Business & Human Rights: Model Contract Clauses for Sustainable Supply Chains

GAIL^® regional event, hosted by GAIL North America

OVERVIEW

This panel, led by members of the Responsible Contracting Project (RCP) team, presented the American Bar Association’s Model Contract Clauses for Human Rights (MCCs), to guide companies and their counsel on achieving responsible sourcing throughout the global supply chains. 

With burgeoning legislation, investor pressure, and consumer demand, responsible and sustainable supply chains are a high priority. The Model Contract Clauses (MCCs) are designed as a practical tool to help buyers and suppliers protect the human rights of workers in international supply chains. They include: 

• a focus on the remediation of human rights harms over contractual remedies
• relational dispute resolution mechanisms
• an obligation of “responsible exit,” by buyers both generally and particularly with respect to force majeure or similar events
• buyers sharing contractual responsibility for protecting human rights with their suppliers and sub-suppliers
• a regime of human rights due diligence, requiring the parties to take appropriate steps to identify and mitigate human rights risks and to address adverse human rights impacts, instead of a typical regime of representations and warranties, with concomitant strict contractual liability
  

This session provided an introduction to the MCCs, along with an overview of the recently launched book: Contracts for Responsible and Sustainable Supply Chains: Model Contract Clauses, Legal Analysis, and Practical Perspectives, Edited by Susan A Maslow and David V Snyder.

The session is useful for practitioners from across large and small law firms, in-house counsel, academia, NGOs, civil society and any others who may be interested in adapting, operationalising and implementing the MCCs to protect human rights in supply chains.

SESSION SUMMARY

Introducing the Responsible Contracting Project 

The Responsible Contracting Project, established in 2022, originated from the American Bar Association Business Law Section‘s working group, which aimed to draft model contract clauses safeguarding human rights in international supply chains. The frustration leading to this initiative stemmed from companies professing adherence to global human rights standards in their policies, yet such commitments were not reflected in their operational practices.

The lack of consensus on defining human rights violations, modern slavery, and related terms, coupled with ambiguous references to applicable laws, created confusion. Many companies claimed ignorance of human rights violations in their multi-tiered and complex supply chains. The Responsible Contracting Project emerged with the hope of resolving these issues by providing clarity, defining key terms, and aligning contracts with human rights principles.

The first version of model contract clauses drew inspiration from the Uniform Commercial Code and the CISG, aiming to bridge the gap between universal human rights policies and actual operations. The second version, a result of extensive consultations, marked a significant shift in contract design, aligning more closely with the principles of Human Rights Due Diligence outlined in the UN Guiding Principles on Business and Human Rights and the OECD guidance.

The role of the contract in protecting human rights 

Contrary to the traditional approach of placing the burden solely on suppliers, the Responsible Contracting Project asserted that contracts play a crucial role in shaping relationships and expectations between buyers and suppliers. While buyers historically held negotiating power and imposed one-sided terms, this approach increased the risk of human rights violations, as seen during the COVID-19 pandemic.

The conventional “tick-box” approach, where suppliers make promises of compliance through representations and warranties was criticised as unrealistic and dangerous. Human rights risks are dynamic, and this approach discourages the open sharing of problems, hindering effective remediation. Traditional contracting, focusing on termination rights rather than remediation for victims, was deemed ineffective and out of sync with evolving mandatory human rights and environmental due diligence standards. So, contracting as usual is insufficient. 

The Responsible Contracting Project urges businesses to embed human rights due diligence into every step of the buyer-supplier process. This involves integrating human rights and environmental priorities into contractual business objectives, fostering collaboration, sharing data, ensuring accurate reporting, and triggering timely rehabilitation mechanisms.

The significance of such an approach was emphasised through the lens of evolving customer expectations, investor priorities, boardroom concerns about litigation, and increasing legislative requirements. The Responsible Contracting Project recommended a reexamination of existing contracts to ensure they are up to the task of upholding human rights and environmental standards in supply chains.

Historically, the application of HRE policies was voluntary. However now, application and effectiveness are becoming mandatory with responsibility for HREDD and greater enforcement of trade sanction laws. 

Why it matters now 

• ESG demands from customers, investors and the board room
• Legislative drivers 

Legislative drivers in the European context

The EU Corporate Sustainability Due Diligence Directive (CS3D) requires appropriate measures to attain due diligence objectives, underscoring the importance of contractual frameworks capable of addressing potential adverse impacts effectively. The MCC framework is a potential solution, offering modular clauses for legal professionals to customise according to the specific needs of their clients.

Further, the German Supply Chain Due Diligence Act, currently in effect, mandates due diligence for major firms. The act necessitates measures that are both effective and adequate, with the MCCs serving as a fitting framework. Specific sections of the act, such as Section 6.4, require contractual assurances from suppliers that extend throughout the supply chain.

Legislative drivers in the US context 

Shifting to the U.S. context, Section 307 of the Tariff Act and Withold Release Orders (WROs) prohibits products manufactured through forced labour from entering the country. Further, the Uyghur Forced Labor Prevention Act (UFLPA), an advancement of withhold release orders specifically targeting the Xinjiang region of China, involves the mapping and tracing of the supply chain to ensure no connection to forced labour, supported by proper documentation established through enforceable contractual means. Additionally, the Trafficking Victims Protection Reauthorization Act poses a substantial litigation risk for companies knowingly involved in enterprises incorporating human trafficking. Companies must abandon claims of ignorance and comprehend and address supply chain risks, particularly concerning human rights issues.

There is an increasing legal imperative for companies to adapt to evolving legal frameworks, transitioning beyond policy statements to contractual obligations. The MCC framework is a versatile tool for legal professionals, aiding in the tailoring of contracts to ensure compliance with emerging laws governing human rights within supply chains.

Voluntary to mandatory models 

There has been a transformative shift from voluntary to mandatory models in addressing human rights and environmental risks within supply chains. Traditional contracting practices, characterized in particular by risk shifting to other actors in the supply chain, are deemed ineffective in this evolving legal landscape. Risk shifting is simply not the same as risk management. 

We need a new contracting model that operationalizes human rights and environmental due diligence principles. The Responsible Contracting Project, manifested through Model Contract Clauses (MCCs) and other tools, aims to achieve this paradigm shift. Notably, the legislative foundation of these tools aligns with the UN Guiding Principles on Business and Human Rights and the OECD guidance.

Three core defects in traditional contracts

• First, traditional contracts rely on one-sided supplier promises of compliance, which are unrealistic and dangerous. This approach also discourages sharing of discovered problems and feeds into plausible deniability higher up the supply chain 
• Second, they ignore buyers’ responsibility to avoid “contributing” to HRE risks, including in purchasing practices. 
• Lastly, they prioritise termination rights and traditional remedies between the parties over human rights remediation for victims, which fails to address victims’ grievances.

In response, the Responsible Contracting Project proposes three core principles reflected in the MCCs and other tools. 

• First, a shared commitment between buyers and suppliers to conduct ongoing risk-based human rights and environmental due diligence. 
• Second, recognition of the impact of buyer behaviour on supplier practices necessitates responsible purchasing practices. 
• Third, the prioritisation of human rights and environmental remediation over traditional contractual remedies such as suspension of payment, termination or damages. 

Current tools include the 2021 Model Contract Clauses and supplier model contract clauses for apparel suppliers, designed to be more supplier-friendly. Additionally, European model clauses are under consultation, aligning with the evolving CS3D and the German due diligence law. The Responsible Contracting Project collaborates with companies, investors, and lawmakers to implement responsible contracting principles and standards.

Q&A 

In light of human rights due diligence as enshrined in the UN Guiding Principles on Business and Human Rights (UNGPs) and other developments, what do lawyers need to do differently, especially in the U.S.? How should both outside and inside counsel approach this?

The UNGPs are organized around three pillars: protect, respect, and remedy. Lawyers must first consider their client’s responsibility to avoid causing or contributing to human rights violations, departing from the traditional goal of shifting responsibility to the other side. Shared responsibility and a shift away from risk-shifting practices are crucial. The Responsible Purchasing Code of Conduct, available on the Responsible Contracting Project’s website, should be examined to evaluate potential impacts of corporate operations on human rights and environmental risks.

In the U.S., recent developments such as the Uyghur Forced Labor Prevention Act and the Tariff Act’s strict liability frameworks necessitate thorough mapping of operations to identify areas with higher risks. Operational-level grievance mechanisms are recommended for effective human rights due diligence. For outside counsel, focus on legislation and whether clients or their affiliates fall within the scope of laws like the German Act or the Corporate Sustainability Due Diligence Directive (CS3D). Assessing contract terms for compliance with legislative requirements is crucial.

Inside counsel faces challenges in managing pricing, profit margins, investor concerns, sustainability fund qualifications, disclosure quality scoring, sustainability reporting, and compliance targets imposed by banks. Meeting Caremark obligations and ensuring a functioning process for reporting to the board is essential. Collaboration across silos, involving procurement, management, and compliance, is emphasised to operationalise discussions and implement effective human rights due diligence. Legal teams should not work in isolation, and the discussions should extend beyond compliance to involve various stakeholders in the business.

What level of awareness and adoption are you seeing around the MCCs, and what does that look like?

We’re receiving significant interest and enthusiasm, particularly in Europe, where companies are proactive in considering new legislation. German companies, subject to the legislation, have shown a positive reception. Multi-stakeholder initiatives, such as the Fair Wear Foundation, are also promoting the Responsible Contracting message. Investors, ethical partnerships, and industry-specific groups are becoming multipliers, aiding in spreading awareness. The MCCs provide a helpful framework for responsible supply chains, fostering collaboration across legal, procurement, and ESG teams.

In the U.S., there’s notable adoption among multinationals, especially those subject to both U.S. and European laws. Larger companies are more aware of the reputational risks and are incorporating operational and contractual obligations to address human rights risks. Mission-driven companies, including B Corps, are leading the adoption, aligning with their multi-bottomline approach. The middle-market range is varied, with some companies initially dismissing risks but later realizing the importance of due diligence.

Can you talk about the enforcement and litigation risks related to human rights due diligence, particularly in the U.S.?

In the U.S., litigation risks arise from laws like the TVPA, focusing on trafficking and modern slavery. Stakeholders can bring claims, and there’s potential for shareholder derivative actions if the board fails in managing human rights risks. Enforcement actions through withhold release orders (WR) and CBP actions are increasing, with a history dating back to the Tariff Act. The interplay between EU and U.S. laws adds complexity, and companies need to consider compliance with both sets of regulations.

EVENT RECORDING

This event is in English. You can watch a recording of the event and can access information about each speaker below.