due to political turmoil, low river levels that made travel to the sites impracticable, and delays due to changes in the verification process for credits. The court found that the plaintiffs “failed to show that the failure to obtain carbon credits … was unforeseen or could not be guarded against” and that the record reflected that the parties agreed to contract terms placing the risk of delay on the plaintiffs. Because the events that prevented issuance of the credits were foreseeable, the court also rejected the plaintiffs’ argument that the doctrine of frustration of purpose relieved them of their obligations.