Legal capacity of the Green Climate Fund

Legal assistance paper

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Date produced: 28/09/2011

1. Assuming the Green Climate Fund does not have legal capacity does the GCF become an operating entity of the financial mechanism under the UNFCCC? Or is legal capacity required to become an operating entity?

2. If the GCF does not have legal capacity and would not be able to carry out certain actions (such as signing contracts) would the World Bank have a role exceeding the mandate given by the 1/COP16? Does that automatically make the World Bank an operating entity of the financial mechanism?

3. If the GCF board makes an incorrect decision leading to liability would, for lack of having it’s own legal capacity,  (I) the countries represented in the GCF board, or, (II) the actual members of the GCF board, be held liable?

Summary:
International funds which lack legal capacity must rely on other institutions such as the World Bank for legal and administrative support. Such arrangements can lead to a close identification between the particular fund and its supporting institutions, but this does not render them identical nor make the latter the ‘operating entity’ for the purposes of relevant conventions. For example, in the case of the Global Environment Facility (“GEF”) the fund is supported administratively by the World Bank but is mandated to operate in a functionally independent and effective manner.
To bestow legal personality and comprehensive privileges and immunities upon a fund requires negotiation of international agreement which may be time consuming. If, for expediency’s sake, the international community prefers to create a fund lacking in legal capacity and claims arise as a result of the fund’s actions, claimants and supporting institutions and staff respectively have no legal personality to sue or shelter behind. The extent of any applicable immunities and privileges will then depend on an analysis of the constitutional arrangements for the particular fund (see the discussion of the GEF’s position below). Such arrangements may afford a degree of protection to parties involved in the relevant fund’s activities, but are not likely to be as extensive as those which would be expected in a comprehensive international agreement dealing with legal capacity and immunities and privileges.

1. Paragraph 102 of Decision 1/CP.16 designates the GCF as ‘an operating entity’ of the financial mechanism of the UNFCCC. Paragraph 107 of 1/CP.16 invites the World Bank to serve as the interim trustee of the GCF.

Lack of legal capacity does not affect designation as an ‘operating entity’. For example, the GEF assumed the role of an ‘operating entity’ of the UNFCCC pursuant to Article 21(3) of the UNFCCC and Decision 3/CP.4 and subsequent decisions. The GEF is typically regarded as lacking legal capacity .

If the GCF does not have legal capacity then [it] would not be able to carry out certain actions, such as signing contracts, and these actions would have to be done by someone else e.g. the World Bank. If this is the case the World Bank would then have a role exceeding the mandate given by the 1/COP16.

2. No, the World Bank does not automatically become the ‘operating entity’ of the financial mechanism by dint of its acting on behalf of another entity lacking legal capacity. For example, the World Bank and the GEF have entered into arrangements which we understand provide that the GEF is “supported administratively by the World Bank” but that the GEF is mandated to “operate on a functionally independent and effective manner.” The GEF is governed by the GEF Board or Council and is the relevant ‘operating entity’ but its actions are undertaken for it by the World Bank. The two are closely inter-related and the World Bank clearly plays a crucial role in supporting the GEF, but this does not render them one and the same.

The query suggests that the GCF acting through the World Bank would lead to the World Bank exceeding the mandate given by 1/CP.16. This is incorrect. Provided the arrangements constituting the GCF are consistent with the provisions of 1/CP.16 and the World Bank complies with them, the World Bank’s actions as interim trustee of the GCF will not exceed its authority. The World Bank does not need to be given the status of an ‘operating entity’ to fulfil its role as ‘interim trustee pursuant to para 107 of 1/CP.16.

3. Lack of legal capacity may affect the extent to which the GCF or its board members assume liabilities in respect of its actions. Paragraphs 25, 27 and 28 of Transitional Committee document TC-3/INF.1 acknowledge this. Paragraph 25 states that “with legal status, the GCF liability would not necessarily be limited to the GCF’s assets, as would be the case if the GCF had legal personality.”

Paragraph 27 states that “the absence of legal status for the GCF could result in Board members being liable for potential damages to third parties caused by GCF funded programmes/projects.”

Paragraph 28 suggests that the advantage to setting up the GCF without legal capacity is speed and simplicity but that the disadvantage is that “the GCF would not be able to enter into direct legal agreements with the implementing entities and the GCF and its Board members might be exposed to greater liability and less control than if the GCF were a separate legal entity.”

The extent of any GCF privileges and immunities from liability depends on what State Parties are willing to agree. State Parties can agree that the GCF has legal capacity and that it and its board and staff are immune from suit in each State Party’s jurisdiction. However, the negotiation of a comprehensive international agreement on these issues which would provide the GCF with uniform privileges and immunities in each UNFCCC party’s jurisdiction is a complex and time-consuming affair.

If, in the interests of expediency, the UNFCCC parties agree to establish a fund with no formal legal status, that fund will depend on other institutions for legal and administrative support. Such a fund does not have a legal personality to which legal liability can be attributed and the institutions and persons acting for the fund do not have a separate legal personality to shelter behind.

The exact extent of such a fund’s and its supporting institutions’ and persons’ liabilities to each other and other parties will depend on the underlying constitutional arrangements of the fund. Given that the context for the creation of a fund lacking legal capacity implies that the relevant parties have not devoted the time necessary to conclude a comprehensive agreement on legal status, privileges and immunity, the ensuing arrangements are unlikely to offer comprehensive protection for the fund itself, its board or its supporting institutions and their staff.

A relevant example are the arrangements for the GEF, which is generally regarded as lacking legal capacity. Paragraph 13 of Annex B of the GEF’s constitutional document, the GEF Instrument , states that the “the privileges and immunities accorded to the Trustee [World Bank] under its Articles of Agreement shall apply to the property, assets, archives, income, operations and transactions of the Fund.”

The World Bank provides staff and administrative, secretariat and trustee services to the GEF. By international agreement, the World Bank has extensive privileges and immunities which protect the World Bank in the performance of its proper functions whether in support of the GEF or otherwise . The extent of such privileges and immunities would need to be carefully considered in the event of any claim arising in connection with the GEF, and the same will be true of the arrangements ultimately agreed for the GCF . As can be seen from Annex B quoted above, such arrangements may offer protection in respect of participating institutions and assets, but are, as already suggested, not likely to be comprehensive and universally applicable. For example, the extent of protection, if any, for GEF Board members is not clear to us from the documentation we have seen.

The answer to the question of whether countries represented on the GCF Board may also be liable will depend on a complex analysis of the principles of state and sovereign immunity applicable to the particular country and the extent to which it has waived any relevant rights. It is not possible to address this in full here, but the possibility that countries may be able to rely on such rights to avoid liability should be noted.