Human Rights Due Diligence in Supply Chain Contracts: A Shared Responsibility of Buyer and Supplier?

This month, the American Bar Association (the “ABA“) published a Report on its suggested Model Contract Clauses to Protect Workers in International Supply Chains (the “MCCs“).

While the MCCs are not put forward as a binding standard, they do provide food for thought for companies who are seeking to align their supply chain contracts with the UN Guiding Principles on Business and Human Rights (the “UNGPs“), and the increasing tide of mandatory human rights due diligence legislation (see more on this impending legislation here).

Key takeaways:

1. The aim of the MCCs is to align drafting in international supply chain contracts with existing human rights due diligence standards and obligations, with a view to providing “operational guidance for mapping, identifying and addressing human rights risks at every tier of the supply chain” and seeking to help companies “implement healthy corporate policies in their supply chains in a way that is both legally effective and operationally likely.”
2. In aligning supply chain contracts with existing obligations and requiring reasonable due diligence by both contract parties, the MCCs seek to address what could be considered an imbalance in the typical negotiation of supply chain contracts where, traditionally, a buyer has tended to shift all responsibility for human rights issues to the supplier.
3. The publication of the MCCs pose some interesting considerations for buyers negotiating supply chain contracts. For example, to what extent is it reasonable for the supply chain contract to reflect the stance that abuses of workers’ rights occurring in global supply chains is a shared responsibility of both buyers and suppliers? The cooperative approach submitted is very different to the traditional oppositional relationship between buyer and supplier, where buyers seek to ensure that any and all responsibility for adherence to prescribed human rights standards falls to suppliers by requiring representations and warranties from suppliers on a “strict liability” basis.

What obligations do the MCCs contemplate?

The MCCs provide a guide on how to integrate existing human rights due diligence standards into international supply contracts. Three of the key obligations, and the context in which they have arisen, are discussed in more detail below. Separately, the report puts forward the “building blocks” for two schedules which, it suggests, could be incorporated by reference into an international supply chain contract. ‘Schedule P’ includes suggested human rights standards that the supplier must follow, while ‘Schedule Q’ includes suggested human rights standards that the buyer must follow. It is recommended these would take the form of ‘codes of conduct’ or specifications of how each party ought to behave throughout the life of the contract.

1. Human Rights Due Diligence

The MCCs suggest that buyer and supplier must each conduct human rights due diligence before and during the term of the contract. This includes both parties taking appropriate steps to identify and mitigate human rights risks and to address adverse human rights impacts in their supply chains.

2. Buyer Responsibilities

The MCCs provide that buyer and supplier must engage in responsible sourcing and purchasing practices, including in relation to order changes and responsible exits.

The ABA suggests that, typically, aggressive contracting characterized by one-sided or oppressive terms can lead to undue commercial pressure being placed on suppliers, exacerbate human rights risks, and undermine the buyer’s ability to meet its own human rights commitments. As the ABA publication points out, this is often with little to no regard for the impact a buyer’s own decisions or actions may have on the supply chain and on the working conditions of the people who are needed to meet those very demands on time. In the alternative, the report suggests “better contracts and better contractual practices can generate better human rights outcomes.”

3. Remediation

The MCCs suggest that buyer and supplier must each prioritize stakeholder-centered remediation for human rights harms before, or in conjunction with, conventional contract remedies and damage assessments. In addition, the MCCs provide that the buyer must also participate in remediation if it caused or contributed to the adverse impact.

For example, the ABA suggests that traditional remedies for breach of contract as a result of ‘nonconforming goods‘ are typically money damages to the buyer. However, the MCCs prioritize the remediation of human rights harms (addressing adverse conditions to benefit the victims and to avoid further abuses) over contractual remedies (although contractual remedies are still permitted when appropriate).

Why should a buyer take the MCCs seriously?

Some buyers in international supply chain contracts may consider adoption of these types of provisions as concessionary. However, they raise interesting suggestions which should be taken seriously in light of the future legislative landscape on human rights due diligence and ever-changing expectations of a global society – increasingly, people and societies around the world are putting pressure on large corporations to bring ESG issues to the fore in their decision-making. For consumer-led businesses, everyday consumers and investors alike are concerned about buying from and investing in companies whose supply chains are tainted by forced or child labor or other human rights abuses, like dangerous working conditions and low pay. Multinational corporations must be equipped to answer questions posed by consumers and investors alike and will need to take an informed view on the approach to take toward human rights due diligence when negotiating supply chain contracts.

The MCCs and Supplier Sustainability Programs

All companies should consider incorporating contractual responses on specific issues, like the MCCs with respect to human rights, as part of a broader supplier sustainability program that addresses a variety of supply chain impacts in multiple ways. For example, a supplier sustainability program aligned with the Ten Principles of the UN Global Compact might seek to address human rights alongside environmental issues like greenhouse gas emissions and pollution, as well as bribery and corruption. That program could require suppliers to adhere to a general “Supplier Code of Conduct” incorporating guidance from the MCCs on human rights, together with references to international standards on labor (ISO 45001, SA8000), the environment (ISO 14001) and anti-bribery (ISO 37001). Best in class programs also incorporate a robust supplier engagement component involving monitoring, evaluation (including through supplier questionnaires and audits) and remediation procedures for when the code of conduct or relevant contractual provisions are breached.

You can view an introduction to the ABA’s report on the MCCs here, the executive summary here, and the full report here. Read more of our coverage on Business and Human Rights.

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