Sustainability Clauses in International Business Contracts 9789462741553, 9789462364813

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Sustainability Clauses in International Business Contracts

Sustainabilit y Clauses in International Business Contracts

K at e ř i n a P e t e r k o v á M i t k i d i s

Published, sold and distributed by Eleven International Publishing P.O. Box 85576 2508 CG The Hague The Netherlands Tel.: +31 70 33 070 33 Fax: +31 70 33 070 30 e-mail: [email protected] www.elevenpub.com Sold and distributed in USA and Canada International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786, USA Tel.: 1-800-944-6190 (toll-free) Fax: +1 503 280-8832 [email protected] www.isbs.com Eleven International Publishing is an imprint of Boom uitgevers Den Haag.

ISBN 978-94-6236-481-3 ISBN 978-94-6274-155-3 (E-book) © 2015 Kateřina Peterková Mitkidis | Eleven International Publishing This publication is protected by international copyright law. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Printed in The Netherlands

Table of Contents Acknowledgments

xi

Part I Research topic and design 1 1.1 1.2 1.2.1

1.3 1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 1.4 1.5

Introduction Background Hypothesis development Lack of transnational governmental regulation for sustainable development Deficiencies of transnational private regulation Growing regulatory power of multinational enterprises Widespread use of sustainability contractual clauses Enforceability of international supply contracts through existing framework of international contract law Key concepts Sustainability, sustainable development, and CSR International and transnational law Regulation and governance International supply chain contracts Effectiveness Relevance Delimitations

2 2.1 2.1.1 2.1.2 2.1.3 2.1.3.1 2.1.3.2 2.1.3.3 2.2 2.2.1 2.2.1.1 2.2.1.2

Research design Theoretical approach Research attitude: Critical thinking Jurisprudence: New legal realism Theorizing the global legal system: Legal pluralism Public/private divide Soft/hard law Conclusion on legal pluralism Sources of law Public International treaties with direct effects on private subjects International soft law

1.2.2 1.2.3 1.2.4 1.2.5

v

3 4 9 9 10 12 13 14 17 17 21 22 23 25 27 30 33 34 35 35 39 40 44 47 48 51 51 52

Table of Contents

2.2.1.3 2.2.1.4 2.2.2 2.2.2.1 2.2.2.2 2.2.3 2.2.3.1 2.2.3.2 2.2.3.3 2.2.3.4 2.3 2.3.1 2.3.2 2.3.2.1 2.3.2.2

National and supranational legislation with extraterritorial effects National and supranational soft law Public-private Public-private agreements Public-private initiatives (standardization, certification) Private Industrial codes of conduct Business-driven cross-sector initiatives International Framework Agreements Corporate codes of conduct Methodology Theoretical research Empirical research Exploratory study Law in action

52 53 53 53 54 55 56 56 57 57 58 59 61 61 62

Part II Sustainability Contractual Clauses 3 3.1 3.2 3.3 3.3.1 3.3.2 3.3.2.1 3.3.3

SCCs’ definition Examples Defining features Distinction from other contractual content Active and passive clauses Placement within contractual text Case study Discussion

67 67 74 76 76 77 79 82

4 4.1 4.1.1 4.1.2 4.1.3 4.1.4 4.2 4.2.1 4.2.2 4.2.3 4.3

Do sustainability clauses fit the contract paradigm? General theories of contract Will (promise) theories Reliance theories Transfer theories Law and economics Contract paradigm shift and modern contract law theories Relational contracts Hybridization of contracts Regulatory contracts Conclusion on contract theories

85 85 86 90 91 92 93 93 95 97 99

vi

Table of Contents

5 5.1 5.1.1 5.1.2 5.1.3 5.1.4 5.1.5 5.2

Literature review Overview of fundamental literature Legal and contractual aspects of codes of conduct Contract law perspective Functional approach Best practice Juridical tool Some reflections on the literature review

101 103 103 104 105 109 110 111

Part III Regulation of Sustainability Contractual Clauses 6 6.1 6.1.1

115 116

6.2.2 6.2.3 6.2.4 6.2.5 6.2.6 6.2.7 6.2.8 6.2.9 6.3

Legal framework Contract law The 1980 United Nations Convention on Contracts for the International Sale of Goods UNIDROIT Principles of International Commercial Contracts Principles of European Contract Law Common European Sales Law CSR regulation UN Human Rights Council Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights “Protect, Respect and Remedy” Framework and the Guiding Principles OECD Guidelines UN Global Compact ISO 26000 EU: A renewed strategy for corporate social responsibility California Transparency in Supply Chains Act of 2010 International Framework Agreements Multi-party business-driven initiatives Multi-party business agreements Conclusion on legal framework

7 7.1 7.1.1 7.1.1.1 7.1.1.2

Sustainability clauses’ anatomy Form Express provisions and incorporation by reference Reference to CSR documents Suppliers’ awareness of CSR documents

153 153 155 157 161

6.1.2 6.1.3 6.1.4 6.2 6.2.1 6.2.1.1 6.2.1.2

vii

116 117 118 119 120 120 121 123 129 132 136 140 142 143 145 147 151

Table of Contents

7.1.2 7.2 7.2.1 7.2.2 7.2.3 7.2.4 7.2.4.1 7.2.4.2 7.2.4.3 7.2.4.4 7.3 7.3.1 7.3.1.1 7.3.1.2 7.3.1.3 7.3.1.4 7.3.2 7.3.2.1 7.3.2.2 7.4 7.4.1 7.4.1.1 7.4.1.2 7.4.2 7.4.2.1 7.4.2.2 7.4.2.3 7.4.3 7.5

Implied provisions Content Topic Implied terms Disconnectedness from the contract subject matter Specificity Examples Reasons influencing specificity Implications under international contract law Conclusion on specificity Scope Enforcement of SCCs by third parties False advertising Unilateral promises Third-party beneficiaries Conclusion on SCCs’ enforcement by third parties Extension of SCCs beyond first-tier suppliers Express and implied warranties Best practice Performance management/enforcement Monitoring Suppliers’ self-assessment Auditing Remedies Relational enforcement tools Contract termination Damages Conclusion on performance management/enforcement Conclusion on sustainability clauses’ anatomy

163 166 166 171 172 175 176 178 181 187 187 190 190 194 196 200 200 201 203 207 210 212 213 216 218 221 226 231 232

Part IV Regulation through Sustainability Contractual Clauses 8 8.1 8.1.1 8.1.1.1 8.1.1.2 8.1.1.3 8.1.1.4

Legalization of CSR/hardening soft CSR regulation Obligation Hardening obligation through formalization Signaling commitment Internalization of agreed values Moral obligation Navigation through regulatory system categories

viii

237 239 242 243 245 245 246

Table of Contents

8.1.1.5 8.1.2 8.1.2.1 8.1.2.2 8.1.2.3 8.1.2.4 8.1.3 8.1.3.1 8.2 8.3 8.4

Summary Hardening obligation through standardization Global best practice Trade usage Expressive function of contracts Summary Hardening obligation through legal transplants Summary Precision Delegation Conclusion on legalization of CSR/hardening soft CSR regulation

247 248 248 250 251 254 254 256 256 260 262

9

Assessing effectiveness of SCCs as a transnational regulatory tool Tractability of suppliers’ sustainable performance SCCs’ attributes moderating effectiveness SCCs’ effectiveness

265 267 270 272

9.1 9.2 9.3

Part V Final conclusions 10 10.1 10.2 10.3

Synopsis, conclusions, and future prospects Synopsis of undertaken research Conclusions Recommendations and future prospects

279 279 281 285

Appendix Annexes

289

References

313

List of graphs and figures

343

ix

Acknowledgments Writing this book was an important step in my career as well as in my life. Therefore, I would like to express my gratitude to all the people who have supported me throughout the process in many different ways. Most importantly, I would like to thank to Professor René Franz Henschel and Professor Hans Henrik Edlund both from Aarhus University in Denmark for their professional advice, inspiration, and encouragement. Thanks also to Professor Michael P. Vandenbergh and Professor Mark A. Cohen for inviting me in 2012 to spend a semester at Vanderbilt University in Nashville, USA, and introducing me to empirical legal research that proved to be an essential part of this work. I would also like to thank Eleven International Publishing for their offer to publish this book and their professional services. Last but not least, many thanks to my husband, Panagiotis Mitkidis, and my family and friends for their understanding and continued support.

xi

Part I Research topic and design

1

Introduction

“…when discussing the public and private dimensions of contract law, and their intersections in a world of government delegation to societal actors, of cross-border contracts, and of emerging transnational governance regimes, any observer is standing on the shoulders of giant. We can see into the vast land, but we must also do our best to ascertain our own, emerging perspectives.” Peer Zumbansen1 Despite the traditionally primary goal of business – to make profit within the applicable legal framework – companies are now, under the imperative of corporate social responsibility (CSR), engaging in activities pursuing public goals in the social and environmental spheres. Public and private actors have developed various tools that help to implement CSR into daily business operations. Many of these tools (such as CSR reporting or labeling) and their legal regulation have been widely discussed by legal scholars. The research presented in this book studies one of the CSR tools that has received much less academic attention, although it is extensively used in practice: social and environmental clauses in international supply chain contracts (hereinafter “sustainability contractual clauses” or “SCCs”). The author: (1) examines the use of the legal instrument of private contract to pursue public policy goals relating to sustainable development, (2) analyzes the legal framework SCCs operate in, (3) discusses what legal effects SCCs may have both within contractual relations between the parties and outside, and (4) evaluates the contribution of this activity and its legal effects in terms of achieving sustainable development objectives. The aim is to explore both the potential and the limitations of contractual governance in achieving global sustainability. The book thus contributes to the current discussion on the development of new regulatory and governance designs to facilitate sustainable development by informing legislators and regulators as well as the business community about the opportunities in relation to contractual governance and its effects.

1

Zumbansen, P., 2007, “Introduction: Private Ordering in a Globalizing World: Still Searching for the Basis of Contract”, Indiana Journal of Global Legal Studies, 14(2), 181–190, p. 188.

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Sustainability Clauses in International Business Contracts

1.1

Background

The promotion of social, environmental, and economic objectives and their balanced development has traditionally been the sole responsibility of states.2 However, due to intensifying globalization, states lack the legal tools to secure the compliance of private parties entering into international business relations with national and international social and environmental standards and with the sustainability objective. On the one hand, private parties are not subject to international law and, on the other hand, the applicability of national law is geographically and personally limited.3 The situation is exacerbated by the fact that some governments, usually in developing countries, do not even fulfill their international obligations, i.e. they do not enforce international law within their territory, either because they do not have the necessary institutional capacity or because they fear an outflow of investment.4 In this way, a legal gap is created where private parties may escape from the legal consequences of the fact that their cross-border activities are not aligned with globally recognized social and environmental standards, and thus do not fulfill the objective of global sustainability.5 Since states are not able or willing to meet their international obligations in terms of protection of the environment and global social concerns, other actors have taken on the task.6 Non-governmental organizations (NGOs), industrial associations, and companies themselves have taken the initiative to regulate sustainability issues at the level they have access to. These actors develop various types of soft and private regulations. Companies’ involvement in the regulatory process is not driven merely by their wish for a clearer environment or upholding of fair labor and social standards; it can be a marketing and

2

3 4

5

6

UN Human Rights Council, Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises, John Ruggie: Protect, respect and remedy: a framework for business and human rights, U.N. Doc. A/HRC/8/5, 7 April 2008 (hereinafter the “Protect, Respect and Remedy Framework”), part II. The State Duty to Protect, para. 27–50. On the “responsibility to protect” see also Stoll, T., “Responsibility, Sovereignty and Cooperation – Reflections on the “Responsibility to Protect”, in König, D., Stoll, P.-T., Röben, V., Matz-Lück, N. (eds.), 2007, International Law Today: New Challenges and the Need for Reform?, Springer, pp. 1–16. National laws with extraterritorial effects are exceptions to the general rule of geographical limitedness. See also infra subsection 2.2.1.3. Protect, Respect and Remedy Framework, para. 14. There are also other reasons possible; for example, the international obligations may not resonate with local social norms, and thus governments are reluctant to enforce them. Ibid, para. 3. See also De Jonge, A., 2011, “Transnational corporations and international law: bringing TNCs out of the accountability vacuum”, Critical perspectives on international business, 7(1), 66–89, pp. 67–68; Sobczak, A., 2006, “Are Codes of Conduct in Global Supply Chains Really Voluntary? From Soft Law Regulation of Labour Relations to Consumer Law”, Business Ethics Quarterly, 16(2), 167–184, p. 168. The present situation is sometimes referred to as “failing states”. See Schwenzer, I., Leisinger, B., 2007, “Ethical Values and International Sales Contracts”, in Cranston, R., Ramberg, J., Ziegel, J. (eds.), 2007, Commercial Law Challenges in the 21st Century: Jan Hellmer in memoriam, Stockholm Centre for Commercial Law, Juridiska Instituionem, Iustus Forlag, p. 249.

4

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Introduction

risk management tool as well. In our globalized society, the general public has become better informed, more aware, and more concerned about the consequences of business behavior in remote parts of the world. The number of protests, boycotts, and riots shows that consumers are attentive to the manner in which business is conducted.7 The general public’s concerns are fed by media that spread the news about unethical business practices all over the world, activating also other stakeholders,8 such as investors or employees’ unions. Business behavior that is in line with the goal of sustainability can, therefore, serve both purposes: enhancing sustainable development while strengthening, complementing, or substituting governmental regulation and protecting business interests, when used as a means to promote a company’s name or as a means to avoid the threat of reputational damage and other risks threatening if the company itself or its business partners are found to be engaged in unethical practices. The phenomenon of business involvement in achieving public objectives has developed into the concept of CSR, which may be broadly defined as business measures that are consistent with the law and ethical standards under which companies accept the responsibility for the effects their activities have on the environment and society.9 Not only is it difficult to define such a concept, but it is also difficult to implement it in practice. Companies try to find ways to embrace CSR in a manner that fits with both their business strategies and public expectations and also complies with legal obligations. Most common CSR tools include an articulation of corporate CSR statements, adopting a code of conduct and other corporate policies, participation in voluntary CSR initiatives, education and engagement of employees, and CSR reporting.10 Implementing CSR throughout international supply chains poses special challenges. Although they are legally independent entities, companies operating across borders have a great interest in the sustainability performance of their suppliers and contractors, since 7

Nike Inc. can serve as an example, developing from a profit-only-oriented company to a CSR-aware company, partly by means of lobbying from the general public. A chronological list of public activities concerning Nike’s social (ir)responsibility between years 1988 and 2000, available at: http://depts.washington.edu/ccce/polcommcampaigns/NikeChronology.htm (last accessed 12/7/2014). 8 For definition of “stakeholders”, see Crane, A., Ruebottom, T., 2011, “Stakeholder Theory and Social Identity: Rethinking Stakeholder Identification”, Journal of Business Ethics,102(1), 77–87, pp. 78–80 (citing among others also R. E. Freeman’s definition: “Any group or individual who can affect or is effected by the achievement of the organization’s objectives”). 9 See also infra subsection 1.3.1. 10 There is no “one-size-fits-all” solution for the implementation of CSR by businesses. Nevertheless, both public and private actors have developed a range of guidelines. See, for example: Human Rights Council, Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie: Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework, U.N. Doc. A/HRC/17/31, 21 March 2011 (hereinafter the “Guiding Principles”), Part II, Section B; or Hohnen, P., (au), Potts, J. (ed), 2007, Corporate Social Responsibility: An Implementation Guide for Business, 2007, International Institute for Sustainable Development, Canada: Winnipeg, available at: www.iisd.org/publications/pub.aspx?id=884 (last accessed 12/7/2014).

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Sustainability Clauses in International Business Contracts

general public and other stakeholders expect them to ensure that they do business only with socially responsible partners.11 Unawareness, either intentional or negligent, of unethical behavior within a company’s supply chain may lead to an assumption that the company is complicit in such conduct, which may cause extensive reputational damage.12 The case of Apple Inc. (Apple) can serve as an example. In 2011, inhuman labor conditions at Apple’s supplier FoxConn in China were revealed. After the issue was discussed in media extensively, Apple pledged to strengthen its suppliers’ audits.13 However, in 2013 more issues were uncovered, and Apple was again in the center of attention accused of lying.14 Therefore, in order to protect themselves when engaged in cross-border activities that are not covered by state-based hard regulation and enforcement, companies employ various tools to control potential social (e.g. risk of losing social license to operate)15, economic (e.g. risk of reputation damage), and legal risks (e.g. risk of litigation). Most of the above-mentioned CSR tools are voluntary, non-binding, and unilateral activities; they do not provide companies with sufficient coercive power over their business partners and, therefore, may not achieve the objective of ensuring the desired behavior throughout supply chains. The lack of factual leverage might be overcome by imposing contractual obligations on business partners. With the backup of judicial enforcement, contracts might give to soft law and self-regulatory CSR instruments a hard law edge and might, therefore, be more successful in fostering ethical behavior of suppliers who are legally independent but often in economic and business terms dependent on the sourcing companies.16 If that is correct, then many questions arise. Why do governments not simply impose an obligation on companies to include sustainability clauses in all their business contracts? Why is there no case law on these issues when we know from the media that

11 According to the UN Global Compact, the incorporation of CSR expectations into contracts is a first step in engagement with suppliers in terms of sustainability. UN Global Compact Office and Business for Social Responsibility, 2010, Supply Chain Sustainability: A Practical Guide for Continuous Improvement, p. 33, available at: http://supply-chain.unglobalcompact.org/site/article/68 (last accessed 12/7/2014). This is mirrored in corporate strategies of CSR-aware companies, such as Hewlett-Packard; see report of the Danish Commerce and Companies Agency, 2008, Small Suppliers in Global Supply Chains, available at: http://etiskhandel.no/Artikler/2502.html?l=en (last accessed 12/7/2014). 12 Deliberate or negligent participation in unethical behavior may also lead to court proceedings (e.g. Kasky v. Nike, Inc., note 161 (chapter 7). 13 Apple Supplier Responsibility 2012 Progress Report, available at: http://images.apple.com/supplier-responsibility/pdf/Apple_SR_2012_Progress_Report.pdf (last accessed 25/2/2014). 14 Armitage, J., “‘Even worse than Foxconn’: Apple rocked by child labour claims”, The Independent, 30 July 2013, available at: www.independent.co.uk/life-style/gadgets-and-tech/even-worse-than-foxconn-applerocked-by-child-labour-claims-8736504.html (last accessed 13/2/2014). 15 See note 9 (chapter 2). 16 Cafaggi, F., 2011, “New Foundations of Transnational Private Regulation”, Journal of Law and Society, 38(1), pp. 20–49 (discussing the role of private regulation in hardening soft law); Kocher, E., 2002, “Private Standards between Soft Law and Hard Law: The German Case”, International Journal of Comparative Labour Law and Industrial Relations, 18(3), 265–280, p. 266 (noting that codes of conduct do not aim to be legally binding, but may gain a binding character through their incorporation into business contracts).

6

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Introduction

there are many breaches of contracts in this area? The logical answer is that companies do not take disputes over SCCs to courts.17 But then, how does the coercive power of contract help in promoting sustainable development? If contracts are not enforced, how do they differ from other tools, such as unilateral codes of conduct? Can and do international supply chain contracts help to achieve sustainable development? These are some of the questions that are addressed in this book. Despite the common usage of SCCs among businesses,18 the academic discussion of the role and possible contribution of business contracts to transnational regulation for sustainable development has surprisingly only evolved in recent years, and the related legal scholarship remains rather sporadic.19 Due to its complexity, the subject is not easily accessible to legal scholars. Since legal research entered the CSR area, it has struggled with a lack of hard, internationally applicable legal regulation. And that is also true of SCCs. Although contracts are in effect legal instruments, they serve various purposes, not only from a legal point of view, but also from an economic and social point of view. In case of SCCs, the social and economic purposes seem to be unusually strong, potentially prevailing over legal purposes. Thus, although legal research is essential to understand the topic, approaching the issues from a purely legal perspective may fail to explain the character of SCCs and to capture the real potential of contractual relations in achieving sustainable development. The propensity of legal research to focus on formal law and placing the researched issues into hard law frameworks may lead to the “legalization” of contracts.20 17 McBarnet, D., Kurkchiyan, M., “Corporate social responsibility through contractual control – Global supply chains and ‘other regulation’”, in McBarnet, D., Voiculescu, A. and Campbell, T. (eds.), 2009, The new corporate accountability: Corporate social responsibility and the law, Cambridge: Cambridge University Press, p. 79; Cafaggi, F., 2011, “The Architecture of Transnational Private Regulation”, EUI Working Paper, LAW 2011/12, European University Institute, p. 9; or Lin L.-W., 2009, “Legal Transplants through Private Contracting: Codes of Vendor Conduct in Global Supply Chains as an Example”, American Journal of Comparative Law, 57(3), 711–744, p. 725. Some companies even include a confidentiality warranty on the CSR information received from their suppliers. The underlying rationale may be questioned, but one reason may be that they do it to gain more transparency and trust in the relationship. See e.g. HP’s Supplier Social & Environmental Responsibility Agreement, available at: www.hp.com/hpinfo/globalcitizenship/environment/pdf/supagree.pdf (last accessed 12/7/2014), Article 2.0 Responsibility (“HP agrees that the report and records referred to will only be used for the purposes of assessing the Supplier’s progress in accordance with HP’s Supplier Code of Conduct and HP’s General Specification for the Environment and will not be disclosed to any third party without Supplier’s prior written consent”). We do not, however, know the number of cases solved within the commercial arbitration framework. Commercial arbitration provides companies with confidentiality regarding their disputes and their outcomes. Nevertheless, based on the information regularly provided by companies in their CSR/sustainability reports and the available scholarship, the number of disputes regarding SCCs appears to be insignificant, if not non-existent. 18 See infra subsection 1.2 (d). 19 The problem of scarce literature has been pointed out in, e.g., McBarnet, Voiculescu and Campbell, supra note 17, p. 59; and Vandenbergh, M. P., 2007, “The New Wal-Mart Effect: The Role of Private Contracting in Global Governance”, UCLA Law Review, 54(4), 913–970, pp. 925–926. 20 Teubner speaks of imperialistic interdisciplinarity. Teubner, G., 2006, “In the Blind Spot: The Hybridization of Contracting”, Theoretical Inquiries in Law, 8(1), 1–21, p. 54 (Disciplines “…base the unity of contract

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Sustainability Clauses in International Business Contracts

Applying this approach, SCCs would be subsumed under the contract law area. But international contract law does not presume that contractual parties will include public goals in their business agreements.21 It primarily aims to remove barriers to international trade and provide a default framework for facilitating private transactions.22 Hence, it does not offer specific rules to acknowledge and analyze all types of non-legal rationales and purposes behind social and environmental contractual clauses, such as marketing, relational, or risk management objectives, which can underlie the usage of these clauses by the business community. However, having said this, it is necessary to stress that legal research in this topic should not be ignored, underestimated, or even refused, as there are some instances of it happening now.23 On the contrary, the author calls for more legal research on this topic, provided that such legal research is informed by and inclusive of pertinent methods, results, and information from other research areas. Therefore, this book will suggest that we cannot truly understand social and environmental contractual provisions when approaching them only from the legal perspective, but that knowledge from other disciplines should be considered in and inform the legal analysis. It is expected that legal scholars will have to engage even further than has been done hitherto in neighboring disciplines, primarily sociology, ethics, management studies, psychology, and economics, in order to comprehend the role of these clauses within transnational regulation for sustainable development and propose adequate regulation to promote these contracting practices.24

21

22

23 24

either on legal consensual obligation or on economic efficiency or on productive transformation and then superimpose their specific perspectives on the other aspects”). International contract law is delineated primarily by the United Nations Convention on Contracts for the International Sale of Goods (adopted 10 March to 11 April 1980, entered into force 1 January 1988) 1489 UNTS 3 (CISG). Further, general principles may be derived from global lex mercatoria and various supporting soft law instruments, such as the UNIDROIT Principles of International Commercial Contracts 2004 (PICC) or the Principles of European Contract Law (PECL). Preamble of the CISG. According to the introductory information provided at the UNICTRAL website (www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html), “The resulting text provides a careful balance between the interests of the buyer and of the seller.” There is no direct reference to global goals of sustainable development generally or to other extra-contractual relationship objectives. International contract law focuses on the seller-buyer relationship and their mutual rights and obligations. However, as stated in the Preamble, the CISG is built on the broad objectives introduced in the UN GA resolution: Declaration on the Establishment of a New International Economic Order, U.N. Doc. A/RES/S-6/3201, 1 May 1974 that include among others the right of the states to choose the social and economic system they deem fit and the regulation and supervision of the activities of transnational corporations. Therefore, it could be argued that the CISG does not support transplantation of norms through contracts from one to another jurisdiction. Nevertheless, the Preamble is commonly not considered as having effects on interpretation of the substantive rules of the Convetnion (Kröl, S., Mistelis, L., Perales Viscasillas, P. (eds.), 2011, UN Convention on Contracts for the International Sale of Goods (CISG), Germany: C.H. Beck) and, thus, the argument outlined above is not considered in here. For the discussion on the role of law in CSR see subsection 1.3.1. See infra introduction to chapter 2 and subsection 2.3 (describing how multidisciplinarity is reflected in the research design of the presented research).

8

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1.2

Introduction

Hypothesis development

This book is a part of the research project on Sustainability and Internationalization of Law conducted at Aarhus University, Denmark, from 2010 to 2013, with the overarching objective to analyze “how to legally secure sustainability in the best way.”25 Considering this overarching research question and based on the background described above, the author has identified international supply chain contracts as potentially suitable regulatory tools for global sustainability. The following suppositions formed a starting point in developing this hypothesis:

1.2.1

Lack of transnational governmental regulation for sustainable development

The international community of states recognizes the environmental and social challenges of our globalized world, but it has so far failed to reach an agreement on the rules that would prevent a negative development in these areas. The 2009 United Nations Climate Change Conference (Copenhagen Summit) was a clear example of the current stalemate, as it showed an urgent need for cooperation to tackle global problems, but a simultaneous inability to find ways, and sometimes also the will, to do it. The Copenhagen Summit failed to adopt a binding international agreement that would set out concrete goals for the reduction of global GHG (greenhouse gas) emissions. No concrete goals mean also no concrete processes. Nevertheless, even in the areas where an agreement exists on the material content, such as human rights,26 the process to reach established goals, especially by the means of legal enforcement, faces a range of barriers. First, the will and commitment to join any agreement as well as the interpretation and enforcement of any adopted rules are highly influenced by the economic and social development of a particular state.27 Second, even if we reach the ideal situation whereby all governments commit to and enforce rules for sustainable development, they would still be unable to control cross-border activities of private actors, since international law is binding upon states but not companies.28 And even if we were to go one step further and optimistically presume that states were able to control the actions

25 Call for project proposals; www.scholarships-links.com/viewdetail/1343/PhD-scholarship-at-Centre-forInternational-Business-Law.html (last accessed 12/7/2014). 26 The main pillar of internationally accepted material content of human rights protection is the Universal Declaration of Human Rights (UN GA resolution 217A (III): Universal Declaration of Human Rights, U.N. Doc A/810 at 71, 10 December 1948). 27 Developing countries in particular often fail to enforce their international commitments. See supra note 4. 28 See infra subsection 1.3.2.

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Sustainability Clauses in International Business Contracts

of private actors incorporated in their jurisdiction, we would still have to address evasive corporate mechanisms, such as outsourcing, which disrupt the legal liability link. The current world based on national legal systems with limited geographical jurisdiction and the international legal system binding governments but not companies does not provide space for public legal regulation that would effectively regulate the transnational operations of companies in order to achieve sustainable development. However, the global governance gaps neither absolve states of their obligation to secure social and environmental standards in their territories nor give them the right to delegate this obligation in its entirety to private actors, even if the latter may be better equipped to lead us out of the regulatory impasse. On the contrary, national governments should understand and accept that they remain to be primarily responsible for finding solutions to the sustainable development problem.29

1.2.2

Deficiencies of transnational private regulation

Given the insufficiency of existing national and international legal instruments in regulation of cross-border business activities, it is necessary to discover and establish new regulatory regimes. As described above, private actors participate in developing these new regimes. They adopt different types of transnational private regulation having autonomous regulatory power or implementing delegated power from national or international law.30 Private regulation may be defined as regulation developed by non-state actors whose “legitimacy, governance, and implementation is not rooted in public authority.”31 Such transnational private regulation may have, for example, the form of standards or guidelines developed in collaboration with governments (co-regulation), among private parties (business private regulation), or by a single entity, being usually adopted as a code of conduct (self-regulation).32 Due to the existing legal gaps, private initiatives constitute important means of transnational regulation in the CSR field. However, transnational private regulation suffers from several deficiencies. First of all, transnational private regulation’s legitimacy is often questioned by legal theory and political science.33 The legitimacy of national and international law is derived 29 Protect, Respect and Remedy Framework, para. 18 et seq. 30 Cafaggi, supra note 16, p. 1. 31 Vogel, D., 2010, “The Private Regulation of Global Corporate Conduct”, Business & Society, 49(1), 68–87, p. 69. 32 For example, Albareda divides the new CSR governance mechanisms in three categories: individually adopted voluntary instruments (self-regulation), voluntary instruments adopted collectively through inter-firm cooperation (equals to industry or business private regulation), and voluntary instruments adopted collectively through cooperation with other actors such as non-governmental organizations (co-regulation), see Albareda, L., 2008, “Corporate responsibility, governance and accountability: From self-regulation to co-regulation”, Corporate Governance, 8(4), 430–439, p. 434. 33 Lambooy, T. E., 2010, Corporate Social Responsibility: Legal and Semi-Legal Frameworks Supporting CSR, The Netherlands: Kluwer, p. 256 et seq.

10

1

Introduction

from the state’s claim to authority vested in it by the governed subjects.34 An alternative to such an authority is, however, missing at the transnational level.35 The uncertain legitimacy of such regulation leads to its lower effectiveness. Effectiveness, another drawback of transnational private regulation, is undermined not only by the unclear legitimacy but also by a lack of verifiable reporting and monitoring systems.36 Compliance monitoring has often the form of CSR audits performed by companies themselves or by third party auditors. Such audits are conducted without any connection to public authorities and auditing entities have generally no formal power to enforce the findings. This results in doubtful quality and effectiveness of CSR audits.37 Overall, since transnational private regulation is based on voluntary participation, it is difficult to assess if it is effective or not, meaning if the situation in regard to social and environmental concerns is improved by the existence of transnational private regulation or if its existence obscures and hinders development of more effective public regulation.38 Finally, enforceability is another focal problem of transnational private regulations. Public laws are enforced by states that derive their authority from democratic representation of the society. As stated above, in transnational private regulation no such central authority is present. Moreover, transnational private regulation is not generally subject to review by national and international courts. The listed deficiencies lead to the characterization of transnational private regulation as regulation based on voluntary participation with questionable legitimacy and effectiveness and lacking formalized and consistent enforcement. Despite this, transnational private regulation plays an important role within the CSR field. It sets out standards reflecting society’s interests and preferences and, thus, has a strong motivational function towards CSR performance. Through standardization it reduces transaction costs and facilitates coordination among firms.39 Moreover, it provides reporting and monitoring tools that are, even though often not enforceable and not precise, used as indicators of CSR.

34 Curtin, D., Senden, L., 2011, “Public accountability of transnational private regulation: Chimera or reality?”, Journal of Law and Society, 38(1), 163–188, pp. 164–165. The author, however, also points out the blurred division between public and private regulation when stating that: “… private law is public law in the sense that private regulation is part and parcel of democratic self-rule by a collective.” 35 Ibid. 36 De Jonge, supra note 5, p. 72. 37 See further discussion infra subsection 7.4.1.2. 38 It must be noted here that a lack of public regulation is one of the reasons, if not “the” reason for existence of transnational private regulation. Therefore, it may be innacurate to compare these categories against each other. 39 Cafaggi, F., Renda, A., 2012, “Public and Private Regulation: Mapping the Labyrinth”, CEPS Working Document No. 370, 1–35, pp. 5–6 (providing overview of causes and motivations of private governance schemes).

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1.2.3

Growing regulatory power of multinational enterprises

The concept of a company, as a legal personality, was originally established in order to make profit for its owners while providing goods and services to society at large.40 However, in the current global economy, companies are no longer merely legal concepts, but also strong economic, and therefore also political and regulatory, actors. According to the World Investment Report of the UN Conference on Trade and Development, there were approximately 82,000 transnational corporations41 worldwide in 2009 and the 100 largest of them accounted for about 4% of world GDP.42 An interesting study was conducted by Anderson and Savanagh, who found that “(O)f the 100 largest economies in the world, 51 are corporations; only 49 are countries (based on a comparison of corporate sales and country GDPs),” whereby General Motors, as the largest company, was ranked above economies such as those of Norway, Denmark, and Poland.43 With their strong economic power and transnational reach, companies have the means to influence political processes and legislative activities (most obviously by lobbying,44 sponsoring political campaigns,45 and signing bilateral investment agreements with national governments46) as well as the everyday life of people worldwide (through, e.g., the environmental effects of their opera-

40 Carroll, A. B., 1991, “The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders”, Business Horizons, 34(4), 39–48, pp. 40–41. 41 United Nations Conference on Trade and Development (UNCTAD) adopted the following definition of transnational corporation: Transnational corporations (TNCs) are incorporated or unincorporated enterprises comprising parent enterprises and their foreign affiliates. A parent enterprise is defined as an enterprise that controls assets of other entities in countries other than its home country, usually by owning a certain equity capital stake, http://unctad.org/en/Pages/DIAE/Transnational-corporations-(TNC).aspx (last accessed 12/7/2014). Within this book, the term multinational enterprise (MNE) is used interchangeably with TNC. Although the concepts may be distinguished by multinational enterprise having a national affiliation of a parent company while the TNC is not affiliated primarily to any location, the terms are very close. 42 United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2009, vol. 1, Transnational Corporations, Agricultural production and Development, Chapter 1 (B), p. 17. 43 Anderson, S., Cavanagh, J., Top 200: The Rise of Corporate Global Power, report, December 4th, 2000, Institute for Policy Studies. 44 Anderson and Cavanagh, supra note 43 (“The exact amount spent on these activities (lobbying) is not known, but of the Top 200 firms, 94 maintain “government relations’” offices located on or within a few blocks of the lobbying capital of the world Washington, DC’s K Street Corridor.”); for the discussion on lobbying in the EU, see Bernhagen, P., Mitchell, N. J., 2009, “The Determinants of Direct Corporate Lobbying in the European Union”, European Union Politics, 10(2), 155–176, p. 163, citing Greenwood, Justin, Interest Representation in the European Union, 2007, 2nd edition, London: Palgrave Macmillan (stating that “… around 85% of all EU-level groups are ‘located within a 2 1/2 hour train ride from Brussels”). 45 Anderson and Cavanagh, supra note 43. 46 UN Human Rights Council, supra note 2, para. 12; Pace University School of Law and IACCM, 2010, The Triple Bottom Line: The Use of Sustainability and Stabilization Clauses in International Contracts, available at: www.iaccm.com for the association’s members (empirical investigation of the use of so-called “stabilization clauses” by companies across the world).

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Introduction

tions47 and employment policies48) and other business entities, especially those in their supply chains.49 From being governed they are evolving into governing entities,50 yet without being subjected to international law obligations.51

1.2.4

Widespread use of sustainability contractual clauses

Sustainability contractual clauses, i.e. contractual provisions that set out in a (seemingly) binding manner the minimum social and/or environmental standards to be upheld by the parties when performing their business activities,52 have been found to be used in the majority of business contracts concluded in recent years. In 2007, Vandenbergh studied contractual practices in relation to the environmental matters of companies from eight retail and industrial sectors and found that over 50% of companies include one or more type of environmental requirements in their business contracts. These companies are generally the largest ones in the specific industry, representing about 80% of the total sales in the specific sectors.53 A later study from 2010 conducted by the Pace University and the International Association for Contract and Commercial Management showed a rapid increase in these contractual practices, whereby almost 80% of companies stated that they had previously imposed sustainability related requirements upon their business partners and approximately 70% of companies considered that the inclusion of sustainability clauses in their contracts was highly or very important.54 This trend has also been shown in the 47 For instance, in several class actions filed from 2005 to 2012, a group of Mississippi Gulf Coast residents and property owners claimed that emissions by energy companies contributed to global warming, which intensified Hurricane Katrina, which, in turn, damaged their property. The courts have dismissed the cases, among other reasons because the plaintiffs did not prove the causal relationship between their property and the emissions of the specific companies (Comer, et al. v. Murphy Oil USA, et al., No. 1:11-cv-00220 (S.D. Miss.), referred to as “Comer II”). Nevertheless, the cases showed how inhabitant of specific areas may feel influenced by the environmental consequences of business activities. 48 The scope of influence may be represented by the number of people employed by transnational corporations, which has risen to about 77 million in 2008, i.e. approximately four times more than in 1982. See UNCTAD, supra note 42. 49 A term “sphere of influence” is commonly used to summarize the extent of MNEs’ influence over other entities, especially in the supply chain context; see infra subsection 6.2. 50 See the Protect, Respect and Remedy Framework, para. 2 (noting that “… history teaches us that markets pose the greatest risks – to society and business itself – when their scope and power far exceed the reach of the institutional underpinnings that allow them to function smoothly and ensure their political sustainability”). 51 See De Jonge, A., 2011, Transnational Corporations and International Law: Accountability in the Global Business Environment, Corporations, Globalisation and the Law Series, Edward Elgar Publishing; De Jonge, supra note 5. 52 For more detailed definition, see chapter 3. 53 Vandenbergh, supra note 19 (NB the results are based on an analysis of contractual texts publicly available from the database of the U.S. Securities and Exchange Commission). 54 Pace University School of Law and IACCM, supra note 46, p. 26 (NB the results are based on a survey conducted with companies representing various industries from North America, Middle East, Africa, Europe, Asia and Pacific and include all areas of CSR).

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course of two empirical studies conducted by the author: a case study of three enterprises based in Denmark but operating internationally and an empirical study examining selfreported information of the biggest global companies from selected industries on the contractual practices in relation to sustainability.55 All three enterprises in the case study confirmed that they include SCCs in all their domestic and international business agreements. The study on sustainability reports, then, showed that over half of the biggest American and European companies from the selected sectors report including environmental and social clauses in their supply contracts and one-fourth request that their suppliers commit in writing to complying with those standards in the pre-contractual phase.56 The results of the above-mentioned studies show that SCCs are not a sporadic but rather are a widespread phenomenon.

1.2.5

Enforceability of international supply contracts through existing framework of international contract law

A contract for the sale of goods is for certain one of the oldest forms of legal instrument.57 Although many differences exist between individual jurisdictions, many principles of contract law are similar across the globe; these include the principle of contractual freedom, the underlying moral imperative pacta sunt servanda,58 and the enforceability of contracts through public legal institutions. The legal system of enforcement of contracts has so far coped rather well with the growing number of inter- and transnational private transactions. In most cases, where the parties do not choose the applicable law, international default law will apply.59 Despite some inherent flaws in international contract law,60 the system is pretty clear, accessible to private parties, and tailored to international business relations. Therefore, provided that SCCs do not prescribe anything illegal or impossible, they should be enforceable under international contract law.61 Nevertheless, attention needs to be paid to the gap between the formal legal enforceability of SCCs and their actual effective implementation.62

55 For the studies’ design, see infra subsection 2.3.2. More results of the studies are referred to further in the book where appropriate, and especially in chapter 7. 56 See subsection 7.1. 57 Posner, R. A., 1998, “Creating a Legal Framework for Economic Development”, The World Bank Research Observer, 13(1), 1–11, p. 2 (noting that contract enforcement predates state and formal legal institutions). 58 Agreements must be kept. 59 Most often, the CISG. 60 Unified interpretation and application is one of the most problematic issues. See, e.g., Diedrich, F., 1996, “Maintaining Uniformity in International Uniform Law Via Autonomous Interpretation: Software Contracts and the CISG”, Pace International Law Review, 8, 303–338. 61 See Schwenzer and Leisinger, supra note 6. 62 Sobczak, supra note 5, p. 169.

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Introduction

When combining the four suppositions introduced above, we may see the following logic: states remain to be primarily responsible for securing sustainability goals, despite the fact that some companies may have stronger economic and political power than those states. Therefore, states have to find new means of transnational regulation, since the prevailing type of present regulation – adopting international agreements with material content – fails. Companies will have to assume a higher responsibility when they enter political processes by influencing legislative activities and policy creation but should not be viewed as solely responsible, since their primary focus remains in the economic sphere. Companies address their higher responsibility by the available means – CSR tools, including supply chain contracts. Sustainability provisions in supply chain contracts operate against the background of the well-established international contract law, which supports their enforcement. Therefore, SCCs may substitute the missing transnational governmental regulation.63 The above-described interaction of public and private regulation is very simplified. However, it permits the introduction of a principal hypothesis in this book on the role of business contracts in transnational regulation for sustainability: Sustainability contractual clauses in international supply chain contracts can be an effective legal means of transnational legal regulation for achieving sustainable development. In order to retain or reject the hypothesis, the suppositions as well as a wider context of SCCs must be critically assessed. The principal hypothesis unfolds into many research questions, including the following: – How are SCCs defined, what are their specific features, and how do they differ from other contractual clauses? In order to discuss any topic, it must firstly be defined. Therefore, the analytical part of this book opens up with establishing a working definition of SCCs. For their legal analysis it is then important to understand how SCCs differ from traditional content of international supply agreements (chapter 3); thus to explain why there may be a difference in application of the default rules as well as a difference in the theoretical explanation of their (potentially) binding force (chapter 4). – How does existing legal scholarship approach SCCs?

63 Cafaggi and Renda, supra note 39 (discussing and providing a theoretical framework for private regulation serving as an alternative to public regulation or its complement; the findings can be similarly applied to SCCs).

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A review of existing literature is a starting point of any research. The context in which SCCs have been discussed till now not only provides indispensable information to understand the topic but also reveals any gaps in research that need to be filled (chapter 5). – What is the legal framework of SCCs? SCCs as parts of contracts operate within the existing legal framework (chapter 6). To understand what legal effects they have or where they derive their power to influence companies’ behavior from, we need to know the framework in which they operate. – How do SCCs’ features influence their legal enforceability? Once the legal framework is understood, we should ask whether the framework facilitates or fails to support contracts as a regulatory means for sustainable development. This question may be answered by the analysis of SCCs’ features under the applicable legal rules (chapter 7). – What do we know about the use of SCCs in practice? Contract law is, due to the principle of contractual freedom, to a large extent influenced or even made by practice. A theoretical discussion may thus be insufficient to assess the phenomenon of SCCs, and we should take account of their practical aspects (throughout this book, mainly chapter 7). – What are the legal and regulatory effects of SCCs? In order to assess SCCs’ effectiveness, we need to discuss the effects both between the contractual parties and outside the contractual relationship (chapter 8). An important question to ask is how SCCs interact with other regulations aiming to enhance sustainable development and, namely, with other transnational private regulation. Furthermore, the discussion about if and how SCCs influence suppliers’ behavior is essential to reflect on the principal hypothesis. – How do SCCs’ features and effects influence their effectiveness in achieving sustainable development goal? As a final step in assessing the effectiveness of SCCs, SCCs’ characteristic features should be linked to their effects in order to draw a causal relationship between them and to understand how SCCs’ effectiveness can be enhanced (chapter 9). There are many other possible questions to ask. The above-mentioned questions constitute only milestones in the development of the author’s arguments in evaluating the effectiveness of international business contracts as effective regulatory means for global sustainability.

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1.3

Introduction

Key concepts

From the outset of any research, the key concepts and the way in which the author uses them have to be clear. This is of particular importance in legal research, which is sensitive to terminology nuances. And it is of even greater importance in legal research in multidisciplinary topics, such as sustainable development and corporate social responsibility, where the terminologies of various disciplines mingle. This subsection aims to explain the terms used in the principal hypothesis and the way they are applied by the author. It will provide a brief explanation of these terms, and since they are pivotal to the presented research, they will be revisited later on in greater detail.

1.3.1

Sustainability, sustainable development, and CSR

This book deals with the multidisciplinary topics of sustainability and corporate social responsibility. None of them has a globally accepted legal definition; furthermore national legal systems have difficulty delineating the confines of these concepts, and thus they often provide either multiple definitions or no definition at all. The words sustainability, sustainable development, and corporate social responsibility resonate in our ears every day, but we can still experience difficulties in explaining their meaning. However close concepts they may be, the words sustainability and sustainable development have a slightly different connotation. As a noun, sustainability suggests a stable state of things. Sustainable development contains the idea of evolution, of a dynamic progress that should eventually lead to the state of sustainability. In other words, sustainability can be understood as an objective and sustainable development as a way to reach it. In spite of the nuances in the words, sustainability and sustainable development concepts have a fundamentally similar content and are commonly used as interchangeable. This, for the sake of comprehensibility, will therefore also be done in this book. The concept of sustainable development was originally used in relation to the exploitation of natural resources but was later incorporated into other areas as well.64 Probably the best known as well as the most widely accepted definition of sustainable development was provided by the Brundtland Commission: “Sustainable development is development that meets the needs of the present without compromising the ability of future

64 Ebner, D., Baumgartner R. J., 2006, “The relationship between Sustainable Development and Corporate Social Responsibility”, conference paper, Corporate Responsibility Research Conference 4–5 September 2006, Dublin, available at: www.crrconference.org/downloads/2006ebnerbaumgartner.pdf (last accessed 12/7/2014), p. 2.

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Sustainability Clauses in International Business Contracts generations to meet their own needs.”65 Nowadays, it is mostly defined as being based on the triple bottom line integrating three areas of development: environmental, social, and economic. The three-pillar definition has been adopted by various governmental institutions as well as international legal instruments.66 However, although the objective of sustainable development has become embedded in the text of public policies and law and has penetrated the activities of private entities, its character is perceived differently in different contexts: as a philosophical idea, legal concept, policy goal, principle of international law,67 or otherwise.68 The author does not aspire to provide either a final or a novel definition of sustainable development, nor does she aim to contribute to the discussion of whether sustainable development is a legal concept. She will also avoid the debate over the legitimacy and validity of sustainable development goals. What she does is to accept sustainable development as a normative concept towards which public and private activities should lead and against which effectiveness of these activities can be assessed. For this purpose, adopting the above-mentioned Brundtland Report’s approach is ideal. Tools or activities are effective in reaching sustainable development if they help to improve the quality of human life,69 i.e. if they contribute to the mitigation of existing and future environmental problems, the protection of human and social rights, and positive economic development, either simultaneously or improving any one aspect without hindering the objectives of the others. Sustainability and sustainable development concepts can be distinguished from the concept of corporate social responsibility, which usually refers to business efforts to introduce sustainability standards into corporate operations, i.e. the environmental and social interests are protected without undermining the economic stability of a company. The

65 UN, Report of the World Commission on Environment and Development: Our Common Future, 20 March 1997, Transmitted to the General Assembly as an Annex to document A/42/427 – Development and International Cooperation: Environment. 66 For example, Article 3(3) of the Treaty on European Union (Consolidated Version of the Treaty on European Union (TEU) [2012] OJ C 326/13) reads as follows: “… It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment….” (emphasis added). 67 The main question is whether sustainability can be considered a principle of international law and, thus, a source of law within the meaning of Article 38(1) of the Statute of the International Court of Justice. The answer is not clear-cut, but there are strong arguments suggesting that the concept does not form a general principle of law but rather servers as a normative concept guiding decisions in cases where primary norms, such as the right to development or the duty to protect environment, conflict with each other. See Harmelen van, M., Leeuwen van, M. S., Vette, T., 2005, International Law of Sustainable Development: Legal Aspects of Environmental Security on the Indonesian Island of Kalimantan, Amsterdam International Law Clinic, Institute for Environmental Security, Netherlands: Hague, available at: www.envirosecurity.org/ actionguide/view.php?r=72& m=publications (last accessed 12/7/2014), p. 19. 68 For a general discussion, see Schrijver, N., Weiss, F. (eds.), 2004, International Law and Sustainable Development: Principles and Practice, Martinus Nijhoff Publishers (Brill Publishers). 69 See Ramlogan, R., 2011, Sustainable development: Towards a Judicial Interpretation, The Netherlands, Leiden: Martinus Nijhoff, p. 13.

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Introduction

notion of CSR goes back to the 1950s.70 Although its origins were independent of the sustainable development idea (whose modern era began in the 1980s), the two are closely connected. Their mutual relationship is the subject of a separate academic discussion with no clear conclusion.71 Moreover, a fierce discussion has divided both public and academia into proponents of voluntary and mandatory character of CSR.72 CSR has traditionally been characterized as based on voluntary corporate measures.73 This approach was however stated by some authors to be inaccurate and even misleading.74 I tend to agree with those authors noting that the discussion on the voluntary/mandatory nature of CSR is superfluous for the following reasons. Understanding CSR as merely voluntary activities beyond the legal requirements is rather unpractical and may even carry an inner contradiction. It presumes a clear definition of law and a binding character of legal obligations. However, law is not always easy to define. Hard law can have soft content and soft law may induce hard obligations.75 Therefore, it can be precarious to use the terms “mandatory” to delineate other concepts, especially as complex as CSR is. The impracticability of tying CSR to activities beyond law also occurs when considering the differences in national laws related to human rights, labor issues, environment, and corruption. Given the differences in national laws, the perception of CSR as activities going beyond the legal requirements may disable an effective international and global communication on the CSR topic.76 Furthermore, as numerous scholars and practitioners have pointed out, the majority of issues generally subsumed under the CSR concept are already regulated at the international level.77 Therefore, these rules are not new, although international law is not directly applicable on corporations. Finally, if we step back and say that the substance may be voluntary, the operationalization of CSR cannot do without law. Questioning the role of law in CSR seems incorrect when 70 Ebner & Baumgartner, supra note 64, p. 2. 71 For list of academic articles on the relationship between sustainable development and CSR (untill 2006) see ibid., Table 2: Overview of reviewed articles, pp. 10 et seq. 72 Zerk, J.A., 2006, Multinationals and corporate social responsibility: limitations and opportunities in international law, Cambridge: Cambridge University Press. 73 See e.g. definition adopted in COM(2001) 366 final, Commission of the European Communities, Green Paper: Promoting a European framework for Corporate Social Responsibility, 18/7/2001. 74 McBarnet, D., “Corporate Social Responsibility Beyond Law, Through Law, for Law” in McBarnet, Voiculescu and Campbell, supra note 17, p. 12; Ward, H., 2003, “Legal Issues in Corporate Citizenship”, Global Ansvar Swedish Partnership for Global Responsibility, London: International Institute for Environment and Development; Zerk, supra note 72, pp. 33–36. 75 See infra subsection 2.1.3. 76 For further discussion see Peterkova, K., 2011, “Enhancing Social Responsibility within Global Supply Chains: Is Legal Regulation the Optimal Solution?”, Conference paper, Nordicum-Mediterraneum – Icelandic EJournal of Nordic and Mediterranean Studies, 6(1). 77 McBarnet and Kurkchiyan, supra note 17, p. 67 (“As one interviewee put it: ‘99 per cent of our requirements are legal requirements; they are not set by us. They are included in our code, 99 per cent or even 100 per cent of them are legal requirements that should be observed anyway’”).

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looking on the used regulatory and implementation tools. Companies are obliged by law to introduce CSR-related procedures, for example by mandatory reporting schemes (e.g. California Supply Chain Transparency act)78 or legally imposed labeling obligations (e.g. EU energy consumption labeling)79, and they themselves use legal tools to implement CSR into their operations, for example by including sustainability requirements into their business contracts. In the light of the above, CSR is for the purpose of this book understood as both voluntary and mandatory corporate activities being based on the triple bottom line, like the sustainability concept, but centered on individual business units, approaching the protected concerns from a microeconomic perspective and constituting one aspect of sustainable development (as illustrated in Figure 1.1 designed by the author). Figure 1.1 Sustainability – sustainable development – CSR

78 Infra subsection 6.2.6. 79 Directive 2010/30/ EU of the European Parliament and of the Council on the indication by labelling and standard product information of the consumption of energy and other resources by energy-related products [2010] OJ L 153/1.

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1.3.2

Introduction

International and transnational law

As the principal hypothesis suggests, contractual clauses are approached herein as a type of transnational regulation. The meaning of transnational regulation seems intuitive; however, it may not be so easy to explain what international and transnational law is and what the differences between them are. International law usually (and also in this book) refers to public international law, which may be defined as a set of legal rules regulating the behavior of states and other subjects of international law (e.g. international organizations) within their mutual relationships.80 It is distinguished from private international law, which is understood as a set of rules regulating legal matters with an international dimension between private subjects (individuals and other private legal entities). In both cases, the denomination “international” is used to describe rules whose authority is rooted in the concept of state sovereignty originating from the Westphalian system.81 As already mentioned earlier, international law (the law of nations) fails to cope with the blurring of state boundaries due to the consequences of intensifying globalization: technology development, mass media, the migration of individuals as well as the movement of capital, workers, and services, and an increasing number of cross-border exchanges.82 Therefore, the idea of a new legal order (or system) of global or transnational law has emerged. The word “new” should be put into context here. The notion of the law transcending boundaries is not new. An often-used example of an “old” system of this type is lex mercatoria dating back to medieval times.83 However, it has never achieved general acceptance by nation-states. A modern concept of law transcending boundaries emerged in the second half of the twentieth century in the international law scholarship.84 One of the first authors to address systematically the idea of transnational law was Philip C. Jessup.85 He viewed it as an extended version of international law, which would cover both private and public international law as well as other standards not falling into these categories.86

80 See e.g. Cassese, A., 2005, International Law (2nd edition), Oxford University Press, p. 3. 81 Boas, G., Public International Law: Contemporary Principles and Perspectives, 2012, Edward Elgar Publishing, p. 9 (“One of the key concepts to come out of the development of the nation state (after the Peace of Westphalia in 1648) was that the law of nations only governed inter-state relations, and that rules were free to ‘govern as they pleased’ within their state”). 82 Domingo, R., 2010, The New Global Law, New York: Cambridge University Press, p. 98–99. 83 For the historical development of global commercial law see Bederman, D. J., 2008, Globalization and International Law, Palgrave Macmillan, pp. 27–34. 84 Ibid., pp. 35–44. 85 Jessup, P. C., 1956, Transnational Law, New Haven, London: Yale University Press. 86 Domingo, supra note 82, p. 39.

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Other authors have a different approach; they see transnational law as distinct from international law and therefore as non-state law only.87 As described in chapter 2 on the research design, CSR is characterized by a wide range of regulatory types with mainly transnational private regulation but also including an increasing number of national and international hard and soft laws with effects that permeate state boundaries and directly influence the behavior of private entities around the globe. Therefore, transnational law, as understood herein, sits between the two abovementioned ideas: on the one hand, it respects the distinctive position of international law, as the law between and applicable to states (and other subjects of international law) only; yet, on the other hand, it comprises state-made law that directly influences the behavior of private entities regardless of national jurisdictions. To summarize, although conceptually different from the Jessup definition, the author will borrow his words and for the purposes of this book amend them a little (words in cursive letters added) to describe transnational law as: “(a)ll law which regulates actions or events between or involving private entities that transcend national frontiers.”88 It comprises all forms of law, including, supplementing, coexisting with, or substituting traditional national and international law; governing issues with a global dimension and directly regulating the behavior of private entities; and originating from both national governments and other actors, such as NGOs, industrial associations, and large enterprises.89

1.3.3

Regulation and governance

The words “regulation” and “governance” are frequently mentioned and used interchangeably in connection to CSR.90 As in other disciplines also the CSR area has to face fuzzy definitions of these terms. In the traditional context, governance was understood as public, i.e. as an activity of a government. However, this view has been overcome and governance 87 See e.g. Calliess, G. P., 2007, “Making of Transnational Contract Law”, Indiana Journal of Global Legal Studies, 14(2), 469–483, p. 476. 88 Jessup, supra note 85, p. 2 (text in cursive letters added). 89 Cotterrell, R., 2012, “What Is Transnational Law?”, Law & Social Inquiry, 37(2), 500–524, p. 501 (describing various conceptions of transnational law). 90 Both governance and regulation may be broadly defined as “the act or activity of looking after and making decisions about something.” Merriam-Webster dictionary, www.merriam-webster.com/thesaurus/governance (last accessed 12/7/2014), www.merriam-webster.com/thesaurus/regulation (last accessed 12/7/2014). As generic terms they are thus often used interchangeably. But their definitions may differ according to the context.

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Introduction

is used to describe a wide range of activity levels (from a single company to global level) where certain goals are achieved through systems of rules and through exercising of control.91 This broad approach is also used in this book. Regulation then is often understood as a product of governance setting out specific rules for the governed subjects. Governance is, therefore, used for a broader scope of activities, including adoption of regulation and its enforcement. In the legal context, regulation was defined as “… legal means of specifying actions that are required to protect public welfare.”92 However, regulation may have a much narrower purpose, for example in the case of corporate self-regulation, whereby companies intend to protect their own interests. The common denominator for all regulation is that it aims to affect and control behavior of the regulated subjects. Since gaps in public governance and regulation are an obvious problem within the CSR area, other types of governance and regulation are used. Governance through contract may substitute public governance here, being a “remarkably direct form of governance that extends from the public (in the form of consumers) in one country through an importing firm to an exporting firm in another country.”93

1.3.4

International supply chain contracts

An international supply chain commonly refers to two or more entities from two or more jurisdictions linked by a flow of goods, information, and funds from the place of origin to the end customers.94 A product’s supply chain usually reflects the product’s lifecycle: from the extraction of raw materials, through the manufacturing of the product’s components, the product’s assembling, transportation, wholesale and/retail, to the distribution and the use of the product. Each level in the supply chain may be constituted of one or more entities, and each of them may furthermore outsource its activity to another subject. Members of a supply chain have a common interest in cooperation and profit-making, but each of the entities involved also has interests of its own. As Cachon put it: “Each firm in a supply chain must execute a precise set of actions to achieve optimal supply chain performance. But each firm’s primary objective is its own

91 Finkelstein, L. S., 1995, “What Is Global Governance?”, Global Governance, 1(3), 367–372, p. 368. 92 May, P. J., 2004, “Compliance Motivations: Affirmative and Negative Bases”, Law & Society Review 38(1), 41–68, p. 43. 93 Vandenbergh, supra note 19, p. 917; for further discussion on governance of and through contracts see Möslein, F., Riesenhuber, K., 2007, “Contract Governance-A Draft Research Agenda”, European Review of Contract Law, 5(3), 248–289. 94 Simatupang, T. M., Sridharan, R., 2002, “The Collaborative Supply Chain”, International Journal of Logistics Management, 13(1), 15–30, p. 16.

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profit. As a result, supply chain excellence requires the coordination of disparate incentives.”95 The coordination takes place within supply chain contracts, which are bilateral business agreements regulating the supply (sale and delivery) of goods between two of the supply chain’s tiers. Supply agreements across the whole supply chain will typically be linked; in fact they have to be coordinated to ensure that the flow of goods is made in an efficient way, and they will often include provisions common to the whole supply chain regarding the principles of cooperation and the quality of goods.96 Sustainability requirements are increasingly becoming one of these common provisions. The focus of this book is limited to contracts for the sale of goods; i.e. not considering contracts for the delivery of services or any other business agreements that may occur in international supply chains.97 This delimitation is made for several reasons: to ensure cohesiveness of the book; to avoid overcomplexity; and, most importantly, to reflect the prevailing influence of the manufacturing processes and transportation of goods on global sustainability. International contract law for the sale of goods is a well-developed area. By comparison, service contracts have not yet been the subject of specific international regulation. Thus, staying in the (relatively) stable legal system of the international sale of goods provides a logical framework for the analysis while focusing on the contractual type that most significantly affects the sustainability performance of supply chain members. With the intention to capture the most intensive effects on sustainability, this book further focuses on contracts concluded between Western-based companies and their suppliers from the developing countries, which are usually at the center of discussion in the sustainable supply chain context.98

95 Cachon, G. P., 2001, “Supply Chain Coordination with Contracts”, 1st draft of invited chapter to Graves, S. C., & De Kok, A. H. A. G. (eds.), 2003, Handbooks in Operations Research and Management Science: Supply Chain Management, 1st ed., North-Holland. 96 See Cafaggi, F., 2010, “Private Regulation, Supply Chain and Contractual Networks: The Case of Food Safety”, EUI Working Papers, RSCAS 2010/10, Robert Schuman Centre for Advanced Studies, Private Regulation Series-03 (discussing different contractual arrangements depending on the type of linkage between supply chain members (p. 13) and the proliferation of food safety standards in supply chain contracts). 97 The scope of contractual types affected by sustainability contractual clauses is not limited. SCCs appear in many other types of private contracts, such as acquisition, credit, real estate, or insurance agreements (see e.g. Vandenbergh, M. P., 2005, “The private life of public law”, Columbia Law Review, 105(7), 2029–2096). However, they are probably mostly known and discussed in the context of agreements for the supply of goods or services in international supply chains, which is the topic of this book. 98 This does not mean that unethical behavior cannot appear in e.g. purely European context. For example, Danish companies were accused to use sub-contractors who systematically exploited their Romanian employees (http://cphpost.dk/news/romanian-workers-systematically-exploited-in-zealand.545.html, last accessed 12/7/2014). However, the developed vs. developing countries context is the most visible and urgent.

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1.3.5

Introduction

Effectiveness

The principal hypothesis suggests that SCCs can be an effective transnational regulatory tool for achieving global sustainability. This claim may seem both vague and bold. In order to avoid that vagueness, it is crucial to fully explain the meaning assigned to the terms and to delimit what the effectiveness is assessed against. Something is effective when it is “successful in producing a desired or intended result.”99 The “intended result” is the determinant of effectiveness. In relation to complex systems such as the law and its instruments (including contracts), multiple objectives may be and usually are present. In the case of a supply agreement provision prohibiting child labor, there may be an underlying labor policy objective to avoid child labor, an economic objective on the part of the buyer to avoid reputational damages caused by complicity in child labor, or a social objective to change the business behavior of the contracting parties.100 Therefore it is essential to choose the objective, against which the effectiveness of SCCs will be assessed. As the principal hypothesis implies, sustainability contractual clauses can be, as a type of transnational regulation, examined against the ultimate objective of sustainable development. Therefore it is not the economic or other objectives of the contractual parties but the objectives of the global society against which they will be assessed. It is legitimate to ask here whether such a multi-faceted concept as sustainable development comprise one or many objectives. As explained above, the answer must be that it is only one objective, i.e. balanced economic, social, and environmental interests.101 Other objectives will be discussed only in relation to the focal goals of sustainable development, and the effectiveness 99 Stevenson, A., Lindberg, C. A. (eds.), 2010, New Oxford American Dictionary, Oxford University Press, 3rd edition. 100 Birnie, P., Boyle, A., Redgwell, C., 2010, International Law & the Environment, USA: Oxford University Press, 3rd edition, p. 12 (noting the different meanings of effectiveness in relation to international environmental law: “Effectiveness has multiple meanings: it may mean solving the problem for which a regime was established…; or achieving goals set out in the constitutive instrument…; or altering behavior patterns…; or enhancing national compliance with rules in international agreements…”) See also Young O. R., Levy MA, “The effectiveness of international environmental regimes” in Young, O. R. (ed), 1999, The effectiveness of international environmental regimes: causal connections and behaviour mechanisms, The MIT Press, pp. 3 et seq. (discussing different meanings of effectiveness based on an adopted approach). 101 It has been argued that sustainable development is a too complex goal against which effectiveness cannot be possible measured (McGrath, C. J., 2007, How to evaluate the effectiveness of an environmental legal system, PhD thesis, Faculty of Law, Queensland University of Technology, Brisbane, Australia, p. 117, “While the overarching objective against which the effectiveness of environmental policy (and an environmental legal system) must be assessed is sustainable development, this objective is too large and unmeasurable to provide a criterion for assessment in its own right. … Because of the scale, complexity and uncertainty of the environment, the objective of sustainability needs to be broken down into more measurable indicators”). However, other authors have not reached the same decision in relation to other complex goal, such as effectiveness of environmental regimes (for review of research on effectiveness of global environmental regimes see Young O. R., 2001, “Inferences and Indices: Evaluating the Effectiveness of International Environmental Regimes”, Global Environmental Politics, 1(1), 99–121).

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will not be assessed against them, although they may be of great importance to various subjects. It is also important to ask how the effectiveness will be measured. Legal definitions of effectiveness are usually associated with the level of compliance; in the case of contracts that means the degree to which contractual obligations are met.102 However, this view has been criticized as narrow, as it ignores the “behavioral change of the targeted actor.”103 The behavioral approach also fits well with the dynamic character of sustainable development and its regulation, the aim of which is to change the behavioral patterns of subjects by making them behave in an economically, socially, and environmentally responsible way. Given the foregoing, SCCs are for the purposes of this book considered effective if they positively contribute to sustainable development by bringing about a change in corporate behavior in international supply chains.104 Effectiveness in this sense cannot be quantified or, therefore, easily measured.105 Therefore, as described in subsection 2.3.1, the method of assessing causal inferences is used.106 This book intends to track traces of changes (partially) caused by SCCs in the regulatory environment; to identify possible changes in suppliers’ behavior; and to derive a probability of causing such changes by SCCs from the theoretical analysis, by identifying the aspects of SCCs influencing their effectiveness. The changes caused at the regulatory level address also the interaction of SCCs with other transnational CSR regulations. This inherently includes a type of comparison between these two regulatory means. However, it is not the main aim to compare the effectiveness of SCCs either to other private regulation, such as CSR reporting, labeling schemes, or corporate codes of conduct, or to public command-and-control regulation. The principal objective is to assess whether SCCs have the potential to induce positive change in suppliers’ behavior.

102 Chambers, W. B., 2008, Interlinkages and the Effectiveness of Multilateral Environmental Agreements, United Nations University, p. 101; Young and Levy, supra note 100, pp. 3–5. 103 Chambers, supra note 102, p. 116. 104 This change should be made without hampering the economic stability of the companies concerned. The economic stability of business is an integral part of sustainable development, therefore positive contribution towards environmental or human rights protection to the detriment of economic stability of companies cannot be considered as a successful and sustainable result. However, due to the feasibility of the project, the economic stability of firms is not further considered in the analysis. 105 Various methods for evaluating effectiveness of global regulatory systems have been developed. For an overview of the methods in the environmental area see McGrath, supra note 101, pp. 109 et seq. 106 Young, supra note 101, pp. 101–108 (the author defines two main methodological ways in efforts to evaluate effectiveness of global environmental regimes: demonstrating existence and strength of causal inferences and devising an index for empirical measurement of effectiveness).

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1.4

Introduction

Relevance

Although both practice and theory seem to be starting to recognize the potential of SCCs in the sustainable development endeavor, only a few attempts have been made to study their purpose, use, and effects, not to speak of the possibility of enhancing their use by targeted governmental regulation. There is a significant lack of literature dealing thoroughly with the different purposes of sustainability contractual clauses or with the role of contract law within sustainability generally.107 A majority of academic writings concerning legal aspects of CSR concentrate on the interaction between CSR and law in a broad sense,108 the liability of multinational enterprises,109 and questions regarding legal theory. The scholarly writings dealing with legal theory issues predominantly concentrate on the interaction of legal and moral norms110 and new regulatory regimes,111 such as transnational

107 See supra note 19 for references on the scarce literature problem. 108 Ward, supra note 74; McBarnet, supra note 74; Buhmann, K., 2006, “Corporate social responsibility: what role for law? Some aspects of law and CSR”, Corporate Governance – The International Journal of Effective Board Performance, 6(2), 188–202; Ward, H, 2005, “Corporate responsibility and the business of law”, GLOBAL ANSVAR – Swedish Partnership for Global Responsibility, London: International Institute for Environment and Development; Kerr, M., Janda, R., and Pitts, C., 2009, Corporate social responsibility: A legal analysis, Canada: LexisNexis. 109 De Jonge, supra note 51; Caillet, M,-C., 2009, Understanding the obstacles to realizing transnational corporation liability, CCFD-Terre solidaire; Zerk, supra note 72. 110 Glinski, C., “Corporate code of conduct: moral or legal obligation?” and Campbell, Tom, “The normative grounding of corporate social responsibility – a human rights approach” both in McBarnet, Voiculescu, and Campbell, supra note 17; Monaghan, P., 2003, “Impacts of reporting: Uncovering the ‘voluntary vs. mandatory’ myth”, Accountability Quarterly, 21, 4–9; Frederiksen, C., 2010, “The relation between policies concerning corporate social responsibility (CSR) and philosophical moral theories – an empirical investigation”, Journal of Business Ethics, 93(3), 357–371; Gilbert, D. U., Rasche, A., 2007, “Discourse ethics and social accountability: The ethics of sa 8000”, Business Ethics Quarterly, 17(2), 187–216. 111 Buhmann, K., 2011, “Reflexive regulation of CSR to promote sustainability: Understanding EU public-private regulation on CSR through the case of human rights”, International and Comparative Corporate Law Journal, 8(2), 38–76; Buhmann, K., 2009, “Regulating corporate social and human rights responsibilities at the UN plane: institutionalising new forms of law and law-making approaches?”, Nordic Journal of International Law, 78(1), 1–52; Sobczak, A., 2007, “Legal Dimensions of International Framework Agreements in the Field of Corporate Social Responsibility”, Industrial Relations, 62(3), 466–491; Hirsch, D. D., 2010, “Green business and the importance of reflexive law: What Michael Porter didn’t say”, Administrative Law Review, 62(4), 1063–1126.

27

Sustainability Clauses in International Business Contracts private regulation112 and codes of conduct.113 To a large extent, an understanding of these issues is relevant and even a precondition to comprehending the role of contract law within the sustainability area. Often, contracts are subsumed under a discussion on transnational private regulation generally,114 but there are vital differences between voluntary self-regulation, such as codes of conduct, and business contracts. Voluntary initiatives and codes of conduct are commonly unilateral commitments with rather ambiguous legal implications.115 On the contrary, contracts are traditionally understood as binding rules between the parties that are enforceable through the courts. However, the two forms may be and often are interconnected (it is common that codes of conduct are incorporated into contracts by reference)116, but it is exactly the contractual form that gives to other private regulations the chance to achieve more significant effects by having legal leverage over the behavior of the contractual parties. Authors who speak of this connection often describe it as having “hardening-of-soft-law” effects.117 Therefore, looking into the role of sustainability contractual clauses provides a missing piece to the research on global governance for sustainability. The research has three levels of relevance: transnational CSR regulation, international contract law, and corporate governance levels. Each of these levels is briefly considered in context below. First, the project is relevant to the global discussion on sustainability regulation. Sustainable development is a proclaimed objective of the international community. However, it is a dynamic and constantly developing objective. Therefore, finding means of achieving sustainability that would be able to react and adapt to this quick development is one of the hurdles that may hinder positive results. Business contracts are certainly one of the most flexible legal tools and, therefore, have the potential to influence sustainability globally if used in an optimal way. This book aims to advance the search for such an optimal use of

112 Transnational private regulation scholarship investigates the shift of global regulatory authority from public to private actors, due to the inability or lack of will and/or agreement among national governments and due to an understanding that a bottom-up approach to regulation is more suitable for certain matters. From the vast scholarship, see e.g. Cafaggi, supra note 16; Mayer, F., Gereffi, G., 2010, “Regulation and Economic Globalization: Prospects and Limits of Private Governance”, Business and Politics, 12(3), 1–25; Curtin and Senden, supra note 34; Vogel, supra note 31; Cafaggi, F., 2006, “Self-regulation in European Contract Law”, EUI Working Papers, EUI LAW, 2006/43, European University Institute; Kolk, A., Tulder Van, R., 2002, “The effectiveness of self-regulation: Corporate codes of conduct and child labour.” European Management Journal, 20(3), 260–271; Abbott, K. W., Snidal, D. (n.d.), 2009, “The Governance Triangle: Regulatory Standards Institutions and The Shadow of the State”, in W. Mattli & N. Woods (eds.), 2009, The Politics of Global Regulation), Princeton University Press, pp. 44–88. 113 Sobczak, supra note 5. 114 For an example, see Albareda supra note 32, p. 434. 115 Unilateral commitments are enforceable only in some jurisdictions, e.g. France. See Sobczak, supra note 5. 116 See infra subsection 7.1. 117 See supra note 16.

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Introduction

SCCs and thus contribute to the search for a flexible and effective transnational regulatory means for sustainable development.118 Second, the project proposes the use of international contract law in achieving sustainability. It is widely accepted that companies should do their part in taking on the responsibility for the negative externalities of their business operations; the question is how should regulators motivate companies to do so? The pressure of existing legal norms can be used as one of the incentives. Contract law is a well-developed, market-based area, and therefore seems a good fit for the CSR issues. In this book, the author tries to answer the question of whether the international contract law system is applicable on, supports, or impedes the use of contracts in achieving sustainability goals, and which of the contract law instruments are or may be used when regulating corporate social responsibility. Answers to these questions are of interest to national and international legislators shaping international contract law, as they may consider how international contract law could adapt to better support the use of sustainability contractual clauses. Third, on the corporate level, the book contributes to defining and development of the current best practice of the SCCs’ use, which has hitherto only been examined to a limited extent.119 SCCs are already in use. In order to assess their role and future potential, it is necessary to examine how they look like and what results they have hitherto brought to the companies and the society in general. To sum, each of global society, regulators, and business community could benefit from the results presented in this book. Global society could benefit from a greater level of sustainability if SCCs show to have the potential to influence CSR behavior in international supply chains. National regulators and international community could then have the possibility to adopt regulation supporting an optimal use of SCCs, which most probably in a form of meta-regulation could be easier negotiated and more acceptable by companies than substantive command-and-control rules, and thus also cheaper.120 Finally, the results 118 The necessity to explore new regulatory tools and regimes has also been shown in the recent setbacks in the regulation of the climate change issue. Firstly, international negotiation of new binding CO2 reduction targets have failed at the Copenhagen Summit (supra subsection 1.2(a)) and, then, the EU emissions trading scheme has shaken considerably in spring 2013 after the carbon price dropped below 3 euro per ton. Both these events have showed that current regulation may not be effective enough. See www.nytimes.com/2013/07/04/business/global/european-parliament-acts-to-support-emissions-tradingsystem.html?_r=0 (last accessed 12/7/2014). 119 See Vytopil, L, 2012, “Contractual Control and Labour-Related CSR Norms in the Supply Chain: Dutch Best Practices”, Utrecht Law Review, 8(1), 155–169 (examining the best supply chain contractual control practice of Dutch companies in the labor conditions area); Pace University School of Law and IACCM, supra note 46 (examining best sustainable contractual practice of companies from around the globe; however, only in relation to limited questions, such as the level of usage, geographical spread, sustainability issues covered, and leaving aside questions of rationales, monitoring and enforcement). 120 Cf. Vandenbergh, M. P., Cohen, M. A., 2010, “Climate Change Governance: Boundaries and Leakage”, New York University Environmental Law Journal, 18(2), 221–292, p. 292 (suggesting that information disclosure schemes could be a viable regulatory solution in situation when governmental action is missing).

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of the empirical part of this book offer companies the possibility to compare their own use of SCCs to that of their peers, understand what the current best practice is, and better assess relevant legal risks. Finally, the relevance of the research on SCCs conducted at a European university is also substantiated by the Renewed EU strategy 2011–14 for Corporate Social Responsibility (hereinafter “EU Renewed CSR Strategy ”).121 The EU Renewed CSR Strategy calls for “(e)nhancing the visibility of CSR and disseminating good practices,”122 “(i)mproving selfand co-regulation processes,”123 “(f)urther integrating CSR into education, training and research,”124 and “(b)etter aligning European and global approaches to CSR.”125 This book contributes to all four of these goals.

1.5

Delimitations

The principal hypothesis is a very broad one and relates to many more issues than can be covered within one book. Therefore, careful delimitation of the research agenda is necessary. The major delimitations have already been introduced in section 1.3 presenting the key concepts. These include delineating the sustainable development and CSR concepts; a working definition of transnational law; a usage of the terms “governance” and “regulation;” limiting the scope of research to international contracts for sale of goods concluded between Western-based buyers and their foreign suppliers; and finally restricting the understanding of “effectiveness” as effectiveness in achieving sustainable development goals, leaving aside economic efficiency and comparative analysis to other CSR tools. It is especially the last delimitation concerning the effectiveness of SCCs that could be seen as a flaw of the presented research. One could argue that effectiveness in the sense of causing a positive change in suppliers’ behavior should be viewed also from the perspective of how costly the implementation tool, here SCCs, is for various actors and how effective it is in comparison to other similar tools, for example CSR reporting or social and environmental labeling schemes. Although more extensive research in SCCs’ effectiveness would be beneficial, it is not the aim of this book. This research solely intends to show whether SCCs can be considered as a type of transnational regulation for sustainable development and whether it may have positive results. This book is thus of more exploratory than comparative character. 121 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and Committee of the Regions, A renewed EU strategy 2011–14 for Corporate Social Responsibility, 25.10.2011, COM(2011) 681 final. 122 EU Renewed CSR Strategy , para. 4.1. 123 EU Renewed CSR Strategy , para. 4.3. 124 EU Renewed CSR Strategy , para. 4.6. 125 EU Renewed CSR Strategy , para. 4.8.

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1

Introduction

Furthermore, a crucial delimitation is done by adopting a working definition of SCCs in section 3.2. The definition excludes from SCCs contractual requirements that directly relates to the subject matter of a contract, such as requirements to attach a specific social or environmental label. Moreover, the project concerns international and transnational law; national law is only considered where relevant. Likewise, although substantive international and national laws, including international conventions on human rights, labor conditions, protection of environment, and combating corruption, influence the content of SCCs, they are not addressed. This book focuses on the use, implementation, enforcement, and effects of SCCs rather than on their substantive content. Next, delimitation can be seen in the fact that this book covers business contracts only. Public procurement is excluded from the scope of the research. Finally, the author is aware that the main topic of this book could be approached from many interesting angles. Namely the management studies are at hand, since the sustainable supply chain management area is well developed there. Moreover, law and economics approach would be helpful in explaining some of the aspects of SCCs that may seem alien to the legal world. However, this book aims to provide primarily legal and socio-legal analysis. Therefore, these other approaches are only acknowledged here as other possible ways to go and used only marginally throughout this book, where it seems appropriate.

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2

Research design

Legal research is often understood as finding the law applicable to a specific topic, systematizing and explaining it, and, eventually, suggesting new or improved regulation. The author does not fundamentally diverge from this approach. The objectives are to find the legal framework (legal dogmatics) in which SCCs operate; to clarify the various sources of law involved (legal philosophy) and examine their application to SCCs (legal dogmatics); to describe how sustainability clauses operate (empirical methods); to evaluate the effectiveness of SCCs within the framework (socio-legal research); and, finally, to suggest some recommendation for future regulation and use (normative considerations). So, why is multidisciplinarity mentioned, and what are the specificities of this research? The distinctive feature of this research is that it connects two central themes: the legal areas of contract law and the theory of law with the multidisciplinary topics of sustainability and corporate social responsibility. Therefore, it is necessary to look outside the legal literature in order to obtain satisfactory background knowledge. Furthermore, the regulation of sustainability is characterized by a maze of public and private regulatory types; this poses a fundamental question to the legal researcher, i.e., which sources of law should be considered and what does “law” mean for the purposes of this research. Finally, business contracts are sources of legal rights and obligations that are created by private parties and may not become known unless a dispute is taken to court. American authors speak of “law in action.”1 Dogmatic and normative legal methods alone are not suitable to examine this vital side of law; therefore, it must be carefully considered which other methods can be validly used by legal research. In particular, the socio-legal approach and its methods can be helpful. According to Macaulay et al.: “One of the lessons of a law and society approach is that while rules and upper level decisions are important, one has to look at the real options open to the parties.”2 1

2

“Law in action” generally refers to the fact that a gap exists between the law in books and the law as it is applied in society. The idea of law in action has been developed in the USA and is primarily associated with the legal realism movement and empirical legal methods of research. For example, the Wisconsin University Law School bases all its education on the concept of “law in action.” See www.law.wisc.edu/law-inaction/index.html (last accessed 12/7/2014) (“Knowing the rules is like learning to play scales when you study a musical instrument. Playing scales is essential, but it isn’t music. And knowing the rules is essential, but it isn’t being a lawyer… Solving a problem requires looking beyond the rules and into the entire set of relationships surrounding the dispute”). On the topic of contracts as law in action, see http://contractslawinaction.law.miami.edu (last accessed 12/7/2014). Macaulay, S., Kidwell, J., Whitford, W., Galanter, M., 1995, Contracts: Law in Action, Contemporary Legal Education Series, Charlottesville, Virginia: The Michie Company, pp. 13–14.

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This view is reflected in the chosen methodology. The multidisciplinarity is, therefore, reflected in the research in two ways: firstly, in the character of the studied subject and, secondly, in the research methods. The first point in itself does not make the research multidisciplinary. We could argue that any topic is fundamentally multidisciplinary; for example, the question of euthanasia is a question of legal research (how does the law regulate it, and should it be allowed or forbidden?) as well as of ethics (does a person has right to die?), psychology (the patient asking for assisted suicide may be in temporary depression), or even economics (public costs of keeping person alive against his/her will). What is more important for labeling the research as multidisciplinary is the range of the applied methods. Entering in research that reaches beyond the boundaries of a single discipline – in this case law – poses a challenge in relation to the research methodology: it must reflect the multidisciplinary character of the studied phenomenon while keeping the analysis simple, so that it is feasible and understandable to the audience. Yet it must not lose the leading point of view – herein legal analysis – so that the research may yield constructive conclusions in a coherent framework of legal scholarship and to ensure that the researcher does not fall into the trap of unmanageable proportions that can bedevil multidisciplinary research.3 All this has been taken into consideration when designing the theoretical and methodological framework for the presented research.

2.1

Theoretical approach

The first step in preparing a research design is to reveal the underpinning theories and the researcher’s assumptions and beliefs, which may explain any bias in the research results. Expressing them in writing also forces the researcher to keep within the given framework and avoid unnecessary complexity in the analysis, especially when the subject being studied has a multidisciplinary character.

3

Van Hoecke, M. (ed.), 2011, Methodologies of Legal Research: Which Kind of Method for What Kind of Discipline?, Hart Publishing, p. vii. See also Baer, J., “Unintentional Dogmatism when Thinking Big: How Grand Theories and Interdisciplinary Thinking Can Sometimes Limit Our Vision,” in Ambrose, D., Sternberg, R. (eds), 2011, How Dogmatic Beliefs Harm Creativity and Higher-Level Thinking, Routledge, p. 167 (“Big thinking, including the search for large-scale theories that might unite a discipline and interdisciplinary thinking that draws from the wisdom of diverse fields, is very often not only bigger but better thinking. But big thinking is not immune to dogmatic traps. The assumption that grand unifying theories must exist in a field can all too easily become a blinding dogma, and interdisciplinary thinking can suffer both because it lacks a discipline that grounds it and because it is difficult, if not impossible, to be an expert in all the many disciplines one might wish to include in one’s interdisciplinary thinking. These are not reasons to avoid searching for grand theories or pursuing interdisciplinary research. They are, however, cautions to those who accept the challenge of thinking big”).

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2.1.1

Research design

Research attitude: Critical thinking

Critical thinking is the leading approach of reasoning in this book. For researchers, it is important to have a critical attitude, especially when examining complex social phenomena and engaging in reading and using sources of information from various fields. Critical thinking helps to discover and eliminate one’s own subconscious bias towards the studied topic and thus enhances intellectual rigor. It is also necessary in evaluating arguments, both in law and secondary sources, to find the “truth” about the subject of the research4 and to understand law in a broader social context.5 To proceed in a structured manner, critical evaluation follows certain standardized phases:6 1. Comprehension – understanding the object of study or the argument and the related conceptual frameworks 2. Analysis – identifying the characteristics of the studied object or premises and conclusions in an argument; defining implicit features, such as hidden assumptions and ideologies; acknowledging uncertainties, such as vagueness or contradictions; and, distinguishing between facts and values 3. Evaluation – evaluating the results of analysis by comparing them to internal criteria, such as truth, or external criteria, such as theoretical standards or moral values; interpreting assumptions; and assessing the reliability of the information source 4. Justification – explaining and defending the result of the evaluation This book follows these steps in relation to both legal and non-legal sources and both at micro (separate arguments) and macro (the overall topic of this book) level.

2.1.2

Jurisprudence: New legal realism

The central topic of this book is the legal instrument of private contract, namely, an international supply contract. Supply contracts are sources of legal rights and obligations, but they are sources stemming from private parties, not governmental legislative power. Nevertheless, the legal power is vested into them by a broader legal framework of statemade contract and procedural law. Therefore, although parties are free to agree on the 4

5 6

Robson, 2002, Real World Research: A Resource for Social Scientists and Practitioner-Researchers, Blackwell Publishers, 2nd edition, p. 18; James, N., Hughes, C., Cappa, C., 2010, “Conceptualising, developing and assessing critical thinking in law,” Teaching in Higher Education, 15(3), 285–297, p. 287 (“Critical thinking is about discovering that which is hidden, and making an effort where many others lack either the motivation or the awareness to do so”). Head, M., Mann, S., 2005, Law in Perspective, University of New South Wales, Introduction. James, Hughes, & Cappa, supra note 4, p. 289 (NB the authors do not speak about phases but about skills of critical thinking. However, in my view, those skills are reflected in steps of the critical evaluation process).

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content of their contract, the legal system will enforce only those contracts that fulfill, or rather do not breach, the rules of national and international contract law. This does not mean that contract compliance is grounded only in the enforceability through state court systems (or commercial arbitration). Compliance with contracts is also driven by the moral norms of the society. The principle pacta sunt servanda is not only a well-known Latin proverb, but it is mainly a moral imperative; we are morally obliged to adhere to the promises we have made.7 Next to the legal and moral normative systems, compliance with contracts is further enforced through informal channels. Firstly, a contract is primarily an agreement between parties in its true sense: the parties cooperate because they want to achieve some business goal (usually making a profit); thus, they intend to comply with the contract when executing it, and they have a common interest in following the contract through.8 Secondly, companies are legal creations: their existence depends on their social license to operate. If a company acts in violation of this license, it may expect a negative reaction from its founders and a broader community of its stakeholders, which may result in a lower profit and, eventually, a cessation of existence.9 Thirdly, the business environment is to a large extent based on reputation.10 A good corporate reputation brings more profit, business partners are more likely to contract with a company known for conforming to its commitments, and customers are more likely to buy goods when the company’s brand is known and trusted. Overall, a good reputation gives to a company greater negotiation power. These informal enforcement means are also of particular interest to the sustainability field.11 To put the foregoing paragraph in other words, contracts entail legally binding obligations on its creators, who thus themselves make law for their mutual relationship. These mutually binding rules can be enforced through state institutions but are predominantly enforced through informal means and the moral normative system. Therefore, contracts may exist and be enforced seemingly independently of the institutionalized legal system. The word “seemingly” suggests that even though a contract agreed upon by the parties may exist, be complied with, and/or be enforced outside of the legal system, the fact that there is a possibility to assess it and enforce it through official legal institutions cannot be 7

Hyland, R., 1993–1994, “‘Pacta Sunt Servanda’: A Meditation,” Virginia Journal of International Law, 34(2), 405–433, p. 406. 8 Probably the most influential theory of contract developing the drivers of parties’ cooperation is the relational contract theory. Ian Macneil, the founder of the relational contract theory, has identified internal norms of business exchange that contribute to parties’ compliance. These include, among others, reciprocity and contractual solidarity. See note 38 et seq (chapter 4). 9 From the vast literature on social license, see, e.g., Gunningham, N., Kagan, R. A., Thornton, D., 2006, “Social License and Environmental Protection: Why Businesses Go Beyond Compliance,” Law Social Inquiry, 29(2), 307–341. 10 The importance of reputation has also been showed in the empirical study presented in this book. See note 86 (chapter 7). 11 More on enforcement can be found infra at subsection 7.4.

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disregarded; this possibility influences the behavior of contracting parties, though it is difficult to measure the extent of this influence.12 The above analysis briefly showed that it is important to view contracts through the legal perspective but also important to understand their broader social context.13 This is true for all private contracts but even more so for SCCs, which regulate areas not covered by hard state-made law. Contractual rules may then have the greatest binding power within the context regulated by a mixture of soft regulations. Therefore, we may truly speak of law in action. Accepting the dynamics of law creation through private contracts points towards legal realism, namely, new legal realism, as the underpinning jurisprudential theory of the presented research. From the author’s point of view, it is the only legal theory that is suitable to explain the new phenomenon of SCCs as a form of transnational regulation. Looking to the alternatives, legal positivism assumes among other things that “a legal system is a ‘closed logical system’ in which correct decisions may be deducted from predetermined legal rules by logical means alone.”14 Such a logical closed system does not exist at the transnational level. Transnational law is a dynamic system developing from the bottom up rather than from top down, and there is no central rule-giving and coercive authority.15 Therefore, the system is not closed and, given the number of participating actors, may also not be logical. Sustainability issues are also often by scholarship described as not being legally but morally driven.16 Even though the author does not fully agree with this claim, the extensive moral force behind sustainability issues cannot be denied, which would not be accepted by legal positivism as it makes a strict distinction between legal and moral obligations. Turning to the other possibility, natural law theory positing that “what natural law is, ought to be”17 goes to the other extreme, considering as legally binding only those obligations that are derived from moral norms. This fusion of morality and law constitutes a very broad and abstract idea. It could certainly provide a better explanation of the SCCs phenomenon then legal positivism, but it remains distant from the reality of business relationships and rules-creation “in the field.”

12 See discussion on the role of formal enforcement mechanisms infra in subsection 7.4.2. 13 One of the theoretical approaches accounting for the social function of contracts is the proactive law theory. This direction focuses on the preventive rather than remedial function of law. Proactive contract law then means drafting contracts in such a way that potential disputes and business risks are avoided. From the literature, see, e.g., Haapio, H. (ed.), 2008, A Proactive Approach to Contracting and Law, Tampere: Juvenes Print. 14 Wacks, R., 2012, Understanding Jurisprudence: An Introduction to Legal Theory, New York: Oxford University Press, 3rd edition, p. 58 (referring to Hart, H. L. A., 1961, The Concept of Law, Oxford: Clarendon Press). 15 Levit, J. K., 2008, “Bottom-Up Lawmaking: The Private Origins of Transnational Law,” Indiana Journal of Global Legal Studies, 15(1), 49–73. 16 On the legal vs. moral grounds of CSR see supra subsection 1.3.1. 17 Wacks, supra note 14, p. 11.

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Unlike the two leading theories – legal positivism and natural legal theory – new legal realism fits the topic of this book well. New legal realism builds on the legal realism of the first half of the twentieth century and similarly studies the function of law in its social context.18 However, it moves away from legal realism’s focus on courts and judicial practice towards a broader examination of the law.19 It understands the law as a developing system and as a means to social ends and not as the final goal. It also acknowledges the rapid nature of social development, which can outstrip the development of the law.20 This provides a space for the development not only of new topics for regulation but also of new regulatory techniques. If we take the issue of climate change as an example, it appeared on the regulatory agenda only about thirty years ago.21 And over these thirty years, it became clear that international law might not be agreed upon quickly enough to mitigate the negative effects of climate change. Thus, the regulators began to discuss and develop new means of regulation, such as cap-and-trade schemes22 and responsive regulation.23 Therefore, the list of sources of law is also not closed for legal realists. The traditional legal realism defined law as any norms and principles, which a judge could use as the basis for a decision. The concept of law under the new legal realism may be understood as a normative societal structure that changes or guides human behavior, comprising both formal state-made law and various types of informal law, law in action, and living law.24 In line with the appreci18 Ibid., p. 146. 19 Macaulay, S., 2005, “Contracts, New Legal Realism, and Improving the Navigation of the Yellow Submarine,” Tulane Law Review, 80(4), 1161–1196, pp. 1165–1166. 20 Llewellyn, K. N., 1931, “Some Realism about Realism: Responding to Dean Pound,” Harvard Law Review, 44(8), 1222–1264, p. 1236. 21 For development of the climate change discourse and regulation, see a timeline prepared by Spencer Weart from the American Institute of Physics at www.eoearth.org/view/article/151167/ (last accessed 12/7/2014). 22 Cap-and-trade schemes are market-based regulations aiming to prevent pollution by means of emissions. Such a regulation typically stipulates a maximum amount of permitted emissions over a certain period of time and allocates those emissions among companies, who then may then trade the allocated amounts among themselves. The largest multinational cap-and-trade scheme is the EU emissions trading system (http://ec.europa.eu/clima/policies/ets/index_en.htm, last accessed 12/7/2014). 23 Responsive or reflexive regulation indirectly stimulates companies’ self-regulation. A typical example of responsive regulation is the law on CSR reporting, under which companies are generally not required to execute specific actions, but to be transparent about what do they do in the social and environmental arena and, if they do not report on specific actions, to explain why; from the literature, see, e.g., Buhmann, K., 2013, “The Danish CSR Reporting Requirement as Reflexive Law: Employing CSR as a Modality to Promote Public Policy Objectives through Law,” European Business Law Review, 24(2), 187–216. 24 This understanding of law is characteristic, namely, of the New Governance movement within the new legal realism. Nourse, V., Shaffer, G., 2009, “Varieties of New Legal Realism: Can a New World Order Prompt a New Legal Theory?,” Cornell Law Review, 95(1), 61–138, p. 93. For definitions of law in action and living law, see Macaulay, supra note 19, p. 1169. See also Krawietz, W., 2001, “The concept of law revised – Directives and norms in the perspectives of a new legal realism,” Ratio Juris, 14(1), 34–46, p. 39 (“A concept of law based solely on the state and concerned exclusively with formal state law without taking account of the manifold informal social conditions and prerequisites for the production of law seems, by contrast, far too narrow an approach… Law does not, however, only come into existence in specific bodies set up by the state or in highly bureaucratised states with their legal staffs. The state has neither a monopoly nor a prerogative for the creation

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ation of continuous social and legal changes, new legal realism evaluates law not based on its moral sense but in terms of its effects.25 This approach is fully adopted in the principal hypothesis, which examines the effectiveness of contracts as a form of transnational regulation to achieve sustainability.

2.1.3

Theorizing the global legal system: Legal pluralism

Legal pluralism refers to a setting in which one social field is occupied or regulated by multiple legal orders.26 Legal pluralism is not a new concept, and it is not pertinent only to global law.27 It has been present in our legal systems for hundreds of years, for example, as a parallel existence of state and religious law or local, national, supranational, and international law.28 Legal pluralism is possible due to the formal and functional flexibility of law and its production. Therefore, a plurality of law is created not only by overlapping state-made legal systems but also an emerging number of laws and quasi-laws made by non-state actors.29 As Vogel put it: “…many of the critical issues in global regulatory governance will revolve around the shifting relationship between hard and soft laws, and between state and nonstate regulation.”30 This has proved to be true. We are witnessing an increasing volume of scholarship from various disciplines – including law, political science, economics, business ethics, management, organizational studies, and philosophy – dealing with the issues of transnational governance from the perspective of state vs. non-state law and/or hard vs. soft law. This is also mirrored in an embracement of non-state and soft law as alternatives to the tradi-

25 26 27 28

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of law. From the point of view of the theory of law and of systems theory, law comes into existence in all social institutions and systems, namely in interactive systems, organisations and in the variety-pool of society, be it regional society or – on a higher level of abstraction – global society as a whole”). Llewellyn, supra note 20; Macaulay et al., supra note 2, p. 7. Berman, P. S., 2009, “The New Legal Pluralism,” Annual Review of Law and Social Science, 5(1), 225–242, p. 226. Ibid., p. 227. Benda-Beckmann, von, F., 2002, “Who’s afraid of legal pluralism,” Journal of Legal Pluralism and Unofficial Law, 37–82, pp. 47 and 62 (giving an example of marriage in West Sumatra, “… marriage is institutionalised in three legal systems: in adat, Islamic law and state law”). See, e.g., Berman, supra note 26, p. 233; Zumbansen, P., 2011, “Neither ‘Public’ nor ‘Private,’ ‘National’ nor ‘International’: Transnational Corporate Governance from a Legal Pluralist Perspective,” Journal of Law and Society, 38(1), 50–75. Vogel, D., 2008, “Private Global Business Regulation,” Annual Review of Political Science, 11(1), 261–282, p. 264 (in this quote, Vogel summarizes the predictions of the editors of Kirton, J. J., Trebilcock, M. J. (eds.), 2004, Hard Choices, Soft Law: Voluntary Standards in Global Trade, Environment and Social Governance, Burlington, VT: Ashgate).

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tional notion of state-made law produced by national legislators. An example of such acknowledgment is the EU Better Regulation policy whereby co-regulation and self-regulation are accepted as possible and in some instances more suitable and effective means of regulation.31 This book contributes to this ongoing discussion by focusing on international supply chain contracts as a type of transnational regulation at the border between public (protecting public interests) and private (protecting private interests), state-made (adopted by public institutions) and non-state-made (adopted by private subjects and having the form of private document/regulation), and hard (legally enforceable) and soft (not directly enforceable by the courts) regulation. This section will discuss the divide between public and private regulation and between hard and soft law. Each of the topics entails an extensive theoretical discussion that could easily become the topic of a separate book. Therefore, the discussion here is limited to a brief overview of the theoretical approaches and their relevance to the subject of this book. 2.1.3.1 Public/private divide The theoretical distinction between the public and private realms of law goes far back into Roman law and the Middle Ages and crystallized in the nineteenth century.32 This distinction has been taught in classes on legal theory around the globe as the basic structural understanding of legal systems and the various legal relationships and status of public and private subjects as regulated or regulating entities. However, the distinction was not always understood in the same way; different theories developed describing public vs. private law. Probably the oldest one – the interest theory – was proposed by the Roman jurist Ulpian.33 He distinguished between law concerning the interests of private subjects and law protecting public interests. In the nineteenth century, a subordinate (subjection) theory arose, considering public law as the law on relationships between the state and its subordinate private subjects and private law as the law on relationships between equal subjects. Finally, the predominant current subject theory considers public law as governing relationships in which one of the parties is a public (state) entity deciding on the rights and obligations of private parties and the rest of the law as private law.34 Generally, under all the different 31 The European Parliament, the Council of the European Union, and the Commission of the European Communities Interinstitutional agreement on better lawmaking [2003] OJ C 321/1, para. 16 et seq. See also Opinion of the European Economic and Social Committee on “The proactive law approach: a further step towards better regulation at EU level,” [2009] OJ C 175/26. 32 Horwitz, M. J., 1982, “The history of the public/private distinction,” University of Pennsylvania Law Review, 130(6), 1423–1428, pp. 1423–1424 (providing evidence of the historical distinction between public and private realms of law, e.g., the position of the King of England as a public vs. private entity as a landowner). 33 Ulpian, Digest, 1. 1. 1. 2. 34 These theories are based in the civil law systems. The common law system works with slightly different conceptions; however, the main idea – state vs. private subjects – is similar. On the theories of the public/pri-

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theories, public law was to be made exclusively by public entities (states and their agencies), whereas private law involved both state-made law (default and framework regulation) and privately made law (contracts and other private legal acts and regulation). Moreover, the distinction does not merely relate to the division of the regulated matters (public vs. private law) but also to the sovereignty to regulate (public vs. private ordering). The produced regulation is then often labeled as state vs. non-state law.35 While public institutions base their legitimacy to adopt legal rules and coerce compliance on the consent of the governed subjects, private entities do not have the power to enforce their rules on other subjects unless they expressly agreed to it.36 Regardless of the underpinning theory, against the backdrop of the globalization process, the public/private distinction in both senses became a topic of criticism. It was pointed out that the public/private dichotomy did not correspond to the political and economic reality of a growing concentration of emerging enterprises and the increasing coercive power they acquired. The movement of American legal realism in the first half of the twentieth century claimed that “all law was coercive and had distributive consequences;” therefore, even private contracts, an example of the most private legal regulation, constituted merely a delegation of public power to private entities; by this claim, they refuted the strict categorization of law in two categories as an unrealistic simplification and emphasized the interconnectedness between plural norms constituting one legal system.37 The criticism is more than vital nowadays, when society is dealing with globalization and an approximation or even merger of politics and business.38 In 1998 Teubner stated that: “It has almost become a ritual these days to de-construct the private/public distinction. The problem is, nobody knows how to dis-place it, not to speak of how to re-place it.”39 In this quote, Teubner pointed at a disturbing fact: there is a vast amount of literature describing the problematic aspects of the private/public dichotomy, but there are only a

35 36 37 38

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vate divide, see Gerlich, A., 2001, Teorie práva, Vydavatelství a nakladatelství Aleš Čeněk, 2nd edition, p. 114–115. See Vogel, supra note 30, p. 265. Vandenbergh, M., 2013, “The Private Environmental Governance Transformation,” Cornell Law Review, 99, p. 176. Horwitz, supra note 32, p. 1426. Legal realists do not say that all law is public but rather that there is only one body of law and no logic in dividing it into two distinctive categories. Teubner, G., 1998, “After privatization? The many autonomies of private law,” Current Legal Problems, 51(1), 393–424, p. 396 (“The simple dualism private law v. public law, which reflects the dualism of political v. economic rationality, cannot grasp the peculiarities of social fragmentation”); Kahler, M., 2000, “Conclusion: The Causes and Consequences of Legalization,” International Organization, 54(3), 661–683, p. 683 (speaking about “marriage of law and politics” in legalization processes on the international level). Ibid., p. 395.

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few suggestions regarding a new conceptual and structural understanding of legal systems that could substitute it, and none of these suggestions is convincing enough to displace the private/public division in the legal theory literature.40 Nevertheless, although we do not have any consolidated theory or conceptual framework substituting the public/private dichotomy in law and its creation, it is undeniable that we fail to explain the current pluralism of legal sources, regulatory techniques, and regulators by dividing them into the simplified categories of private and public.41 Once again, this is especially true at the global level of regulation, where the paramount public sphere of ordering is missing, while the public interests that need to be protected remain.42 How are these public interests, such as protection of the environment or human rights, then secured? As already stated above, private subjects enter, under various legal, social, and economic pressures, the legislative area and use the available tools within their authority to create more or less binding transnational private regulations competing with, collaborating with, or substituting state-made law.43 Transnational regulation deviates from the public/private dichotomy in various ways. First and foremost, non-state law regulates public interests, pulling these topics out from the public sphere and raising concerns about the sufficiency and efficiency of the new regulations. Second, private law tools, such as contracts, surpass their traditional function of regulating relationships between private parties and extend their application to third, potentially unknown subjects, substituting public law tools.44 Third, but not finally, public and private subjects join in regulatory efforts and develop hybrid regulations, which cannot be subsumed under either of the private and public categories. Therefore, it is impossible to precisely delineate a distinction between private and

40 For some of the new conceptual suggestions and theories, see, e.g., Teubner, ibid. (suggesting replacement of private/public divide by polycontexturality, i.e., an acknowledgment of pluralism of social perspectives/systems that would be reflected in law); Abbott and Snidal, note 112 (chapter 1) (proposing the concept of a “governance triangle”); or Backer, L. C., 2008, “Multinational Corporations as Objects and Sources of Transnational Regulation,” ILSA Journal of International and Comparative Law, 14, 499 et seq. (describing a regulatory system based on private contracts as a global “freestanding, autonomous, self-communicating system” parallel to national public regulations). 41 For example, Basse, E. M., 1994, “Solid Waste Management – Public Power and Monopoly or Private Market?,” CeSaM, Working Paper No. 4, pp. 26–29 (noting the uncertainty about which law – public or private – should govern voluntary environmental agreements and the possible conflict between the principles of freedom of contract and principles of administrative law in this context). 42 Callies, G. P., Renner, M., 2009, “Between Law and Social Norms: The Evolution of Global Governance,” Ratio Juris, 22(2), 260–280, p. 265 (“The very distinction between public and private ordering, however, has long become questionable not only in law … but also in its neighbouring disciplines… In the ambit of transnational governance it is even more difficult to be upheld – even from a purely analytical point of view. For without the nation-state as an Archimedean point of reference, the public or private status of regulators becomes fundamentally ambiguous”). 43 For references to legal scholarship on transnational private regulation, see note 112 (chapter 1). 44 From the vast literature on the private/public divide, see the following that have a direct connection with the topic of contracts: Vandenbergh, note 97 (chapter 1) (examining how private contracts extend the scope of effects of public policies); Cafaggi, note 16 (chapter 1).

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public regulation of CSR, because the two groups react to each other, blend together, and create a fusion of public and private regulators, interests, and regulatory tools.45 Abbott and Snidal conceptualized this fusion as a “governance triangle” between states, NGOs, and firms and concluded that “it is difficult if not impossible” for any of these actors to have all the necessary competencies (independence, representativeness, expertise, and operational capacity) at the relevant stages of the regulatory process (agenda setting, negotiation, implementation, monitoring, and enforcement) to adopt effective transnational regulation on their own but that they all can benefit from collaboration between them.46 Working with SCCs as the focus topic of this book, the question arises where they are positioned in the public/private divide. If we draw a line of the public/private continuum, where on one side are the states and on the other side firms, sustainability clauses in business contracts will be at the very private end, being adopted by private parties and taking the form of a private regulatory tool. However, we must consider how this placement is influenced by the fact that firms must keep the contractual form and content within the applicable framework of contract law and that it is only thanks to the existing framework that the contracts may actually be formally enforced.47 If we look at the public/private continuum from the perspective of governed relationships, the position of SCCs is even more uncertain; the obvious protected interests are public (e.g., abolition of child labor), but we can infer that companies do not adopt these clauses for purely philanthropic reasons but that they actually protect private interests as well (most commonly companies’ reputations).48 Therefore, the question may be posed whether business contracts are on the con-

45 A very clear description of the interaction between public and private ordering is provided by Nourse and Shaffer, supra note 24, p. 94 (“Private ordering is often developed in response to the public legal system, to preempt public law’s creation as unnecessary, to internalize public law by creating new internal policies and procedures, or to exit from the public legal system through the development of alternative dispute-resolution mechanisms. Publicly made law is likewise often a response to developments in the private sphere. Sometimes publicly made law addresses private ordering’s purported deficiencies; other times, it codifies privately made law (such as lex mercatoria), business custom, and business institutional developments (such as alternative dispute resolution) into national statutes, regulations, and institutional practices. Legal interpretation and enforcement affect economic behavior; organizational behavior, including business internalization practices, in turn, affects public law. The one (public law) cannot be understood without the other (private ordering)”). 46 Abbott and Snidal, note 112 (chapter 1), p. 46. Since the publication of a working paper on the “governance triangle” by Abbott and Snidal in 2006, the concept has been adopted by many authors. See, e.g., Roberts, T., 2011, “Innovations in Governance: A Functional Typology of Private Governance Institutions,” Duke Environmental Law and Policy Forum, 22(1), 67–144. 47 For example, business contracts would not meet Vogel’s definition of civil regulation (“Regulations that govern the social and environmental impacts of global firms and markets without state enforcement…”). See Vogel, supra note 30, p. 261. 48 Cafaggi, F., 2012, “The regulatory functions of transnational commercial contracts, New architectures,” EUI Working papers series, 1–32, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2153096 (last accessed 12/7/2014), p. 30 (“Transnational commercial contracts, including regulatory provisions, pursue complex objectives that combine exchanges with regulatory goals”).

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tinuum at all or if they are used as a bridge between the two antagonistic conceptual categories of law and its creation.49 2.1.3.2 Soft/hard law Generally speaking, hard law is considered as binding and enforceable through public institutions, whereas soft law is considered as not binding and not enforceable through public institutions. Similarly to the public/private divide, the dichotomy between hard and soft law has been the topic of vivid discourse among legal scholars. Surprisingly, the idea of the two distinctive categories of law – soft and hard – is rejected by many of them, albeit for very different reasons. Legal positivists refute the discussion entirely, because in their view only binding norms that are enforceable by state institutions constitute law.50 There is no such thing as non- or less-binding law in the legal positivistic philosophy.51 While at the other end of the spectrum, legal realists and especially new legal realists regard the dichotomy between hard and soft law as illusory, because there are many variations of law that would not fit in either of the categories, but rather lie somewhere in between.52 Shaffer and Pollack speak of the “hardening of soft-law regimes” and the “softening of hard-law regimes.”53 An example of such a hybrid regulation is the Danish CSR reporting law, which prescribes mandatory CSR reporting for large companies but exempts those who report under the UN Global Compact or the UN principles for responsible investments.54 In this case, the hard national law is linked to transnational soft law regimes. Both of the abovementioned UN initiatives are rather vague in their nature, providing broad principles without any concrete substance, and although they operate under the auspices of the United

49 This thought brings us back to the quotation from Teubner (supra note 38). Legal scholars and their colleagues from other disciplines recognize that the public/private distinction is an anachronism, yet it is easy to accept this change but more difficult to alter our conceptual thinking. Contracts may serve as a reconciliation between the new reality and the traditional legal notions. 50 Shaffer, G. C., Pollack, M. A., 2012, “Hard and Soft Law: What Have We Learned?,” Minnesota Legal Studies Research Paper No. 12–17, pp. 1–28, available through www.ssrn.com, forthcoming in Dunoff, J. L., Pollack, M. A. (eds.), 2012, International Law and International Relations: Insights from Interdisciplinary Scholarship, New York: Cambridge University Press, p. 2. 51 Shaffer, G. C., & Pollack, M. A. (2009). Hard vs. Soft Law: Alternatives, Complements, and Antagonists in International Governance. Minn. L. Rev., 94, p. 713. 52 See, e.g., Kirton and Trebilcock, supra note 30, p. 22 (“Most of the authors in this volume easily affirm the view that the distinction between hard law and soft law is less a dichotomy then a continuum, while maintaining the core, distinctive features of each”); Shaffer and Pollack, supra note 51, p. 716 (“We thus agree with the approach that hard and soft law are best seen not as binary categories but rather as choices arrayed along a continuum”); Abbott, K. W., & Snidal, D. (2009). Hard and Soft Law in International Governance. International Organization, 54(3), 421–456. p. 422 (“…soft law comes in many varieties: the choice between hard law and soft law is not a binary one”). 53 Shaffer and Pollack, supra note 51, pp. 710–711 (and throughout the whole article). 54 Act No. 1403 of 27 December 2008, Financial Statements Act, Section 99a (Denmark).

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Nations, they are essentially privately driven.55 In this way, the national law can become soft in its requirements. On the other hand, the private initiatives, which are generally considered as soft law, gain a hard edge by this public hard law recognition. Despite this dissent from the hard/soft law dichotomy, the conceptual categorization is key to describing the transnational regulatory landscape. In order to discuss the varieties of transnational regulation, we have to decide on working definitions of hard and soft law, even though these may not form two closed categories but rather two ends of the hard/soft law continuum. The search for viable definitions may lead some authors to a misconception that hard law is always a product of public regulators and soft law of private ones. This obviously does not correspond to the reality. For example, the EU regularly uses soft law instruments, such as communications, guidelines, White Papers, or Green Papers.56 Moreover, some legislation that takes the form of a hard legal instrument can have purely soft content. The Regulation on EU Eco-Management and Audit Scheme (EMAS) is an excellent example.57 Under Article 288 of the Treaty on the Functioning of the European Union (TFEU),58 a regulation is a normative legal act with direct binding force on the member states; however, the EMAS Regulation deals with voluntary participation of companies in a managerial tool and therefore has no legal effects on subjects that do not voluntarily participate in it. If the hardness and softness are not necessarily related to the type of regulator in question, we must base the distinction on other aspects. Abbott and Snidal provided one of the most detailed technical distinctions between hard and soft law. They define hard law as:

55 The UN Global Compact is a collaboration between private companies and international organization (www.unglobalcompact.org/AboutTheGC/index.html,last accessed 12/7/2014); UN principles for responsible investments were founded by a group of international investors (www.unpri.org/about/, last accessed 12/7/2014). 56 Although the use of soft law was criticized by the European Parliament, it presents a common regulatory method in the EU (www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P6-TA-20070366+0+DOC+XML+V0//EN, last accessed 12/7/2014); see also Jessen, P. W., “Soft law as a regulatory instrument in the EU,” in Olsen, B. E., Sörensen, K. E. (eds.), 2006, Regulation in the EU, Copenhagen: Forlaget Thomson, pp. 171–194 (analyzing the binding force of soft law instruments in the EU on the basis of its substance or their character as an agreement and its indirect legal effects on the basis of the operation of general legal methods and principles). 57 Regulation (EC) No 1221/2009 of the European Parliament and of the Council of 25 November 2009 on the voluntary participation by organizations in a Community eco-management and audit scheme (EMAS) [2009] OJ L 342/1. 58 Consolidated version of the Treaty on the Functioning of the European Union (TFEU) [2012] OJ C 326/47.

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“…legally binding obligations that are precise (or can be made precise through adjudication or the issuance of detailed regulations) and that delegate authority for interpreting and implementing the law.”59 Soft law then is all other regulation that is weakened in one or more of these three respects: obligation, precision, and delegation.60 Although not providing a clear-cut distinction between the two, this definition works well in evaluating various regulatory tools and therefore is used for this purpose also in this book. For example, a business contract containing a clause saying that “the supplier will act in compliance with the highest ethical standards of the industry” may seem rather soft, but it provides for an obligation that can be made precise if taken to a court (the relevant court would look into what behavior represents the highest ethical standards of the specific industry, e.g., through examination of industrial codes of conducts and best practice), and it implicitly delegates the power to interpret and implement the contract to the courts because of the background framework of contract law. Therefore, it has all three features of hard law as presented by Abbott and Snidal. However, a corporate code of conduct for suppliers that is merely posted on a buyer’s corporate website may include a precise articulation of the desired behavior of suppliers, but because a unilateral statement cannot generally bind others, it will not constitute an obligation and will not delegate the power to interpret and implement it to a third party.61 Thus, such a code of conduct takes the form of soft law. The distinction between hard and soft law by Abbott and Snidal relies on the theory of legalization developed within the area of international relations.62 Considering its rather easy applicability, this theory is used in chapter 8 to frame the discussion on hardening of soft CSR regulation through international supply chain contracts. Regardless of the theoretical position on the soft and hard law question, it cannot be denied that variations of soft and hard or, maybe more accurate, softer and harder regulations exist. Regulators choose those regulations that they deem appropriate or which are feasible in a given situation. An example of the latter was the already mentioned Copenhagen Summit on Climate Change, which did not manage to reach consensus on a binding international agreement and which therefore resorted to a soft regulation and the adoption of so-called Copenhagen Accord, a non-binding instrument including a political position of the participating states without laying down any precise obligations.63 Although an international agreement would certainly bring better or more measurable results, the states 59 Abbott and Snidal, supra note 52, p. 421. For discussion on the content of each of the three features, see Abbott, K. W., Keohane, R. O., Moravcsik, A., Slaughter, A.-M., Snidal, D., 2000, “The Concept of Legalization. International Organization,” 54(3), 401–419, p. 401; see also infra chapter 8. 60 Abbott and Snidal, supra note 52, p. 422. 61 On possible effects of unilateral statements, see infra subsection 7.3.1.2. 62 Abbott et al., supra note 59. 63 http://unfccc.int/meetings/copenhagen_dec_2009/meeting/6295.php (last accessed 12/7/2014).

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caught up in the political stalemate at least adopted a soft legal instrument that could form a stepping stone in reaching a “harder” instrument in the future. It formulates common values and directions, reinforces the will to negotiate further, and may influence individual national legislation in this area. Regulators may also choose soft law because of its advantages over hard law: greater flexibility; lower negotiation, monitoring, and enforcement costs; the space to be ambitious without the need to worry about enforcement; and/or wider applicability. On the other hand, hard law provides greater precision and credibility and therefore greater legal certainty.64 To summarize, given the theoretical foundations of the presented research, soft and hard laws are not considered as two separate categories, but regulations are viewed as softer or harder depending on where they are positioned on the hard/soft continuum. If we are to discuss the features of SCCs in this respect, it seems that formally they should be perceived as hard regulation. However, consideration should be given to the fact that we do not have any case law in this area and therefore the delegation feature of Abbott and Snidal’s conception is somewhat distorted.65 Moreover, the condition that hard law must prescribe an obligation can also be discussed here, since the language of a contract can be vague in such an extent that it is impossible to deduce from it any specific requirement.66 2.1.3.3 Conclusion on legal pluralism The author adopts a legal pluralistic position towards the transnational regulation of sustainability characterized by fading or non-existing public regulatory ability. It is unquestionable that global regulation is carried out through a variety of public, private, and publicprivate as well as softer and harder instruments. The aim of the author is not to provide a new theory or approach that will help in overcoming our seemingly invincible legal concepts of public/private and soft/hard law, but to investigate what function contracts play in this regulatory environment.

64 A vast literature deals with the advantages and disadvantages of soft and hard law. For a summary of them, see, e.g., Shaffer and Pollack, supra note 51, pp. 717–719; Trubek, D. et al., “‘Soft Law,’ ‘Hard Law’ and EU Integration,” in De Búrca, G., Scott, J. (eds.), 2006, Law and New Governance in the EU and the US, Hart Publishing, pp. 66–67; Abbott and Snidal, supra note 52, p. 423. 65 Nevertheless, if SCCs’ compliance is audited by third parties, it could be concluded that the right to interpret and implement has been delegated, especially if such audits are conducted by certifying authorities or institutionalized auditing collaborations. See infra subsection 7.4.1 on monitoring. 66 See infra subsection 7.2.4 on language specificity.

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2.2

Sources of law

The question of what constitutes a source of law is tightly bound to the theory of law that it is viewed from, but it may also be answered differently according to the legal tradition one comes from or the legal system under discussion. Nevertheless, a basic understanding at least will be common to all: sources of law inform us about the norms of (human) behavior and the origin from which the norms derive their binding force. In the majority of legal systems, formal sources of law will be defined or listed in relevant major legislation or constitutional documents (whether national constitutions, charters of supranational organizations, or constituting documents of international courts) and perceived as formal reference points for judicial decisions. These sources of law in the positivist sense will typically include various types of state-made legislation (such as constitutional documents, statutes, and executive regulations), with a strict hierarchical order in civil law systems;67 precedents and legislation sometimes complemented by customary law or legal scholarship (e.g., in the United Kingdom) in common law systems; international treaties, international customs, general principles of law, and under some conditions judicial decisions and legal scholarship at the international level;68 and various types of regulations at the supranational level, such as the EU’s treaties (sources of primary law), directives, regulations, decisions, opinions, and recommendations (sources of secondary law)69 and general principles of law (sources of supplementary law).70 We may as well describe sources of law in a material sense, meaning as sources of law’s content. Material sources will, for example, include traditions and customs, as well as political and cultural developments in a specific location, or basic values such as reasonableness or justice. Whereas legal positivists will primarily work with formal written sources of law and natural legal theorists with material sources of law, new legal realists supporting the theory of legal pluralism are not biased towards one or the other, but work with all types of legal

67 Based on the text of the legislation, the written law may be complemented by trade usage and general principles of law. For example, Act no. 513/1991 Coll., Commercial Code (Czech Republic), Section 1, Para. 1(2): “The legal relations specified in subsection (1) above are subject to the provisions of this Code. Should it prove impossible to resolve certain issues according to the provisions of this Code, they shall be resolved in accordance with the civil law provisions. In the event that such issues cannot be resolved in accordance with the civil law provisions, they shall be considered according to trade usage and, in the absence of this, according to the principles upon which this Code is based” (emphasis added). 68 Article 38 of the Statute of the International Court of Justice. 69 Article 288 of TFEU. 70 http://europa.eu/legislation_summaries/institutional_affairs/decisionmaking_process/l14534_en.htm (last accessed 12/7/2014).

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sources. These sources affect behavior of their subjects because the subjects perceive these as sources of normative rules.71 However, when speaking about the sources of law used in the presented research, the question is primarily directed to formal sources of law: which forms of legal regulation do I include in the legal analysis? The selection of studied sources is largely influenced by the topic itself. This book focuses around the transnational regulation of CSR. As already stated, transnational activity is distinguished by the non-existence of any central authority or sovereign with the right to legislate, i.e., to prescribe legal norms. Therefore, we do not have a list of formal sources to look at, but we must discover which norms and regulations exist in practice and assess whether they fit the adopted definition of transnational law (section 1.3.2). The chosen definition, in line with the theoretical framework of the presented research, is rather inclusive, comprising all existing transnational public and private law, as well as soft and hard law, in so far as they regulate the behavior of private subjects. In the light of the foregoing discussions, it would be fallacious to consider only traditional sources of national and international law. There are many other sources of legal norms of a softer and more private character that must be accounted for in the analysis of effective transnational regulation of sustainability, if only because they are currently the predominant mode of regulation at the global level. All these regulatory means form an interconnected pluralistic normative system shaping the sustainability area and influencing the behavior of private actors, including the contracting practices of companies operating across borders. However, a question still remains unanswered. How do we distinguish between social and legal normative systems? This is a topic of many heated discussions and not an easy one, if even possible, to answer. Callies and Renner proposed a performance-function conceptual distinction between social and legal norms.72 According to their analysis, the CSR normative system fails in the function area, where there is no clear setting for dispute resolution, which means that the system also lacks a self-referencing stabilization of normative expectation.73 Thus, they concluded that it remained to be seen whether CSR would generate legal norms. In my opinion, the CSR normative system has since the article of Callies and Renner clearly moved towards being an institutionalized legal system. Many new regulations have been adopted, with the Guiding Principles being central to developments.74 The Guiding Principles provide a holistic description of obligations, responsibil71 Ratnapala, Suri, 2009, Jurisprudence, Cambridge University Press, p. 113 (describing the perception of the binding force of law by a representative of Scandinavian legal realism Karl Olivecrona: “The binding force of the law is an idea in human minds.” Although this seems to be very abstract, it will be shown later in this book that such a perception is very real when it comes to regulation of corporate behavior at the transnational level). 72 Callies and Renner, supra note 42. 73 Ibid., p. 276 (normative stabilization is achieved through repeated adjudication). 74 See note 10 (chapter 1).

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ities, and functions (including in relation to dispute resolution processes) of the actors involved in the regulation of human rights.75 According to the Guiding Principles, dispute resolution is to a large extent dependent on states’ activities and should be based within the existing remedial institutions and supported by other, new dispute resolution settings.76 This led the Danish legislators, for example, to adopt new legislation establishing a mediation-like forum in which complaints can be lodged against companies that do not meet the globally recognized standards.77 This type of self-referencing has also been continuously enhanced in recent times through CSR reporting, monitoring, and auditing. All this has led to a higher level of legal institutionalization of the CSR system, although it remains primarily outside of national governments’ legislation and depends to a large extent on soft enforcement methods.78 To conclude, it would be too bold to claim that CSR has reached the stage of a coherent and self-referential global legal system; however, it would also be an underestimation to view it only as a social normative system. Nevertheless, it is neither critical for this book nor its objective to have a definite answer as to which norms in the CSR area are legal and which are social norms; moreover, solution to this conundrum becomes less important when one works within the perspective of the theory of legal pluralism.79 Further, as it was stated by Benda-Beckmann, such definitions are conceptual choices that are only a part of our broader social theoretical understanding of the normative system and the world; as such, they are tools which allow us to speak of such concepts as “law” or “legal pluralism” but have no claim to a definite truth.80 The important point of departure is to identify, under the theoretical and conceptual choices made by the author (critical thinking, new legal realism, and legal pluralism), which norms influence corporate behavior, namely, contracting practice in international supply chains, and what their mutual relationships 75 Although the Guiding Principles relate to human rights only, the general framework may be extended to cover other CSR issues as well. 76 Guiding Principles, para. 25–27. 77 Act No. 546 of 18/06/2012. 78 Such a view is supported also by legal scholarship describing CSR as a new type of legal system building on the actions of all involved actors: state institutions, the business community, and general public. See, e.g., Backer, L. C., 2007, “Economic Globalization and the Rise of Efficient Systems of Global Private Lawmaking: Wal-Mart as Global Legislator,” Connecticut Law Review, 39(4), 1739–1784, p. 1752 (describing the functionality of the CSR system based on: “… (i) an essential role of private law through contract; (ii) transparency, disclosure and its use by elements of civil society; (iii) a connection between civil society and media; (iv) a connection between media and public, consumers, public law enforcement institutions; and (v) a connection between public and internal corporate investigation and sanction apparatus”). 79 Berman, supra note 26, p. 237 (“…pluralism frees scholars from needing an essentialist definition of law. For example, with legal pluralism as our analytical frame, we can get beyond the endless debates both about whether international law is law at all and whether it has any real effect. Indeed, the whole debate about law versus nonlaw is largely irrelevant in a pluralist context because the key questions involve the normative commitments of a community and the interactions among normative orders that give rise to such commitments, not their formal status. Thus, we can resist positivist reductionism and set nation-state law within a broader context”). 80 Benda-Beckmann, supra note 28, p. 39.

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are. Given the chosen theoretical approaches, a number of types of regulation (see below) are considered to form the regulatory framework of CSR.81 Each of the sources is briefly described and for illustration purposes put into the context of transnational regulation of sustainability issues. Finally, a chart at the end of this section illustrates the position of these regulations on the private/public and hard/soft law continua.

2.2.1

Public

Formal sources of law will usually include rules and norms adopted by public actors. As it was described earlier, there are many other actors creating norms that can be viewed as a type of law. However, public rules commonly enjoy high level of authority and form a framework within which other sources of law emerge and operate. 2.2.1.1 International treaties with direct effects on private subjects International law governs relationships between states and other subjects of international law (mainly international organizations). It is generally not binding upon private parties. However, in some instances, international law may grant or reassure existence of private rights (e.g., basic human rights) and sometimes also obligations for private subjects. An example of an international treaty directly applicable to private parties is the 1980 UN Convention on Contracts for the International Sale of Goods (CISG).82 According to CISG, it will by default apply to contracts for the sale of goods between parties whose places of business are in different contracting states or when the rules of private international law lead to the application of the law of a contracting state, provided that the parties do not choose another specific governing law for their transaction or expressly opt out of the CISG regime.83 Furthermore, international law is an indirect source of rights and obligations of private parties, since states have the obligation to enforce their commitments within their territories. The Universal Declaration of Human Rights is an example, where the preamble proclaims the obligation of states to secure a universal and effective recognition and observance of the Declaration within their territories, which therefore includes companies operating in their territories.

81 This section gives only a theoretical overview of relevant sources of law. For analysis of specific instruments in relation to the SCCs, see infra chapter 6. 82 In some jurisdictions, CISG has to be implemented or transformed into national law before it becomes applicable on companies. The situation depends on the question of monistic vs. dualistic system of international and national law in each jurisdiction. However, once CISG becomes a part of national legal order, it is then directly applicable by courts. 83 CISG, Articles 1 and 6.

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2.2.1.2 International soft law International soft law comprises all instruments adopted by states and international organizations that do not have formally binding force. This may include various types of guidelines, principles, charters, model laws, and other initiatives. In the sustainability area, probably the most influential initiative is the aforementioned “Protect, Respect and Remedy” Framework and the Guiding Principles of Professor Ruggie. Although not taking the form of international treaties, these instruments have already received great acceptance among states, as well as the business community, and also affect other soft initiatives. For example, the Organization for Economic Cooperation and Development Guidelines for multinational enterprises (hereinafter “OECD Guidelines”) were updated in 2011 to include a new chapter on human rights consistent with the “Protect, Respect and Remedy” Framework. Furthermore, the EU decided to take a leading role in implementing the framework,84 and companies refer to these documents in their corporate CSR strategies.85 In the contract law field, the UNIDROIT Principles of International Commercial Contracts are of the central importance.86 2.2.1.3 National and supranational legislation with extraterritorial effects The applicability of national law is generally limited personally (to citizens of a specific country) and geographically (to the events and objects within the territory of a specific country). Therefore, it does not normally influence relationships and events that are happening abroad, such as relationships and activities in international supply chains. However, in some instances the applicability can be extended beyond national boundaries, usually by tying the applicability to the subject – a natural or legal person – who or which carries it even across borders. National laws are subject to interpretation and enforcement through national court systems. The US Foreign Corrupt Practice Act (FCPA)87 is an example of national law with extraterritorial effects. The FCPA applies to all US companies including their foreign subsidiaries, as well as on foreign companies operating in the USA, and it is intended to prevent the bribing of public officials. The FCPA is broadly used; in recent years, it has, for example, become important in the pharmaceutical industry, with a number of US

84 http://ec.europa.eu/enterprise/policies/sustainable-business/corporate-social-responsibility/humanrights/index_en.htm (last accessed 12/7/2014). 85 For example, the Coca-Cola Company describes its efforts to implement the Guiding Principles on its corporate website: www.coca-colacompany.com/sustainabilityreport/global-challenges.html#section-womenseconomic-opportunity (last accessed 12/7/2014). 86 Supra subsection 6.1.2. 87 The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd-1, et seq.

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companies and their foreign subsidiaries being prosecuted for bribing foreign health-care providers.88 2.2.1.4 National and supranational soft law Like international soft law, national soft law does not have formally binding force. It may, for example, have a form of policy statements, guidelines, and recommendations. The list of all the possible instruments would be endless. In some jurisdictions, for example, in the EU, the use of soft law is assumed by legislation: it is an official form of regulation. Soft law can be used to regulate situations where the state or supranational institutions do not have a clear jurisdiction to legislate, where a social consensus on basic values has to be made prior to harder legislation, or where soft law is expected to achieve better results than formally binding obligations. In the context of CSR, many examples could be provided from all jurisdictions. To take just one, the EU Renewed CSR Strategy builds the basis for new policies and legislation to be adopted in the area of CSR, as well as informing the general public on the attitude of the EU to the subject area. In the context of international contract law, the Principles of European Contract Law are of interest for this book.89

2.2.2

Public-private

As public actors realize their limited powers to regulate cross-border activities, they increasingly recognize that collaboration with private actors may be helpful and offer more effective solutions. The hybrid public-private regulation can have many forms. In the CSR area, two forms are the most common: public-private agreements and certification and standardization initiatives. 2.2.2.1 Public-private agreements Public-private agreements are contracts concluded between governmental institutions and private companies. Public-private agreements may have various forms and be concluded for various purposes. A typical example is a public procurement contract,90 under which a state outsources provision of public services to a private party or under which a state procures goods to be used in executing public functions.91 In these kinds of contracts, sustainability issues can be included in the final contractual text or as selection or awarding

88 For example, Johnson & Johnson, Deferred Prosecution Agreement between Johnson & Johnson and the United States Department of Justice, Criminal Division, Fraud Section (2011). 89 Supra subsection 6.1.3. 90 Public procurement contracts are delimited from the scope of the main analysis in this book; see supra section 1.5. 91 Outsourcing public services is sometimes referred to as “government by contract.” See, e.g., Collins, H., 1999 (reprinted 2005), Regulating Contracts, USA, NY: Oxford University Press, pp. 303 et seq.

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criteria during the procurement process. It is rather intuitive to expect the public institution as guardians of the public interest to promote sustainability issues throughout their procurement activities; however, the inclusion of sustainability conditions into public procurement was also disputed since it may bring less transparency to the process due to the possible vagueness of these requirements, may disadvantage SMEs that generally have fewer resources to invest in CSR than multinationals, or may raise the price of procured goods and services.92 Nevertheless, sustainability concerns have at least made their way into the legal regulation of public procurement in some jurisdictions.93 Public-private arrangements may also influence sustainable development in a negative way. This can happen in cases of the so-called stabilization clauses.94 Stabilization clauses are provisions of agreements on the protection of investment concluded between governments and foreign investors entering their market. It has become common that foreign investors want to ensure that the legal environment in the country of the investment will not radically change in a way that could adversely affect its financial interests. Therefore, if the investor has enough bargaining power, it may insist on a contractual provision under which the government ensures the legal status quo in a given area for the time of the investment or otherwise economic compensation for the investor’s expenses spent in complying with new legislation.95 Obviously, such provisions could have negative effects in the areas of sustainability and CSR areas, in practice stopping or slowing down the legislative development in these areas. Although such provisions are rarely enforced and, moreover, the main sanction for a breach is to pay compensation, they do put governments under pressure when adopting new laws, thus affecting the shape of new laws.96 2.2.2.2 Public-private initiatives (standardization, certification) Another type of cooperation between state and non-state actors are various initiatives aiming to enhance CSR behavior. State actors (governments and international organizations), aware of their limited legislative power at the transnational level, employ their expertise and authority to initiate or support a CSR-targeted collaboration with private

92 McCrudden, Christopher, “Corporate social responsibility and public procurement,” in McBarnet, Voiculescu and Campbell, note 17 (chapter 1), pp. 93 et seq. 93 For example, according to para. 5 of the Preamble to the Proposal for a Directive of the European Parliament and the Council on public procurement of 20.12.2011, COM(2011) 896 final: “This Directive clarifies how the contracting authorities may contribute to the protection of the environment and the promotion of sustainable development, whilst ensuring that they can obtain the best value for money for their contracts.” 94 Pace University School of Law and IACCM, note 46 (chapter 1), p. 30 et seq. 95 Shemberg, A., 2009, Stabilization Clauses and Human Rights, prepared for IFC – John Ruggie, UN SGSR briefing paper (the author found that 59% of the investigated companies included some type of stabilization clause into long-term investment contracts with governments; three types of stabilization clauses were identified: (1) freezing clauses, (2) economic equilibrium clauses, and (3) hybrid clauses). 96 Ibid., pp. 33–36 (stressing that the informal use of stabilization clauses has greater effects than their formal use).

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actors (NGOs and companies). The involvement of public actors increases the legitimacy of such collaboration, as well as the trust of participants and, especially, outsiders in its activity. The usual aims of such public-private CSR initiatives are standardization or certification. The first type of these initiatives merely issues a set of standards or rules that may be voluntarily adopted and applied by companies. Their implementation and compliance monitoring and enforcement are left to the companies themselves. Probably the best known is the UN Global Compact. Operating under the auspices of the United Nations, it is based on voluntary corporate participation. Its objective is to bring together corporate expertise and the authority of the UN, thereby obtaining the best from both.97 Another example is the International Standardization Organization (ISO), an NGO bringing together standardization bodies from the participating countries. ISO has a peculiar position between the public and private spheres, because some of the participating subjects are state institutions and some are purely privately run. The organization itself develops voluntary standards that enjoy wide acceptance and authority. In 2010, it adopted the ISO 26000 standard on social responsibility that provides guidance on the implementation of CSR issues in corporate operations, though it does not offer the certification that many other ISO standards provide (e.g., ISO 14000).98 The other types of public-private CSR initiatives are various certification and labeling schemes. The ISO 14000 can serve as an example here, offering a third-party certification verifying the implementation of the standard. In these types of initiatives, companies still participate voluntarily but must fulfill certain obligations for being able to use the specific label or certification.

2.2.3

Private

CSR regulation is also created in a purely private context. There is a large range of possible instruments to be used and collaborations to be formed. Many of them remind the publicprivate standardization and labeling initiatives, however, with the difference that no public authority is involved in any stage of the regulations’ adoption, implementation, and enforcement. To classify private CSR regulation, we may generally distinguish between business-driven initiatives formed at the industry level, cross-industry initiatives, collabo-

97 “The initiative seeks to combine the best properties of the UN, such as moral authority and convening power, with the private sector’s solution-finding strengths, and the expertise and capacities of a range of key stakeholders. The Global Compact is global and local; private and public; voluntary yet accountable;” www.unglobalcompact.org/AboutTheGC/index.html (last accessed 12/7/2014). 98 www.iso.org/iso/home/standards/iso26000.htm; www.iso.org/iso/home/standards/management-standards/iso14000.htm (both last accessed 12/7/2014).

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rations between companies and trade unions, and single-company initiatives. Each type is briefly addressed below. 2.2.3.1 Industrial codes of conduct The urge to standardize CSR behavior is driven not only by the wish to enhance protection of the environment or human rights but also by practical need for legal certainty and risk management. Standardization of CSR behavior among direct competitors means that they create a kind of “safe harbor” for the industry;99 if a company complies with the agreed standards, it is unlikely to be accused of negligence. It also allows for competition to concentrate in the area of product quality and price, areas that are certainly easier to control and more visible to consumers and clients than sustainability performance. An illustration of a well-established industrial initiative is the Responsible Care Initiative of the International Council of Chemical Associations.100 Its members must accept the Responsible Care Global Charter that sets out basic principles of participation in the program. Overall, the program is intentionally drafted in broad (or even vague) terms in order to allow its adaptation to the legal and social frameworks of different locations. From 2006, the Initiative has concentrated on proliferation of its principles throughout the whole supply chain, including suppliers and users of the products. 2.2.3.2 Business-driven cross-sector initiatives Business-driven cross-sector initiatives often focus on a specific CSR issue.101 The underlying idea is not to level up with the direct but broader range of competitors, to lower CSR compliance costs, and as in the case of industrial codes of conducts to achieve greater legal certainty and to manage CSR-related risks. As in the case of public-private initiatives, two broad typologies exist also here: standardization initiatives and certification and labeling initiatives. For example, the Business Social Compliance Initiative (BSCI) associates companies from various industries, such as the apparel, pharmaceutical, or retail industries.102 All members must sign up to the BSCI Code of Conduct and are provided with monitoring and auditing tools to secure the compliance of their supply chains. Suppliers who once undergo audits according to the BSCI standards are registered in a database that is accessible to all BSCI members. As such, the BSCI helps to lower the CSR auditing costs both on the buyers’ and suppliers’ side.103 99 Glinski, note 110 (chapter 1), p. 139 et seq. See also note 71 (chapter 8). 100 www.icca-chem.org/en/Home/Responsible-care (last accessed 12/7/2014). 101 For example, climate change; see the Carbon Disclosure Project, www.cdproject.net/en-US/Pages/HomePage.aspx (last accessed 12/7/2014). 102 www.bsci-intl.org (last accessed 12/7/2014). 103 In the explorative study, one of the participants expressed it as follows: “We have a member database where we register the audits and companies auditors, there we may see who complies…we have our own producer

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2.2.3.3 International Framework Agreements International Framework Agreements (IFAs) are another hybrid form of regulation that have an influence on the use of SCCs. IFAs are negotiated between global union federations and multinational enterprises (MNEs),104 thus representing a bilateral commitment to ethical conduct. The intention is to ensure that MNEs observe the same standards across all countries they operate in. The agreements will primarily cover labor conditions (based on the ILO conventions) and then to a greater or lesser extent respect for human rights generally, protection of the environment, and business integrity. As of April 2012, 98 companies have concluded an IFA.105 Although IFAs appear to take the form of legally binding agreements, their legal character is unclear. Labor law has not conferred the power to any actor to negotiate IFAs; in another words, there are no transnational rules for collective bargaining processes, which raises doubts as to the actual legal enforceability of such agreements.106 Nevertheless, IFAs, as bilateral arrangements, constitute an important level of transnational regulation for CSR that is distinct from unilateral corporate statements. 2.2.3.4 Corporate codes of conduct The most private and individual form of CSR regulation is an individual company’s selfregulation. Most often this will take a form of a code of conduct. Corporate codes of conduct set out basic ethical standards for conducting business. They are usually publicly available unilateral statements. The question of whether codes of conduct have binding force has been the topic of many discussions and even court review.107 The prevailing opinion is that codes of conduct have no direct legal effects, although they may be enforced indirectly, for instance, using false advertisement or unfair competition claims, or through contract law.108

104 105 106 107 108

there and if for instance another retailer has a conducted an audit with one of our producers we will be able to upload that to use to our own list and when we agree will not need to do the audit too because it has been done and it has been done in line with specific BSCI code of conduct….it saves costs of duplication of audits… the supplier does not have to fulfill many different requirements …just one.” See note 41 (chapter 1). www.global-unions.org/framework-agreements.html (last accessed 12/7/2014); some companies have negotiated an IFA with more than one global union. Sobczak, note 111 (chapter 1). Doe vs. Wal-Mart Stores, Inc., 572 F.3d 677 (9th Cir. 2009), referred to as “Walmart case.” Sobczak, note 5 (chapter 1).

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Figure 2.1 Hard/soft, public/private map

2.3

Methodology

As already described in the Introduction, although this research is primarily rooted in legal disciplines (legal theory and contract law), traditional legal methods may be insufficient when examining sustainability issues, which by their definition include economical, social, and environmental considerations. Therefore, methods commonly associated with disciplines other than law must be drawn on to understand the legal instrument of a contract. The research methodology used here can, thus, be labeled as legal research enriched by multidisciplinary methods and considerations.

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2.3.1

Research design

Theoretical research

Legal dogmatics – a systematic approach to applicable sources of law, their identification, systematization, and interpretation109 – is generally understood as a prevailing method in legal research and sometimes is even called “the legal method.” However, this does not mean that there are no other methods of legal research. Nevertheless, finding and describing the current status of law in the area of research is most often the first step to be taken in order to enter into legal analysis of a specific subject and also a stepping stone in determining the further methods to be applied.110 The traditional notion of doctrinal legal research is connected to an analysis of hard, black-letter law. However, as the boundaries between hard and soft law blur,111 so does the line demarcating which sources of law are to be covered in legal dogmatic research. Since the author takes the legal pluralism perspective on the area of CSR and sustainability, she also includes all the sources of law listed in the previous chapter in the doctrinal analysis.112 Throughout this book, the question of the ethical and legal foundations of CSR repeatedly arises. This question is one to be answered by means of legal philosophy. Therefore, where appropriate, legal philosophy is applied as a method. However, it should be noted that this book does not aim to answer the question whether CSR should be regulated by legal or social norms, but only introduces some of the major thoughts on this issue. Moreover, as already described above, SCCs are to a large extent law in action rather than law in books. Therefore, it is necessary also to apply some socio-legal methods in order to learn about the life of the provisions.113 Socio-legal research is understood here as research going beyond traditional doctrinal methods and studying not only law as such but also the “context within which law exists.”114 This socio-legal research is further described in section 2.3.2 on empirical methods (case study and sustainability reports’ content analysis). Except for the empirical part of the presented research, socio-legal method is to be found in the assessment of the effectiveness of SCCs in the sustainable development context, where also other disciplines (such as management studies, psychology, sociology, and behavioral science) are touched upon. As the presented research is based primarily in the discipline of law and due to the educational background of the author, it 109 Wacks, supra note 14, pp. 5–6; McConville, M., Chui, W. H., 2010, Research Methods for Law, Edinburgh: Edinburgh University Press, p. 4. 110 Cleff, E. B., 2009, Mobile Advertising: Proposal for Adequate Disclosure and Consent Mechanisms, PhD thesis, Aarhus School of Business, Aarhus University, pp. 23–24. 111 Supra subsection 2.1.3.2. 112 See specifically supra PART III. Regulation of sustainability contractual clauses. 113 McConville and Chui, supra note 109, pp. 4–6 and 32 et seq. 114 Banakar, R., Travers, M. (eds.), 2005, Theory and Method in Socio-Legal Research, Oxford and Portland Oregon: Hart Publishing, p. xii (referring to Wheeler, M., Thomas, P. A., “Socio-Legal Studies,” in Hayton, D. J., 2002, Law’s Future(s), Oxford: Hart Publishing)

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is not feasible to investigate each of the non-legal arguments in detail. Therefore, the author only outlines the arguments here and acknowledges the interaction of these primarily nonlegal processes with legal institutions while leaving a more profound examination of these issues to future (interdisciplinary) research. Two methodological approaches to the effectiveness assessment have been described in the literature: causal inferences and indices of effectiveness.115 Neither of them leads to provable conclusions, as they both result in subjective judgments; the former depends of subjective deliberation about where to seek for an effect; the latter depends on arbitrary choices of listed indicators of effectiveness.116 Nevertheless, these two methods have provided many important findings in the immensely complex area as global regulatory regimes are. Drawing a causal link between an action (an SCC in a supply agreement) and an effect (adoption of higher ethical standards by suppliers) proves to be eminently difficult if possible at all. The major obstacle that needs to be overcome is a puzzle, how we can separate the influence of SCCs from influences of other forces (such as public regulation, investors’ or consumers’ pressure, or market pressures) that simultaneously affect suppliers’ performance.117 This seems to be unfeasible in such a complex system as global regulation of sustainability is. And it may as well not be right, because the functionality of private contracts for sustainability goals relies on the full, complex system of economic, legal, and social drivers and incentives for suppliers’ behavioral change.118 Therefore, an approach adopted here takes inspiration from the causal inferences deducing process described by Young: “Causal analysis starts from the observation that regime as such are not actors and focuses on an exploration of the pathways through which regime rules, decision-making procedures, and programs influence behavior and create roles for relevant actors.”119 On this background, this book explores how sustainability requirements in business contracts seem to influence the roles of companies and regulators in global governance of CSR and the suppliers’ sustainability performance. In order to demonstrate indications of causal relationships, a model of regime effectiveness developed by Getz is taken as a starting

115 116 117 118

Young, note 101 (chapter 1), p. 100. Ibid., pp. 103 and 100. Ibid., p. 100. Gunningham, N., “Corporate environmental responsibility: law and the limits of voluntarism,” in McBarnet, Voiculescu, and Campbell, note 17 (chapter 1), pp. 476–500 (describing the mutual interaction and overlaps between social and legal licenses to operate); Vandenbergh and Cohen, note 120 (chapter 1) (describing how different regulatory strategies, including SCCs and transparency requirements, mutually reinforce each other and create a complex system of incentives for CSR). 119 Young, note 101 (chapter 1), p. 105 (naming this method as “identification of behavioral mechanisms”).

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Research design

point.120 The model is amended in order to fit the characteristic features of sustainability contractual clauses and to allow illustrating how they may influence the effectiveness of SCCs as a type of transnational regulation. This book concludes with some limited normative considerations on possible improvements for SCCs’ effectiveness. However, the normative legal method is not used as one of the main methods,121 but only to draw conclusions. As a final note on methodology, it is important to stress that the methodology as well as the sources of law and literature selection are complicated by the transnational focus of this book. The legal and information sources from various jurisdictions are used to demonstrate the global character of the studied topic. However, all the sources chosen are those which reflect the transnational effects of CSR regulatory tools and strategies.

2.3.2

Empirical research

In addition to the theoretical analysis, this book also includes empirical findings on the topic. Two types of methods were used to study the vital and dynamic side of SCCs. 2.3.2.1 Exploratory study At the beginning of the research process, the author approached three multinational companies based in Denmark, which were identified as sourcing from developing countries and were considered to be leaders in CSR. The objective was to affirm preliminary findings from a review of the literature on sustainability requirements in international supply chains and to uncover any unnoticed issues that companies deal with in passing their CSR requirements on to their foreign suppliers. Acquiring information directly from the companies was an important step in developing the principal hypothesis and related research questions. The format of a case study was chosen as the most suitable method to frame this part of the research. Firstly, the publicly available information about and documents of the companies relating to the topics of sustainability and CSR were examined. Then the companies were contacted through e-mail to schedule an interview. Each interview was conducted in person on the corporate premises. In all cases, the respondents were representative of the management responsible for the sustainability area. In one case, a representative of the public relations department was also present on demand of the company. The interviews took between thirty and seventy-five minutes according to the time provided by the

120 Getz, K. A., 2006, “The Effectiveness of Global Prohibition Regimes: Corruption and the Antibribery Convention,” Business & Society, 45(3), 254–281. There are many other models that could be used. This model is chosen as it basically mirrors what is identified as characteristic features of SCCs. 121 Wacks, note 14, p. 6.

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respondents. The chosen format was a semi-structured, open-ended interview. The author prepared a set of questions before the study was conducted. The list of questions is found in Annex no. 1. The questions were not asked in the same order in all three cases, but were posed in response to the themes the specific respondent raised in order to give the respondents as much space as possible to develop their answers. All companies were given the assurance that they would remain anonymous; the interview transcripts are available with the author and can be provided as anonymously coded or upon prior consent from the relevant company. These exploratory case studies revealed some patterns of corporate behavior in relation to sustainability in international supply chains, namely, in the character of relevant corporate strategies, the motivations behind relevant corporate activities, and problems that such companies face in implementing sustainability in their supply chains, especially in the areas of compliance monitoring and enforcement. The results of the studies are obviously skewed by companies’ characteristics and interests, and therefore they cannot be generalized. However, it was not the objective of the case study to answer specific research questions, but rather to help developing them. The findings are referred to throughout this book when appropriate. 2.3.2.2 Law in action Empirical research can serve not only to reveal problematic issues and help in articulating research questions but also to map, describe, and clarify how the law and legal instruments function in practice. As described above, this book approaches SCCs in international supply agreements primarily as law in action, and, thus, theoretical inquiries are necessary though not sufficient to understand the role these contracts play in the transnational regulation of sustainability. A legal system is only one part of a broader system of social relations influencing the use and effects of SCCs.122 Therefore, an empirical method has been employed to scrutinize the use of SCCs in practice. When deciding on the suitable empirical research methods, the following limitation was taken into consideration. There is a tremendous number of supply contracts concluded worldwide every day. However, we have problems accessing them, because contracts are usually internal and confidential documents accessible only to the contractual parties. Thus, when conducting research, we have to rely on publicly available data and have to determine the content of SCCs based on statements and texts provided by companies themselves or retrieved from public databases.123 Drawing general conclusions from publicly 122 Luhmann, N., 2004, Law as a Social System, NY, USA: Oxford University Press. 123 Legal scholars commonly use these sources. For research using public statements of companies, see, e.g., Cedillo Torres, C. A., Garcia-French, M., Hordijk, R., Nguyen, K., Olup, L., 2012, “Four Case Studies on Corporate Social Responsibility: Do Conflicts Affect a Company’s Corporate Social Responsibility Policy?,” Utrecht Law Review, 8(3), 51–73. For research using public databases of contracts, see, e.g., Vandenbergh,

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available contracts may, however, be problematic. They are still only a small sample of all existing contracts and may not be a representative one, since companies may tend to disclose those contracts covering social and environmental issues and keep confidential those that are controversial in the CSR context.124 Relying on publicly disclosed corporate communications and documents is also likely to be problematic due to the excessive positive bias. Nevertheless, they can yield a more objective analysis if studied in a systematic and structured way.125 Given the foregoing, a content analysis of sustainability reports in relation to sustainability requirements within international supply chains was chosen as the most appropriate method to uncover the extent to which contracts are used in this respect and to describe any existent patterns in the use of them.126 The studied population is the 2012 Fortune 500 Global companies,127 which represents the largest companies based on revenue gained in 2011.128 From this list, a sample of EU/ EEA and US companies was selected based on their industry affiliation. The analysis contains only European and American companies for two reasons. This is firstly because they are the most interesting in relation to spreading demanding ethical, social, and environmental standards to less developed countries. Secondly, this is because most of their documents are available in English. Industries with representation of at least five companies were included in the analysis and selected to cover various types of markets, products, and both close-to-market and business-to-business industries. This selection provided a total sample size of n=55. For each company, the last issue of its sustainability report (being it a separate document or online information) was found and its content analyzed based on a list of dummy-coded variables. The search for the latest sustainability report was carried out through the companies’ websites on the supposition that the majority of companies that issue such documents also publish them

124

125

126

127 128

note 97 (chapter 1); Lin, note 17 (chapter 1); Geis, G. S., 2010, “An Empirical Examination of Business Outsourcing Transactions,” Virginia Law Review, 96(2), 241–300. From this perspective, probably the most suitable sources of data are databases in which companies are obliged to submit their contracts, such as the U.S. Securities and Exchange Commission (SEC) database available at www.sec.gov/. However, even there, only those contracts that are considered material are submitted, and supply agreements often fall outside this materiality test. Haddock-Fraser, J., Fraser, I., 2008, “Assessing corporate environmental reporting motivations: differences between ‘close-to-market’ and ‘business-to-business’ companies,” Corporate Social Responsibility and Environmental Management, 15(3), 140–155, p. 144; Collis J, Hussey R., 2003, Business Research, 2nd edition, Basingstoke, UK: Palgrave, MacMillan; Harwood, TG, Garry, T., 2003, “An overview of content analysis,” The Marketing Review, 3(4), 479–498. Krippendorff, K., 2004, Content Analysis: An Introduction to Its Methodology, 2nd edition, Thousand Oaks, CA: Sage (noting that six questions must always be addressed in content analysis research: Which data are analyzed? How are they defined? What is the population from which they are drawn? What is the context relative to which the data are analyzed? What are the boundaries of the analysis? What is the target of the inferences? All these questions have been considered by the author in designing this study). http://money.cnn.com/magazines/fortune/global500/2012/full_list/ (last accessed 12/7/2014). For some of the companies, this is based on the calendar year; for others, the fiscal year is decisive.

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Sustainability Clauses in International Business Contracts on their website to reach as many of their stakeholders as possible.129 If no report was found on the corporate website, the existence of such a report was double-checked through the Global Report Initiative database.130 In the event that the report directly referred to a relevant internal policy of a company (e.g., code of suppliers’ conduct or purchasing principles), this policy was included in the analysis and read as an integral part of the report. The analyzed variables were directed to the following issues: the character of the report (e.g., third-party assurance, guidelines used), the corporate CSR strategy (e.g., relevant corporate policies, participation in voluntary initiatives), the inclusion of supply chains in the report (e.g., type of reference to supply chain, position in the report), the level of commitment to sustainability in the supply chain (e.g., SCCs, sustainability as non-binding business requirements or recommendations), the monitoring and enforcement strategies (e.g., suppliers’ self-assessment, audits), and reported non-compliance (number of occurrences).131 All the variables were analyzed in relation to all SCCs both together and separately in relation to environmental requirements, social and labor requirements, and anti-corruption requirements. The variables are described in a codebook, which forms the first part of Annex 2. The data sheet is on file with the author and can be provided upon request. This empirical study is exploratory and thus somewhat limited in its ability to draw strong statistical conclusions. Because of the relatively small sample size and non-random nature of the selection process, no statistical tests are performed. Instead, it is meant to help illuminate and suggest many interesting observations that might not otherwise be apparent when reading only a handful of company sustainability reports. With this in mind, the results are referred to throughout this book when appropriate, especially in chapter 7.

129 Haddock-Fraser and Fraser, supra note 125 (stating that this is consistent with established content analysis methodology). 130 http://database.globalreporting.org (last accessed 12/7/2014). 131 The complete list of the variables and the coding criteria are described in detail in Annex no. 2.

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Part II Sustainability Contractual Clauses In order to engage in legal discourse on SCCs, it is necessary to establish the meaning of the term adopted for the purposes of this book, to examine how SCCs fit into the mainstream theories of contract, and to review the relevant existing legal scholarship. Thus, Part II will firstly see what sustainability clauses are and how they differ from other contractual provisions (chapter 3). Then it will delineate the meaning of “contract” and look into the influence of SCCs on the traditional notion of a contract (chapter 4). And finally, it will examine how the legal scholarship has addressed SCCs hitherto (chapter 5). This part of this book offers a detailed explanation of the central topic and sets the stage for a discussion on regulation of SCCs in Part III.

3

SCCs’ definition

As described in the Introduction, SCCs set out in a binding manner minimum social and environmental standards to be upheld by contractual parties when performing their business activities.1 This broad definition is, however, not sufficient to analyze their legal status and effects. We must search for further details to understand the characteristics of these provisions, assess whether (and if so how) they differ from other contractual provisions, and ascertain the legal implications of those. For this purpose, it is helpful to look first at some practical examples. Such an investigation is a first step that will help to describe how SCCs may look and how companies actually use them. For this purpose, five examples of SCCs were selected from internationally concluded contracts, with an attempt to cover clauses implemented by both medium-sized and large companies, in various forms, with various degrees of binding force, and concerning various CSR issues. It is not the ambition of the author to include all existing types of SCCs, but to show the modality of these clauses, find their common features, and set the scene for their further legal analysis.

3.1

Examples

This section shortly describes five examples of SCCs. The examples are then referred to further within the text where appropriate and especially in chapter 7. 1. “With the design of the products and with the choice of materials, production methods, employees and sub-contractors, the seller must ensure that buyer’s environmental policy is complied with. Furthermore compliance with UN’s Global Compact should be observed.”2

1

2

The article works with the term “sustainability contractual clauses” as not being solely related to the macroeconomic view on sustainability, but also on the general understanding that they are clauses promoting sustainable development, including CSR, social, environmental, and/or ethical clauses. See Pace University School of Law and IACCM, note 46 (chapter 1), p. 24 (setting out various names, these clauses are called by the business community). The provision forms a part of the General purchasing terms for Pressalit Group A/S. The full text is available at: www.pressalit.com/NR/rdonlyres/0FFF18D6-6FE7-4A07-A67F-E21EDE90C31A/0/Indköbsbetingelser_ENG.pdf (last accessed 12/7/2014). UN Global Compact www.unglobalcompact.org/ (last accessed 12/7/2014). The text of Pressalit’s Environmental Policy is available at www.pressalit.com/pressalitgroup/en-GB/ CSR/Environment/ (last accessed 15/01/2013).

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The first example comes from the General purchasing terms for Pressalit Group A/S (hereafter “Pressalit’s General Terms”), which form by reference an integrated part of all contracts for the delivery of goods to Pressalit A/S.3 The provision refers to two other documents: Pressalit’s environmental policy and the UN Global Compact. The environmental policy is a short online stipulation of Pressalit’s objectives with regard to protection of the environment, with very vague wording.4 The UN Global Compact is a voluntary initiative aiming to encourage corporate socially responsible behavior worldwide. It consists of ten broad principles in the area of human rights, labor, environment, and anti-corruption.5 While suppliers are obliged to comply with the environmental policy, observance of the UN Global Compact is merely recommended. At first sight, it thus seems that the degree to which the supplier is obliged to respect those standards varies considerably between environmental matters as compared to other issues. However, the practical effect is likely to be similar, since both the environmental policy and the UN Global Compact comprise only vague and general requirements. In both cases, it will therefore be difficult to establish what exactly are suppliers required to do and, thus, also determine whether suppliers comply with the requirements or not.6 This weak binding power is further enhanced by the fact that the general terms do not stipulate any compliance monitoring mechanism or specific sanction in the event of breach of these obligations.7 2) “Supplier confirms that it has read HP Supplier Code of Conduct (Electronic Industry Code of Conduct) and HP’s General Specification for the Environment and agrees with its statement of requirements.”8 This provision is included in the Supplier Social & Environmental Responsibility Agreement of Hewlett-Packard Company (hereafter the “HP CSR Agreement”), a one-page document, setting out the most important procedural rules of cooperation between HP and its suppliers in relation to social and environmental responsibility, which supplements all contracts for

3

4 5 6 7 8

Pressalit is a middle-sized Danish company. It was established in 1954. Today, Pressalit A/S is one of the leading European manufacturers of toilet seats and specialized bathroom solutions for people with disabilities. In 2009, the 382 employees of Pressalit A/S created a turnover of 460.3 mio DKK, primarily in the European markets. See more information at: www.pressalit.com/pressalitgroup/en-GB/About+us/ (last accessed 12/7/2014). An example of vague wording from the environmental policy: “We wish to extend and improve collaboration with our suppliers and subcontractors on environmental issues concerning both process and product.” For more details on supply chain activity, see infra subsection 6.2.3. See infra subsection 7.2.4. However, a separate provision on monitoring and/or enforcement may be included in the actual text of the contract or a separate document attached to the contract, which are not available. See note 17 (chapter 1).

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the supply of goods and/or services to HP. The fact that a separate agreement is concluded demonstrates the importance of such issues to the company. However, the agreement does not itself stipulate any specific requirements, but only refers to two internal HP documents: the Supplier Code of Conduct and the General Specification for the Environment. The HP Supplier Code of Conduct obliges participants to adhere to applicable law and only “encourages” going beyond the legal minimum in the area of labor, health and safety, the environment, and business ethics.9 Once again with rather vague wording, it is based on international standards and refers to a range of international instruments, such as the OECD Guidelines,10 ISO 14001,11 or the UN Global Compact. HP’s General Specification for the Environment is quite opposite a highly detailed quality standard (of 106 pages) that is by reference an inherent part of all contracts for the design, manufacture, and purchase of HP’s branded products.12 By signing the HP CSR Agreement, the supplier does not undertake to comply with the referred documents, but only acknowledges their existence and expresses its consent with their content and its willingness to collaborate to achieve the goals stipulated therein. Compliance is controlled via the supplier’s regular self-assessment and reports on progress, with HP having the right to audit upon prior notice the supplier’s records to verify the content of such reports. HP then undertakes not to disclose any information received under the cooperation to any third party without the supplier’s prior written consent.13 In conclusion, the binding force of the provision seems to be low and highly relational. This, however, does not necessarily mean that it is not effective.14 3) “17.1 Company warrants that all Products specifications shall be in full compliance with all applicable laws and regulations then in force, provided that TGB warrants compliance with all labor and other laws governing workers’ rights and workplace safety in the country or territory in which the Products are manufactured by TGB or its Manufacturing Subcontractors or other Subcontractors.”15

9 10

11 12 13 14 15

The Electronic Industry Code of Conduct, at www.hp.com/hpinfo/globalcitizenship/environment/pdf/supcode.pdf (last accessed 12/7/2014). The Organization for Economic Cooperation and Development Guidelines for multinational enterprises, www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/ (last accessed 12/7/2014); see subsection 6.2.2 for details on this CSR instrument. ISO 14000 standards on environmental management, www.iso.org/iso/home/standards/managementstandards/iso14000.htm (last accessed 12/7/2014). www.hp.com/hpinfo/globalcitizenship/environment/pdf/gse.pdf (last accessed 12/7/2014). HP CSR Agreement, Article 2.0. The effects and effectiveness of SCCs are discussed in detail infra Part IV. The provision forms a part of the Sourcing Agreement concluded between TGB, LLC and Heeling Sports Limited. The full text is available at: http://files.shareholder.com/downloads/HLYS/0x0xS1104659-1021843/1373980/filing.pdf (last accessed 29/03/2012).

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This is an excerpt from the Sourcing agreement concluded between two American companies: TGB, LLC and Sports Limited (hereafter the “TGB Sourcing agreement”) with effects extended throughout TGB’s international supply chain. However, the effects are limited. The provision only concerns labor conditions and does not require anything more than compliance with laws of the location where the products in question are manufactured. There is no reference to internationally recognized standards on workers’ protection, such as various instruments of the International Labour Organization.16 Further, there is no stipulation of specific sanctions in case of breach. With regard to monitoring and enforcement mechanisms, the only relevant provision could be Section 9 of the TGB Sourcing Agreement (“Inspection and Defective Products”), which allows for inspections of manufacturing premises but only upon prior notice; moreover, if external auditors are used, they must be approved by the seller. Given the way that the provision on inspections also covers the topic of defective products, we must assume that adherence to labor laws determines the quality compliance of the products, which could be a difficult connection to prove.17 In summary, although theoretically this provision should secure observance of labor law throughout the whole supply chain, in practical terms it does not offer any operative rules. Moreover, considering the placement and length of the clause (3 lines) in the context of the whole agreement (17 pages), it is obvious that the clause is not one of the business priorities of the parties. Therefore, its effectiveness remains questionable. 4) “15.5 Miscellaneous. Seller Covenants that no goods or services supplied under this Order have been or will be produced: (a) utilizing forced, indentured or convict labor; (b) utilizing the labor of persons younger than sixteen (16) years of age or in violation of the minimum working age law in the country of manufacture of the goods or performance of the services under this Order, whichever is higher; or (c) in violation of minimum wage, hours or days of service, or overtime laws in the country of manufacture or of the goods or performance of the services under this Order. If forced or prison labor, or labor below applicable minimum working age, is determined to have been used in connection with this Order, Buyer shall have the right to terminate this Order immediately without further compensation to Seller.”18 This provision is a part of the GE Energy’s general terms of purchase for the European region (hereafter the “GE Terms of Purchase”), which is incorporated by reference into 16 See www.ilo.org/global/standards/lang--en/index.htm (last accessed 15/01/2013). 17 See infra subsection on claims for damages 7.4.2.3. 18 The provision forms a part of the GE Energy’s Standard Terms of Purchase for Goods for the European region. The full text is available at: http://site.ge-energy.com/about/suppliers/en/document.htm (last accessed 12/7/2014).

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orders for supply and supply agreements of the company. The provision is placed in Section 15, entitled “Compliance with laws.” At first sight, this placement would seem to suggest that the overall goal is mere compliance without any intention to go beyond legal requirements (with one exception in the child labor issue, where the higher age limit from the contractually stipulated 16 years and the locally regulated age limit will be decisive to determine whether child labor has occurred). However, this may be misleading in relation to forced and child labor. Although the clause simply echoes what is stipulated in both national and international laws,19 it introduces new standards and raises the bar in countries that have not ratified all international conventions or where law enforcement is weak. For example, India has not ratified the UN Convention on the Rights of the Child, stating that the socio-economic situation in the country does not allow for one age limit applicable to all types of work.20 In this and similar cases, the contractual provision may be a substitute for legal regulation. Considering the binding nature of the provision, it appears to be strict in relation to forced and child labor issues. If a breach is discovered, the buyer has the right to terminate the contract with immediate effect. However, this option is not given in relation to other working conditions, such as the minimum wage.21 It is relevant to ask whether this omission was accidental or if it was done intentionally with the expectation that the wage and other regulations would not be observed.22 Finally, it is worth noting that the GE Terms of Purchase also contain other clauses that could be labeled as SCCs. Section 14 (“Proper Business Practices”), referring to the Integrity Guide for Suppliers, Contractors and Consultants, prohibits bribery. Clause 15.1 then expressly requires compliance with certain laws, among other things in the areas of the environment and employment. Furthermore, clause 15.2 obliges the supplier to 19 The main instruments of international law against forced labor include the Slavery Convention (1926), ILO Convention (No. 29) concerning Forced or Compulsory Labour (1930), the Universal Declaration of Human Rights (1948) (Article 4), the Convention for the Suppression of the Traffic in Persons and of the Exploitation of the Prostitution of Others (1949), and ILO Convention (No. 105) concerning the Abolition of Forced Labour. The international instruments banning child labor include ILO Convention (No. 182) on the worst forms of child labour (1999), ILO Convention (No. 138) on the minimum age for admission to employment and work (1973), and the UN Convention on the Rights of the Child. The list of international instruments on working conditions can be found at: www.ilo.org/travail/areasofwork/WCMS_145675/lang--en/index.htm (last accessed 12/7/2014). 20 India’s declaration in respect of the UN Convention on the Rights of the Child available at: http://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY& mtdsg_no=IV-11& chapter=4& lang=en (last accessed 12/7/2014). 21 However, it may also be possible for the company to terminate with immediate effect in cases other than forced or child labor, provided that it can be proved that the breach constituted a fundamental breach. CISG, Articles 25 and 49(1)a. 22 In answering this question, a contrario interpretation could be used, i.e., the contract can be immediately terminated in case of forced or child labor occurrence since parties have agreed this possibility in the contract, which a contrario means that it cannot be terminated with immediate effect in case of breach of other provisions.

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establish an effective program to ensure that any sub-supplier complies with the whole of Section 15. Overall, the GE Terms of Purchase comprehensively cover the CSR area and have a broad application not only in the bilateral relation with the specific supplier but extending further to third parties. 5) “The Company hereby agrees, represents and warrants that neither itself nor any of its directors, shareholders, officers, employees or agents will make or has made or offered, or caused to be made or offered, any payment, loan or gift of money or anything of value directly or indirectly to: (a) any official or employee of any foreign government, or any agency or instrumentality thereof; (b) any political party or official thereof or any candidate for political office; or (c) any other person, under circumstances in which the Company, its directors, employees or agents know, or have reason to know, that all or any portion of such money or thing of value will be offered or given, directly or indirectly, to any person named in clauses (a) and (b) above to influence a decision or to gain any advantage for itself, its directors, employees or agents, Buyer or any Affiliate of Buyer, or its or their directors, employees or agents, or their affiliates, in connection with any transaction relating to this Agreement that could result in a violation of the U.S. Foreign Corrupt Practices Act, and any other law, regulation, order, decree or directive having the force of law and relating to bribery, kick-backs, or similar business practices. Any breach of this clause shall be considered an irrevocable breach of this Agreement and shall be cause for immediate termination of the Agreement.”23 The fifth example is a provision on anti-bribery compliance. The provision forms a part of a sample Product and Service Supply Agreement concluded between Verizon Australia Pty. Limited and its suppliers (hereafter the “Verizon Australia Supply Agreement”). It is embodied in Article 17 (“Foreign Corrupt Practices Act”). The US Foreign Corrupt Practices Act of 1977 (hereinafter the “FCPA”)24 is an American law with extraterritorial effects. It is applicable not only to US-based companies but also their foreign subsidiaries. Large monetary sanctions can be imposed on the US parent company in the event that any of its subsidiaries breach this law, even when such breach takes place abroad. Under the Verizon Australia Supply Agreement, the supplier bears the liability for the actions of its directors, shareholders, officers, employees, or agents. The provision is of a strictly binding 23 The provision forms a part of the sample Product and Service Supply Agreement of Verizon Australia Pty. Limited, version PSSA – Australia_051010-2. The full text is available at: www.verizonenterprise.com/resources/legal/au-vzb-pssa_en_xg.pdf (last accessed 12/7/2014). The sustainability contractual provisions from this contract form the Annex no. 3. 24 www.legislation.gov.uk/ukpga/2010/23/contents; www.justice.gov/criminal/fraud/fcpa (both last accessed 12/7/2014); the FCPA does not directly require the incorporation of anti-bribery provisions into international contracts but indirectly enforces this in the event of breach by treating those companies who have effective measures, for example, SCCs, in place more leniently.

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nature; non-compliance is considered to be a material breach allowing the buyer to terminate the contract with immediate effect. Looking at the content, the provision simply prohibits the provision of bribes within the terms proscribed by the FCPA and other anti-bribery legislation. Thus, this provision again repeats what is already stipulated in binding laws. In addition to the FCPA, Verizon’s suppliers are obliged to pay attention to anti-bribery rules that are set out in meta-regulatory international law as well as national laws with extraterritorial effects. An example from international law is the UN Convention against Corruption, which have undertaken to enforce its content on companies within their territories.25 From national law, the UK Bribery Act 2010 may be relevant.26 The features of the individual examples are summarized in Table 3.1.27 Table 3.1 Features of SCCs – examples Pressalit

HP

TGB

GE

Verizon

Provision’s place- General terms Separate CSR Express provi- General terms Sample Prodment and condiAgreement sion – specific and condiuct and Sertions agreement tions vice Supply Agreement Form of incorDouble referporation into the ence (general contract terms + internal policy/ UN GC)

Double refer- Express provi- By reference ence (CSR sion Agreement + Supplier Code of Conduct/General Specification for the Environment)

Express provision

Specificity

Vague

Environment Specific – specific Others – vague

Specific

Specific

Content

Environment UN GC – human rights, labor, environment, anticorruption

CC – labor, Labor health and safety, environment and business ethics Environment

Labor

Corruption

25 United Nations Convention against Corruption (adopted 31 October 2003, entered into force 14 December 2005) 2349 UNTS 41, Chapter III. Criminalization and law enforcement. 26 Bribery Act 2010 (c. 23) (UK). 27 The features covered in the figure were chosen to cover those aspects of SCCs that are assumed to be able to influence the legal enforceability of these provisions, according to the knowledge that the author possess and the tools she is used to work with.

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Pressalit

HP

Delivery of goods

Supply agree- Sourcing ments agreement

Purchase Supply agreeorders, supply ment for agreements goods and services

Scope – personal Screening criapplicability teria for choice of subcontractors, but not responsibility for implementing in SC

CSR Agreement – only bilateral responsibility Referred documents – supplier and any sub-suppliers

Seller, manufacturing, and other subcontractors

Seller and its representatives, contractors, subcontractors, agents, and subagents

Controlling mechanism

None

Self-assessment, report on supplier’s actions upon request, audit of records upon reasonable notice

Right to inspect and monitormanufacture of products by access to seller’s factory and other premises for manufacturing upon reasonable notice

Right to audit None all records and conduct reasonable inspections of facilities of the seller. No prior notice is mentioned

Sanction

Not specified Not specified Not specified Immediate termination (in the event of forced or child labor)

Scope & type of contracts

3.2

TGB

GE

Verizon

Seller and its employees, directors, shareholders, officers, and agents

Immediate termination

Defining features

The examples provided above reveal a wide range of SCCs; for instance, SCCs may cover different issues or have different degrees of binding force. However, they also show some consistent common characteristics regarding their form, content, specificity, scope, and enforcement. However, the examples self-evidently do not show all possible variations of SCCs, and thus general conclusions cannot be drawn from the findings. Therefore, other sources of information have to be consulted in order to describe SCCs. Due to the previously mentioned problematic access to the text of private contracts, we have to search for alternative empirical evidence. A first solution is to rely on the relevant empirical legal scholarship.28

28 See, e.g., McBarnet and Kurkchiyan, M., note 17 (chapter 1); Vandenbergh, notes 19 and 97 (chapter 1); Pace University School of Law and IACCM, note 46 (chapter 1); Vytopil, note 119 (chapter 1); Cafaggi, note 48 (chapter 2) (although not conducting truly empirical study, the author provides plenty of practical examples to illustrate and substantiate his theoretical arguments).

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Two studies were particularly helpful in this respect: (i) a study conducted by the Pace University in cooperation with the International Association for Contract and Commercial Management in 2010 via a worldwide questionnaire survey, which concentrated on describing the content, scope, subjective importance, and best practice in relation to SCCs,29 and (ii) two articles by Vandenbergh, who used data gathered from the SEC database to examine the form of the environmental contractual clauses in the context of private governance and the occurrence, content, and types of SCCs in various industries.30 The second solution is to conduct an original empirical investigation. As introduced in the methodological section, two such studies were conducted in connection to the presented research – a case study of three internationally operating companies based in Denmark selected from those considered to be among CSR leaders and a study of CSR reporting activities of the largest global companies from selected industries in relation to SCCs.31 I have combined all the accessible information to deduce the defining features of SCCs. The following characteristics of SCCs repeatedly emerge from the reviewed contractual texts, relevant literature, and empirical findings: – Frequent incorporation into contracts by reference to an external document, such as general terms and conditions, codes of conduct, or other corporate documents. – Protection of environment, labor issues, and anti-bribery provisions as the most common subjects covered. – Irrelevance to the subject matter of a specific contract or the tangible quality of supplied goods. – Protection of public rather than private interests. – Long-term value orientation. – Out-of-contractual relationship extent (total supply chain initiative). – Relational monitoring and enforcement mechanisms. – Contract termination as an ultimate sanction. Based on the above, I have developed the following definition of SCCs for the purpose of this research. Sustainability contractual clauses are contractual provisions covering social and environmental obligations that are not directly connected to the subject matter of a specific contract and which pursue long-term business objectives and public interests, by frequently aiming to extend their applicability to third parties and employing relational monitoring and enforcement tools.

29 Pace University School of Law and IACCM, note 46 (chapter 1). 30 Vandenbergh, note 97 (chapter 1); Vandenbergh, note 19 (chapter 1). 31 See infra subsection 2.3.2 and Annexes No. 1 and No. 2.

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All these features are further analyzed in chapter 7, discussing their legal implications.

3.3

Distinction from other contractual content

The features listed above seem to be typical for SCCs. However, this does not mean that they do not appear in other contractual provisions. For example, incorporation by reference is a common way of including various documents in a contract, making them an integral part thereof. Standard terms and conditions or quality standards are typical examples in this respect. Even a double reference system, as found in the case of Pressalit or HP, is not unusual. However, it is not this feature alone but its combination with all the other features that marks out sustainability provisions as being different. It is difficult to describe in exact terms why they are special and different from other provisions. This is not only because it is a complicated task to discern their common features but also because one has difficulties to find a common denominator for the other “normal” contractual clauses. Contracts cover highly differentiated rights and obligations of the parties, as well as provisions serving as guidance for their behavior during the performance and use of the contract. Still, we may try to compare SCCs with “normal” provisions, for example, by their categorization according to various types of standard contractual clauses.

3.3.1

Active and passive clauses

Generally, contractual provisions can be divided into passive and active ones.32 Active clauses will stipulate what the parties must do. Usually their fulfillment will require some effort and resources.33 Passive clauses will then provide for the parties’ rights in the event that the active clauses are not fulfilled. Therefore, in the event that everything develops in accordance with the agreement, they will remain irrelevant. Passive clauses do not merely cover sanctions in the event of breach, but also liability exemptions (e.g., force majeure) or limitations.34 Finally, there are some clauses that have both active and passive elements. For example, a provision for alternative dispute resolution (ADR clause)35 can be seen as active, since it directs certain parties’ actions in the event that they encounter a disagree-

32 Henschel, R., “Flexibility in Contracting: flexibility in projects supported by contractual and relational design (Empirical studies of software contracts + more),” paper presented at The Project “Flexibility in Contracting” 4th Workshop Instruction, 20–22 March 2013, Institut für Ostrecht München, Regensburg, Germany, p. 3. 33 Ibid. 34 Cummins, T., David, M., Kawamoto, K., 2011, Contract and Commercial Management: the Operational Guide, Zaltbommel: Van Haren Publishing, p. 366. 35 ADR is a clause under which parties decide to resolve any eventual disputes over their contract without resorting to litigation.

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ment, as well as passive, since it remains inactive if there is no dispute.36 Nevertheless, each group of provisions, such as interpretation clauses, forum selection clauses, liability limitation clauses, or time of performance clauses, can be roughly subsumed under one of the three categories. However, this is not the case with SCCs, because they include too diversified provisions. SCCs can cover provisions of both an active and passive type; they may have an active character, meaning that they cover activities to be undertaken by the parties within their business relationship (e.g., that the supplier must comply with all applicable labor law rules), as well as a passive one, meaning that they will be activated only once an active provision is not fulfilled (e.g., in the event that the supplier fails to implement a corrective action plan, the buyer has the right to terminate the contract). Some provisions may contain both active and passive aspects or transform from active to passive over time. An example of the latter could be the obligation to implement a corrective action plan in the event that any non-compliance is revealed during an audit. Until the audit, the provision has a passive character, while after the audit it becomes activated, and termination of the contract will be a corresponding passive provision. To sum up, since SCCs can have both an active and a passive character and that character can also change over time, this distinction does not help us to distinguish SCCs from other contractual provisions or understand them in the terms of the logic of the general categorization of the contractual clauses.

3.3.2

Placement within contractual text

Another distinction of clauses follows the logic of the contractual text. Although it is obvious that there is no one-size-fits-all supply agreement design that could be used for all types of industries, products, and jurisdictions,37 contracts still have some structural similarities. They will usually contain three parts: introductory provisions, the body of the contract, and final provisions.38 In relation to SCCs, we may firstly ask where they are placed within the contract. Secondly, we may ask what character SCCs have and accordingly

36 Henschel, supra note 32, p. 3. 37 Ibid., p. 364: “Contract structure should have some common legal elements for all contracts and solution-specific elements depending on what is being bought/sold”; see also Bridge, M. G., 2003, “Uniformity and Diversity in the Law of International Sale,” Pace International Law Review, 15(1), 55–89 (proposing that differences between various types of trade, e.g., commodity trade and the sale of goods for consumer use, should be regulated differently and the respective contracts should thus have different features). 38 Yeates, J. L., “Best Practice in Contract Drafting,” accessed at: www.gordonarata.com/720DE/assets/files/ lawarticles/Best%20Practice%20in%20Contract%20Drafting.pdf (last accessed 12/7/2014), pp. 3–6 (although that author regards the preamble and recitals as two separate parts of a contract, I am for present purposes subsuming both under the term “introductory provisions”; the author also subsumes miscellaneous provisions under the main body of a contract, whereas I regard them as final provisions).

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where they should be placed. Before answering these questions, the three parts of contractual texts are briefly introduced. Introductory provisions can consist of a preamble, stating the parties, the name of the contract, and a date of the contract’s execution, and recitals, covering a broad range of issues, for instance, the background to the agreement, an introduction of the parties, an overall purpose of the agreement, linkage to other agreements, or the important circumstances of the collaboration.39 In general terms, we may say that introductory provisions include information that is relevant to the whole contract and which forms an explanation of its framework in the broadest terms. Not all agreements have both preamble and recitals, and some will have neither of them. However, if they do, questions may arise as to the legal implications of the introductory provisions, including the recitals. In some jurisdictions, the legal effects of recitals may be contested.40 Fontaine and De Ly list various legal implications that recitals may have; among other things, recitals may serve as an interpretation aid to the contract, as grounds to estop inconsistent behavior of the parties with the circumstances and objectives underlying the contract or as a legal linkage to other documents or third parties.41 The body of the contract contains covenants on the rights and obligations of the parties focused around the subject matter of that contract; it is the operational part of the contract.42 In addition to the provisions establishing the parties’ rights and obligations in relation to the subject matter, the body of the contract often includes parties’ representations and warranties for which the parties may become responsible. Thus, the body of contract will generally contain a large number of highly varied provisions organized into articles or sections. Although the order of the provisions may not have any legal implications, common drafting practice suggests that the articles or sections should be placed in a logical sequence. Yeates lists five principles for drafting the body of contract:43 i. General provisions should be placed before special provisions. ii. More important provisions before provisions of lesser importance. iii. More frequently utilized provisions before less frequently utilized provisions. iv. Permanent provisions before temporary provisions. 39 Fontaine, M., De Ly, F., 2009, Drafting Commercial Contracts: An Analysis of Contract Clauses, Leiden, Boston: Martinus Nijhoff Publishers, pp. 63–79. 40 Yeates, supra note 38, p. 4 (expressing the view that the legal implications of recitals should be derived from the substance rather than the form of those provisions); Fontaine and De Ly, supra note 39, p. 89 (pointing out that English law and civil law ascribe different value to recitals as tools to interpret the agreement; while English law prefers to rely on the parties’ will as expressed in the operational part of the contract, civil law allows the use of recitals as guidance for interpretation). 41 For a comprehensive analysis, see Fontaine and De Ly, supra note 39, pp. 59–102. 42 Yeates, supra note 38, p. 4 (noting that the denomination of the body of a contract as the “operational part” may be misleading or imprecise, since all parts of contracts are important in determining the legal effects and obligations of the parties). 43 Yeates, supra note 38, p. 6.

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v. Miscellaneous provisions should be placed at the end of the body of the agreement. The placement of a provision may thus suggest how great a value parties assign to that provision, and it may therefore help in interpreting the contract and the parties’ intentions. What Yeates calls miscellaneous provisions, I consider as final provisions for the present classification.44 They will usually include rules of more organizational and formal character and rules on the use of the contract. They may include provisions on assignment of the contract, the type of legal relationship between the parties, the choice of governing law and forum selection clause, an entire agreement clause, contact information for any notice under the contract, or the effectiveness of the contract.45 I see the distinction between the body of contract and the final provisions in the relevance to the subject matter of a contract. While the provisions in the body of the contract have as their main focus to facilitate the transaction in question, to describe what each party is required to do in order to sell and buy the specific goods, the final provisions have as their main objective the functionality of the contract. Furthermore, the body of the contract will contain active and passive provisions, while the final provisions contain many clauses that cannot be classified into either of these categories. For instance, the provision on the effectiveness of the contract is obviously activated from the beginning; however, it does not demand any kind of effort or resources from the parties. 3.3.2.1 Case study To answer the questions outlined above, i.e., where are and where SCCs should be placed, I analyze the Verizon Australia Supply Agreement.46 For illustrative purposes, example no. 5 in section 3 presented only one provision of the Agreement. However, the Agreement touches upon CSR issues in several places: – Article 3.11 requires the supplier to provide Verizon with a list of all subcontractors used in relation to the contract or to seek Verizon’s consent to engage a specific subcontractor in relation to a specific purchase order. – Article 9.4 includes the supplier’s warranty of compliance with EU environmental law for the purpose of the use of the delivered products within the EU territory. – Article 14.2 requires the supplier to comply with Verizon’s Supplier Code of Conduct, which is thus incorporated by reference.

44 The final provisions are also commonly referred to as boilerplate clauses; for their analysis, see CorderoMoss, G. (ed.), 2011, Boilerplate clauses, international commercial contracts and the applicable law, Cambridge, New York: Cambridge University Press. 45 See, e.g., the TGB Sourcing agreement, pp. 13–14. 46 The agreement has been chosen because the full text is available, and it contains the most important and varied examples of SCCs. The text forms Annex No. 3.

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– Article 15.8 confirms the principle of privity of contract, meaning that no third party may be considered to be a beneficiary of the contract. – Article 17 covers the abovementioned compliance with the FCPA. First of all, although Article 9.4 covers environmental compliance, one of the focal themes of CSR, it does not fulfill the working definition of SCCs, since it is directly connected to the subject matter of the contract.47 It stipulates quality requirements for the delivered products that are to be used within the EU territory. If we assess the contract from the CISG perspective,48 the provision would be assessed as the use of goods for a particular purpose in line with Article 35 (2) (b): the use of goods in a specific location can be considered as a particular purpose,49 the seller is expressly made aware of the purpose by a written contractual provision, and it is made aware before signature of the contract.50 Given this, compliance with the provision is necessary in order to achieve the stipulated products’ quality conformity and thus falls outside the discussion in this book.51 The placement within the text corresponds to the character of the provision – it is placed among other conditions stipulating products’ quality in the body of the contract. The relevance of Article 3.11 to CSR is not straightforward. It may well be that in practice the article will not be used in the CSR context, but it does at least provide the possibility of it being used there. The article may serve as a means to avoid working with any subcontractor known for unethical behavior and thus can be used as a CSR reputation management tool. The placement of the provision at the beginning of the body of the contract signals that it sets out an important rule of cooperation between the parties regardless if used in the CSR or general context. It is a control tool of Verizon over the members of its supply chain. Article 15.8 is not self-evidently connected to CSR issues either, but it does nevertheless contain an important rule that third parties cannot enforce the contract and thus also cannot enforce the Supplier Code of Conduct, although it is they whose rights are the main focus of the CSR provisions. The same rule is once more repeated in the Preamble to the Supplier Code of Conduct, which states that “(t)he Verizon Supplier Code of Conduct is 47 This connection would even be stronger if Verizon were to request suppliers to present an environmental label or certification (e.g., ISO 14000). 48 The parties have actually opted out of CISG in Article 15.10 (governing law). However, for the purposes of this section, I disregard the choice of law and assess the contract from the international contract law perspective. 49 Henschel, R. F., 2005, Conformity of Goods in International Sales, Copenhagen: Forlaget Thomson, Sections 6.2 and 5.5.3.1 (discussing the decision of the German Federal Supreme Court of 8 March 1995 and concluding that the norms of the seller’s location constitute a reference for an ordinary purpose in the light of Article 35(2)(a) CISG). 50 For a detailed discussion, see Henschel, supra note 49, pp. 221–239. 51 For a detailed discussion on the remoteness from the subject matter of the contract, see infra subsection 7.2.3.

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not intended to create new or additional third party rights or obligations to third parties, including any rights of, or obligations to, employees of suppliers.” Such provision in essence sets limits to the legal liability of Verizon towards third parties and is a demonstration of the distinction drawn by companies between their social responsibility and legal liability.52 Since this provision contains rules relevant for the use and functionality of the whole contract and it does not stipulate any rights and obligations of the contractual parties, it seems correctly placed in the final provisions. Finally, Articles 14.2 and 17 are typical examples of SCCs; they are not crucial to the transaction or, more particularly, the delivered goods. They focus on public interests (although the implementation of these provisions could be driven by private risk management) and on long-term value creation (reputational management). Article 14.2 incorporates the Verizon Supplier Code of Conduct into the contract.53 The Supplier Code of Conduct consists of a preamble and six sections on selected CSR and ethical issues.54 The main focus is on business ethics, and environmental and social requirements are formulated in a very vague manner. In the Preamble, Verizon reserves the right to audit suppliers’ compliance with the Code, but no sanctions for non-compliance are stipulated. Article 17 contains anti-bribery rules. The article was described in detail in chapter 3. Articles 14.2 and 17, regulating the core CSR obligations of Verizon’s suppliers, are both to be found towards the end of the contractual text. However, they are slightly differently placed. While the obligation to comply with the Supplier Code of Conduct is placed just on the border between the body of contract and the final provisions, compliance with the FCPA is the penultimate provision of the contract. If we take into consideration the list of principles for drafting commercial contracts by Yeates, we could interpret the CSR provisions as being special (as opposed to general), less important, and less frequently used provisions. However, in reality this does not correspond to their functions and objectives. While it is true that Article 17 on FCPA compliance is clearly a special rather than a general provision, it is also important. Breach thereof may lead to immediate termination of the contract. Compliance therewith also requires certain resources on the part of the supplier, which would suggest that it should be classified as an active provision. For example, the supplier must educate its employees, directors, and other affiliated persons about the obligations under the FCPA. From this perspective, it would seem more logical to place the provision in the body of contract, possibly after Article 9.4 on compliance with the EU environmental laws in the section on warranties. In my opinion, the reason for its placement at the very end of the contract is the very specific nature of the provision and 52 See discussion on the sphere of influence infra subsection 6.2. 53 The Code of Conduct is accessible at: www.verizon.com/about/supplier_code_of_conduct.pdf (last accessed 12/7/2014). 54 Ethics and Standards of Conduct, Labor, Health and Safety, Environmental, Access to Verizon Premises and Non-Employee Verizon Identification, and Management System.

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the fact that there is no necessary link to the transaction itself. If the provision were to be excluded, the transaction would most probably happen in the same manner as without it. This is also supported by the fact that Verizon does not provide for any form of inspection of compliance. The placement of Article 14.2 on the obligation to comply with the Supplier Code of Conduct may seem appropriate. It is still in the body of contract, which corresponds to the fact that we speak of an active, highly special provision. However, we could equally argue that the provision is more general than special. It presents overall values that the business cooperation is based on. Thus, in theory it could have been placed in the Preamble instead. While this would seem logical, it could have a twofold implication for the legal effects of the provision. Firstly, the legal nature could be called into question. Secondly, it could imply that the provision would be used to interpret the rest of the contract, suppressing the economic objectives in favor of the social and environmental ones. Moreover, placement of the article in the introductory provisions would not fit with the active character of it. It is not merely a statement, but also a requirement to undertake specific activities. In the light of the above, it must be concluded that the placement of the CSR obligations within a contractual text can be a difficult task. It seems most logical to include these provisions with other parties’ warranties and towards the end of the body of contract. This placement matches the specific features of SCCs. In any event, I would advise contractual parties to closely consider the placement of SCCs, as it may indicate their purpose as well as influence the legal implications thereof.

3.3.3

Discussion

It seems that formalistic categories of contractual terms and their placement within the contractual text do not offer much guidance in distinguishing SCCs from other provisions. What the discussion above showed is, however, highly interesting. Sustainability clauses contain both active and passive provisions, and they are placed in various parts of contracts. An important observation is that if the sustainability provisions were cut out, the contract would still work without them. But what is more, taken alone they will often consist of a kind of contract within a contract: with introductory provisions, operational parts, and final, more managerial clauses. Taking the Verizon example, Article 14.2 by reference implements the Supplier Code of Conduct. The article alone could be seen as a set of introductory provisions to the sustainability obligations. The introductory provisions then continue in the Preamble to the Code and are followed by obligations in different CSR areas. The Code is concluded by provisions on the implementation of the Code at the managerial level. From this perspective, it becomes clearer that SCCs aim to protect different

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interests than those of the transaction in question and they have a different time frame.55 It also answers the question of why they are usually implemented by reference, i.e., it is simply because they often are a complete agreement on their own. Therefore, we may ask if their inclusion in supply agreements is the right approach or if they should be taken out and signed as a separate document.

55 A supply agreement will often be concluded for the long term, but the results of CSR requirements likely exceed any contractual term.

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Do sustainability clauses fit the contract paradigm?

Having established the meaning and characteristic features of SCCs, we have to ask how they fit into the traditional contract paradigm and its shifted versions in modern theories and whether they can be considered as an enforceable part of a contract under the mainstream contract theories. Do the specific features of disconnectedness from the subject matter of a contract, frequently used multi-level reference system, and relational enforcement make the provisions’ validity and enforceability questionable, or should they be treated like any other contractual clauses? This section does not intend to provide a comprehensive overview of contract theories or an analysis of SCCs under them.1 Instead it concentrates on selected mainstream theories only and aims to examine whether they provide a satisfactory theoretical background for assessing SCCs as a binding part of contracts.

4.1

General theories of contract

2

A theory is an explanation of a phenomenon. Thus, in order to develop a theory, there must be a clear subject which the theory aims to explain.3 A contract can be understood in different ways: as a promise, a mutual meeting of minds, a legal framework of an economic transaction, a business relationship, or just a signed piece of paper.4 What is common to all these different views of a contract is that a contract is binding and enforceable. Theories

1

2

3 4

For a critical overview of contract theories, see Benson, P., “Contract,” in Patterson, D. (ed.), 2010, A Companion to Philosophy of Law and Legal Theory, Wiley-Blackwell, 2nd edition, 29–63 (p. 29: noting that many scholars agree that a generally recognized theory of contract is missing nowadays). General theories of contract are understood here as theories explaining contract and contract law in their entirety, i.e., explaining all the main features of contracts and contract law, in contrast to theories which focus on explaining a specific feature of contract or contract law. Smith, S. A., 2004, Contract Theory, New York: Oxford University Press, pp. 41 et seq. Bix, B. H., 2006, “Contract Law Theory,” University of Minnesota, Legal Studies Research Paper Series, Research Paper No. 06-12, p. 2. For some definitions of contract, see, e.g., Kinsella, N. S., 2003, “A Libertarian Theory of Contract: Title Transfer, Binding Promises, and Inalienability,” Journal of Libertarian Studies, 17(2), 11–37, p. 12 (“A contract is a relation between two or more parties which includes legally enforceable obligations between them”); Gold, A. S, 2009, “A Property Theory of Contract”, Northwestern University Law Review, 103(1), 1–62, p. 19 (“Contracts can be seen as legally binding promises”); or a linguistic definition from the Merriam-Webster dictionary (“… a binding agreement between two or more persons or parties; especially: one legally enforceable”).

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of contract thus aim to explain what a contract is by providing a normative explanation of the binding force of contracts.5 Traditional contract law theories, concentrating on the interpretation of existing contract law rather than on the relationship or behavior of the contractual parties, see a contract as a promise, an agreement, or a title transfer.6 This section will assess how these theories – will theories, reliance theories, transfer theory, and law and economics – work with SCCs.

4.1.1

Will (promise) theories

One of the oldest perceptions of a contract is based on the moral imperative that promises should be kept.7 A promise may be defined as “… a statement by which one person commits to some future beneficial performance, or the beneficial withholding of a performance, in favor of another person.”8 Although most people would agree with the basic principle of contract law – pacta sunt servanda – the promise doctrine has to deal with several objections. One of the objections is that a moral norm is not the same as a legal one. Firstly, not everyone shares the same moral standards, but furthermore not all promises are or should be enforced by the state institutions.9 The promise theory itself fails to provide reasons why certain promises are contractual (binding) and others are not. It is thus up to the legal system to determine which promises must be protected.10 Therefore, under the promise doctrine of contract, the source of contracts’ binding power stems from the will of the promisor, which, however, must be supported by the normative authority of the legal sovereign.11 In specific cases, law allows for breach of promises that are normally protected. The exemptions from liability for non-performance typically include force majeure events12 and in the event of non-monetary obligation, impossibility, or sometimes impracticability of performance.13 The basic idea behind the liability exemptions is that a party should not 5 6 7 8 9 10 11 12 13

I focus here on interpretive theories, leaving aside historical, prescriptive, and descriptive theories. For the division between these types, see Smith, supra note 2, pp. 4–5. Hogg, M. A., 2011, “Contract Theory: Is There a Path Through the Theoretical Jungle?,” University of Edinburgh School of Law Working Paper No 2011/44, p. 2. See, e.g., Fried, C., 1981, Contract as promise, Cambridge, Massachusetts: Harvard University Press. Hogg, supra note 6, p. 6. For example, promises to God or promises the content of which is illegal are not to be enforced through law. Bix, supra note 3, p. 27. Hogg, supra note 6, p. 6. CISG, Article 79; UNIDROIT Principles, Article 7.1.7; PECL, Article 8.108. UNIDROIT Principles, Article 7.2.2 (“… Where a party who owes an obligation other than one to pay money does not perform, the other party may require performance, unless (a) performance is impossible in law or in fact; (b) performance or, where relevant, enforcement is unreasonably burdensome or expensive…”); PECL, Article 9.102 (“…Specific performance cannot, however, be obtained where: (a) performance would be unlawful or impossible; or (b) performance would cause the obligor unreasonable effort or expense…”) (emphasis added).

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bear responsibility if specific performance becomes impossible due to conditions that cannot be influenced by the party bearing the obligation. The event of force majeure will not occur frequently in relation to sustainability-related obligations, but both impossibility and impracticability seem relevant. Impracticability refers primarily to the extensive financial burden on the party bearing the obligation. If we look at a practical example, Clause 15.2 of GE Energy’s terms of purchase14 obliges the supplier to establish an effective program to ensure that any sub-supplier will comply with the whole Section 15 (“Compliance with laws”), which contains several SCCs. This provision basically extends the sustainability obligations throughout the whole supply chain. However, establishment of a process that would secure compliance of a whole supply chain is certainly extremely burdensome, financially as well as logistically, if not wholly impossible. There are many guidelines and recommendations available, but no secure way to maintain responsible behavior throughout global supply chains has been discovered yet. So should such an obligation fall under the liability exemption based on the principle of impossibility? Probably not. Although the performance is evidently impracticable or almost impossible, international instruments of contract law usually refer to ex post impracticability,15 meaning an impracticability that occurs after a contract is concluded and could not have been foreseen by the parties. In the case of sustainability clauses, the impracticability is known from the outset. But even if so, impracticability and impossibility do not nullify the contract, and therefore other remedies, including damages, would still be available to the buyer.16 Another objection to the promise doctrine is that a promise is a unilateral act, but contracts request mutuality. This critique has been addressed by the agreement doctrine, building on the will (promise) theory but understanding a contract as a mutual parties’ assent to the subject of a contract and its binding character. This mutual assent is sometimes referred to as a “meeting of minds”. According to various international contract law instruments, a mental meeting of minds is essential to the existence of a contract.17 The notion of a “meeting of minds” assumes that the parties have negotiated and agreed on the content of the contract. However, this approach is highly impractical nowadays when 14 See note 18 (chapter 3). 15 UNIDROIT Principles, Article 6.2.2 (hardship). 16 Bonell, M. J., 2006, Unidroit Principles in Practice: Caselaw and Bibliography on the Unidroit Principles of International Commercial Contracts, Martinus Nijhoff Publishers, Netherlands: Leiden, p. 365. 17 PECL, Article 2:101 (“A contract is concluded if: (a) the parties intend to be legally bound, and (b) they reach a sufficient agreement without any further requirement”); UNIDROIT Principles, Article 2.1.1 (“A contract may be concluded either by the acceptance of an offer or by conduct of the parties that is sufficient to show agreement”); Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law, 11.10.2011, COM(2011) 635 final (CESL), Article 2 (“…‘contract’ means an agreement intended to give rise to obligations or other legal effects”) (emphasis added). For criticism of an agreement or “meeting of minds” to be a precondition of a contract, see Cohen, M., 1933, “The Basis of Contract,” Harvard Law Review, 46(4), pp. 575 et seq.

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many contracts are concluded between parties with unbalanced negotiating power. It is commonly the case in international supply chains that buyers from developed countries in practice unilaterally impose contractual terms on their suppliers from developing countries. Therefore, a question arises whether the subjective or objective standpoint should be taken to evaluate the existence of a contract under the will theories. Will theories presuppose that in order to enforce a commitment, one’s will to be bound must be genuine. But will is an internal state of mind which is hard, if not impossible, to prove. Therefore, it is necessary to look for objective proof of one’s intention to be bound – most often a signature or behavior of the parties.18 Such an objective expression usually corresponds to internal will. But what happens in cases where it does not? Should the law seek to learn the true personal state of mind? This approach cannot be supported by the law, since it opens a possibility for the promisor to withdraw from the promise given by providing evidence that his will and its objective expression contradicted each other, which could lead to great legal uncertainty and undermine the usefulness of contracts and contract law as such. Therefore, the objective view of the promisor’s will has prevailed.19 However, as noted by some authors, an objective manifestation of will can be overruled by a subjective meaning of assent. This may happen in situations where the “promisee (buyer) has an access to the subjective or actual understanding of the promisor (seller).”20 Then the promisee should not rely on the objective manifestation, i.e., the actual text of the contract. Let me again consider the theory in relation to the practical examples introduced in Chapter 3. HP’s CSR Agreement provides for cooperation of the parties in social and environmental areas. The agreement refers to two internal documents – the Code of Conduct and the General Specification for the Environment – containing both generic and specific requirements, which form an integral part of all HP’s supply agreements. HP’s CSR Agreement stipulates that the parties agree to collaborate in order to achieve the goals of the two internal documents; therefore, it basically softens the requirements. Just by accepting that the parties shall collaborate to achieve the goals in future means that they assume that there may be breaches or non-compliance along the way during the specific supply agreement’s term. This is further supported by the agreed process when a breach is discovered, i.e., a corrective action plan. This all means that each supply agreement actually allows for a certain degree of non-compliance with the Code of Conduct and the General Specification for the Environment. We could thus conclude that HP knows at the time of conclusion of each supply agreement that the supplier promises something he will 18 Hogg, supra note 6, p.10. See also Barnett, R. E., 1986, “A Consent Theory of Contract,” Columbia Law Review, 86(2), 269–321. From legislative texts, see, e.g., CISG, Article 18(1) (“A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance…”). 19 Barnett, R. E., 2011, “Contract is Not Promise; Contract is Consent,” Suffolk University Law Review (forthcoming), Georgetown Public Law Research Paper No. 11–29, available through www.ssrn.com (in this article, Barnett summarizes his theory of a contract as a form of consent). 20 Ibid., p. 6.

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breach (compliance with HP’s internal documents) and, therefore, that the objective manifestation of the promise (signing the supply agreement) is in contradiction with the subjective understanding of the supplier. This could then mean that a court should interpret the interconnected documents (individual supply agreement, HP’s CSR Agreement, Code of Conduct, and General Specification for the Environment) as a promise to collaborate only, leaving aside compliance with the generic and specific requirements of the internal documents. In this context, we may further consider the following scenario. A buyer includes an absolute ban on child labor with the possibility of immediate termination of the contract if a breach is discovered (similar to GE’s General Terms and Conditions) in all its supply agreements. The buyer has been contracting for several years with the same supplier and always included this provision in their mutual contracts. The buyer has also been aware of repeated non-compliance by the supplier but has never terminated a contract based on this awareness. However, suddenly the buyer is accused in the media of using child labor and thus wants to terminate the contract with the supplier immediately. The question is whether, based on the will theories, the provision banning child labor factually forms a part of the agreement/promise. Objectively probably yes, although an objective analysis could also lead to the conclusion that the parties have waived the right to enforce the provision; subjectively no, since the common understanding of the parties was to not enforce this provision. Should the court in such a case take the approach of the will theories to enforce the objective manifestation or the subjective meeting of minds?21 Finally, the will theories face the critique that they cannot explain all aspects of contracts, namely, implied terms and gap-filling rules, which are imposed by legislators or courts. As stated above, underlying the will theories is the notion that a contract is only what is promised or agreed between the parties. However, this may be problematic in the event that the parties leave some gaps in their agreement or they do not sufficiently specify the terms of the contract.22 How can the provision from Pressalit’s General Terms that the UN Global Compact should be observed be interpreted using the will theories? According to the will theories, the court does not have the right to fill in a gap. So, what is the actual content of the promise if the principles of the UN Global Compact are rather vague? If the court applied the will theories of contract, the obligation to observe the UN Global Compact would be unenforceable due to the lack of specificity.23

21 This question is partly answered in laws on implied contractual terms based on the practice established between the parties, which the court would also have to consider. An example from a legislative text is, e.g., CISG, Article 9(1) (“The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves”). For further discussion on this topic, see infra subsection 7.1.2. 22 Barnett, supra note 19, p. 7. 23 For further discussion on specificity of language, see infra subsection 7.2.4.

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Based on the above, it is possible to conclude that the will theories (promise and agreement theory) do not help to establish all sustainability clauses as enforceable parts of contracts. SCCs regularly raise all the typical problems connected with these theories. To sum up, even though the promise to behave in a sustainable way is unequivocal from a moral point of view, the question is whether the law supports it as well, dealing with the problem of impossibility or impracticability of performance. Further, taking the objective manifestation of will as decisive may be problematic owing to the numerous demonstrations of the parties’ subjective understanding that the promise will be breached and the contract law sanctions not used. Finally, as a result of the fact that there is usually a considerable level of vagueness in the text of the sustainability clauses, the will theories may not be able to define what the content of the promise or agreement actually is. Therefore, it seems that only highly specific provisions, which are supported by adequate sanctions and systematically enforced, may justify classification of SCCs as part of a contract under the will doctrine.

4.1.2

Reliance theories

Contrary to will theories, reliance theories do not focus on the promisor but on the other contractual party: the promisee. They posit that the binding force of a contract stems from the reliance of a promisee on the promise made.24 Accordingly, only promises, which induce the belief that they will be fulfilled, should be enforced. However, personal reliance may not be justifiable in every case: misunderstandings may occur. For example, what one party means only as a pre-contractual negotiation, the other may already understand as a firm offer and act upon it. One must ask in each situation whether an act of reliance was reasonable, i.e., whether an ordinary person would do the same. Such an objective test once again undermines the parties’ legal certainty and means that reliance theories stand on the same shaky subjective/objective ground as the will theories. The same examples may actually be used for both theories.25 If we look at HP’s example from the promisee’s standpoint, signing HP’s CSR Agreement obliges the parties to cooperate in order to achieve the given goals but does not actually require them to comply with the goals. As described above, there is effectively a certain level of non-compliance expected during the process. Similarly to the case with regard to will theories, where the question is whether the objective or subjective promise should be decisive, under reliance theories, the question is whether HP can claim the sustainability requirements to be part of the contract based on its reliance on the promise, when it knew from the beginning that the supplier would breach it and, therefore, the reliance could be classified 24 Barnett, supra note 18, p. 274. 25 For the full description of the examples, see supra chapter 3.

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as unreasonable. The same logic applies to the child labor example. If the parties have repeatedly breached and tolerated the breach of a specific clause, then the promisee ought not to be able to maintain a justifiable reliance on the promise. The above suggests that reliance theories do not offer a convincing explanation of contractual binding force and, therefore, also cannot determine whether sustainability requirements are enforceable parts of contracts or not. Nevertheless, reliance theories can provide grounds for liability claims and help to establish the right to damages.26

4.1.3

Transfer theories

Another well-established theory of contract is based on a transfer of rights (or property) from one party to the other. The theory presupposes the existence of the transferred rights before a contract is concluded.27 Although it forms a good explanation of the main subject of contracts concluded in international supply chains – sale of goods – the theory fails to provide normative grounds for all contractual obligations. What right would be transferred in relation to sustainability provisions, for example?28 If we once again take Pressalit’s General Terms as an example here, we can see that the provision stating that the UN Global Compact should be observed does not comprise any particular right. Nor can the provision be classified as a condition for the main subject of the contract – the transfer of title to goods – because the obligation is not absolute: it is merely a kind of recommendation. Some authors, however, claim that a transfer of rights is included in all contracts, if not directly then as a consequence of a breach (right to damages).29 But this ought to mean that it would then be possible to calculate the amount of damages or, we should perhaps say, that damages are available for breach of contract, namely, that the breach was foreseeable and that there is a causal relationship between the actions of the breaching party and the damage caused.30 Both these conditions may be problematic in relation to sustainability clauses, where damage/loss is often of a reputational nature and, moreover, usually not factual but only potential.31 To summarize the foregoing, the theory of contract based on transfer of rights does not support the character of SCCs as enforceable parts of business contracts either, due to 26 27 28 29 30

For further discussion, see infra subsection 7.3.1. Hogg, supra note 6, p. 15. Similarly, this theory cannot explain most service agreements. Ibid. Kinsella, supra note 4, p. 14. CISG, Article 74 (“Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract”) (emphasis added). 31 For further discussion on the issue of damages in relation to SCCs, see infra subsection 7.4.2.3.

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the lack of property rights involved, the inherent vagueness of SCCs, and the complex applicability of monetary remedies in the event of breach.

4.1.4

Law and economics

The existence and content of contracts have also been examined by law and economics scholars, who, however, do not provide an answer to the question of which commitments should be enforced and which should not, but rather offer a normative basis for contract law.32 In theory, therefore, to consider the law and economics approach in the same context as the will, reliance, and transfer theories is not strictly speaking accurate. However, in my opinion, the law and economics approach to contracts can be now classified as a traditional theoretical approach. The law and economics theory describes a contract as an “expression of efforts to maximize individual and social gains from trade.”33 As discussed above, it is a feature of SCCs that they do not aim to maximize the parties’ profits. Furthermore, although they may maximize social gains, it is difficult to establish that with certainty, because not only it is hard to quantify social gains but also the maximization will only occur in the event of full compliance with or enforcement of the clauses. If we consider Pressalit’s General Terms in this context, we should ask how the provision “Pressalit’s policies” contributes to the maximization of gains. From the individual perspective, the economic benefits of implementing such a clause are not obvious. It could be claimed that they can only be recognized from a long-term perspective, but the direct link between implementing sustainability requirements into contracts and positive long-term economic performance has not yet been proven with certainty.34 From the societal perspective, it is certainly positive that Pressalit includes such a clause in its contracts, but the actual social gains will only be achieved when the company is able to secure the compliance of its business partners. The latter appears to be hard to achieve, especially when the wording is vague and no specific sanctions are laid down. Overall, the Pressalit’s General Terms do not seem to maximize either the private or the public interests. Therefore, it appears that the inclusion of the SCC into the contract cannot be explained by the law and economics theory. Furthermore, the law and economics theory of contract faces the criticism that it leaves out many stakeholders, such as judges or third-party beneficiaries, as well as the moral

32 Barnett, supra note 18, pp. 278–279. 33 Bix, supra note 3, p. 10. 34 However, there are some studies showing that the level of general sustainability performance influences the economic performance of firms. See, e.g., Konar, S., Cohen, M. A., 2001, “Does the Market Value Environmental Performance?,” Review of Economics and Statistics, 83(2), 281–289 (finding that “poor environmental performance has a significant negative effect on the intangible-asset value of publicly traded firms”).

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foundations (pacta sunt servanda).35 Both these issues are of core importance to SCCs. External stakeholders have a strong influence on sustainability conditions in contractual relations: they are the driver both of implementation and the use of any enforcement powers. The same applies to the moral foundations of contract: due to the complicated formal enforcement of SCCs, the contractual parties rely to a large extent on the underlying moral imperative. Therefore, without considering all the relevant stakeholders and the moral foundations, we cannot grasp the complex theoretical basis. Finally, due to the specific characteristics of sustainability clauses, some core concepts of the law and economics theory are not viable in this context, such as the concept of efficient breach of contract. The idea that parties not only can but should breach a contract where they will be better off is inappropriate in the case of environmental and social provisions, where public interests are at stake and where a breach will most often not mean direct damage to either of the contractual parties, but to a third, independent party.36

4.2

Contract paradigm shift and modern contract law theories

Based on the above, we can conclude that none of the general theories of contract is suitable to determine SCCs to be an enforceable part of contracts.37 The contract paradigm based on these theories has, however, undergone several changes, and new theories have evolved. Some of them have become well established, while some of them have not gained broader application. This section examines whether these shifts could be seen as more inclusive regarding sustainability requirements than the general contract theories.

4.2.1

Relational contracts

Firstly, contracts have become more relational, meaning that their content is focused on governing the parties’ behavior and their mutual relationship rather than on specifying the exact conditions of the transaction and securing the parties’ interests in the event of contractual breach. This shift has been described in a widely recognized relational contract

35 Ibid., p. 11. 36 On differences between contractual and regulatory breach, see Ostas, D. T., 2004, “Cooperate, Comply, Or Evade? A Corporate Executive’s Social Responsibilities with Regard to Law,” American Business Law Journal, 41(4), 559–594, p 574. 37 This may be a consequence, as some authors argue, of the fact that commercial practices change more rapidly than contract theories, which may render them out of date and unable to capture the business reality; see, e.g., Diathesopoulos, M., 2010, “Relational contract theory and management contracts: A paradigm for the application of the Theory of the Norms,” Lancaster University Law School Research Papers, 1–125, p. 9.

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Sustainability Clauses in International Business Contracts theory introduced by Ian R. Macneil.38 Under the relational contract theory, a contract is not seen as a formalized agreement but instead as an overall framework of an economic exchange and a commitment to the relationship and common goals of the parties. Such commitment entails undertaking to respect “the norms necessary to maintain the health of that relation.”39 A relational contract is to a large extent self-enforcing, meaning that in the event of non-compliance parties, it will concentrate more on how to remedy the situation in order to reach the common goal rather than on applying sanctions or terminating the relationship.40 The relational contract theory can, thus, provide a good explanation of contractual provisions such as SCCs. It explains the disconnection from the specific performance by factoring in the broader socio-economic context of the transaction and by stipulating the common moral values of the contractual parties. It also explains the low number of cases brought to court. If a breach of a sustainability clause is discovered, the typical remedies (termination of contract, damages, and specific performance) will rarely be used. The situation will often be solved using relational contractual tools (e.g., audits, plans of action, self-assessment, educational programs), because the purpose is to secure social and environmental standards and not to terminate existing business relationships.41 A typical example of relational contracting can be observed for instance on the part of the LEGO Group. Their Code of Conduct, forming an integral part of all business agreements concluded by the group, provides the following: “If an on-site inspection reveals non-compliance with this Code of Conduct the LEGO Group will enter into a constructive dialogue with the vendor in question in order to improve conditions. The LEGO Group will

38 Macneil, I. R., 1980, The new social contract: an inquiry into modern contractual relations, New Haven: Yale University Press. In addition to Macneil, Stewart Macaulay has contributed extensively to development of the theory. 39 Gudel, P. J., 1998, “Relational Contract Theory and the Concept of Exchange,” Buffalo Law Review, (46)3, 763–798, p. 786 (referring to norms of relational contract developed by Macneil, i.e., role integrity, reciprocity, implementation of planning, effectuation of consent, flexibility, contractual solidarity, protection of restitution, reliance and expectation interests, creation and restraint of power, propriety of means, and harmonization with the social matrix; Gudel, p. 782, sees these norms as “generated by the contractual relation itself and related to the relation in a functional way…”). 40 Harms, D., Hansen, E. G., Schaltegger, S. (forthcoming), “Strategies in Sustainable Supply Chain Management. An Empirical Investigation of Large German Companies,” Corporate Social Responsibility and Environmental Management, p. 20, available through ssrn.com at http://papers.ssrn. com/sol3/papers.cfm?abstract_id=2046934 (last accessed 12/7/2014) (“In terms of sustainable development, supplier development seems to be preferable to the termination of supplier contracts because if suppliers are developed instead of being listed out, the local economic, social, and environmental conditions at the production sites of the suppliers can be improved. In case of the termination of a supplier relationship the conditions and practices may remain unchanged as the suppliers neither have incentives nor financial resources to change”); for literature describing non-use of formal remedies by parties to relational contracts, see Adar, Y., Gelbard, M., 2011, “The Role of Remedies in The Relational Theory of Contract-A Preliminary Inquiry,” European Review of Contract Law, 7(3), 399–424, FN 8. 41 See further discussion on remedies infra subsection 7.4.2.

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request adequate action plans to correct issues of non-compliance and will undertake followup inspections to verify that improvements are made.”42 As LEGO says on their website, they “…engage in proactive cooperation and capacity building of our suppliers to promote sustainable supply chains.”43 From the wording of the corporate documents, it is evident that the LEGO Group lays emphasis on cooperation for achieving positive change rather than strict compliance. According to the LEGO Progress Report 2011, 98% of major nonconformities of suppliers with the Code of Conduct, i.e., breaches of sustainability provisions in LEGO Group’s business contracts, were solved via the action plan technique without the necessity to open a formal dispute resolution proceeding.44 The principal goal of the contract is thus to agree on ethical values when conducting business and to work together to achieve and sustain such values rather than only to strive for the economic efficiency of a discrete transaction. Based on the above, we may say that SCCs are a typical example of relational contract provisions, which traditional theories struggle to capture. SCCs even push the relational notion of contract further, implementing norms that are not related to the relationship between the parties but which aim to protect the interests of other subjects as well. In this sense, SCCs move relational contracts towards behavioral regulatory tools,45 meaning that they straddle the thin line between bilateral agreements and regulation.46

4.2.2

Hybridization of contracts

Secondly, there are now an increasing number of contracts resembling different forms of organization rather than agreements between two (or more) independent parties. This shift is the result of optimizing the financing and risk management of business structures within the current companies and contractual network- and chain-driven economy.47 It is important to note here that a contractual network is not a legal concept, at least in most

42 The LEGO Group Code of Conduct, Version 4.0, p. 5 (emphasis added) http://cache.lego.com/downloads/info/Codeofconduct/CODEOFCONDUCT_English.pdf (last accessed 12/7/2014). 43 Ibid. 44 LEGO Progress Report 2011, p. 38. 45 For general discussion on behavioral consideration in regulatory processes, see Vandenbergh, M. P., Carrico, A. R., Bressman, L. S., 2011, “Regulation in the Behavioral Era,” Minnesota Law Review, 95(3), 715–781. 46 See subsection 4.2.3. 47 See, e.g., Geis, S. G., 2009, “The Space Between Markets and Hierarchies,” Virginia Law Review, 95(1), 99–153, pp. 101–102. For more on contractual networks as a hybrid form between markets and organizations, see (from the vast literature), e.g., Powell, W. W., 1990, “Neither Market Nor Hierarchy: Network Forms of Organization,” Research In Organizational Behavior, 12, 295–336; Teubner, G., Collins, H., 2011, Networks as Connected Contracts, Oxford and Portland, Oregon: Hart Publishing Ltd.; Cafaggi, F. (ed.), 2011, Contractual Networks, Inter-firm Cooperation and Economic Growth, Edward Elgar, UK: Cheltenham; Campbell, D., Collins, H., Wightman, J., 2003, Implicit Dimensions of Contract: Discrete Relational and Networks Contracts, Oxford: Hart Publishing.

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Sustainability Clauses in International Business Contracts jurisdictions.48 However, the legal scholarship recognizes that this kind of relationship on the border between discrete market transactions and formal organizational structures has a special position within the regulatory environment. Various types of organizational contracting range from joint ventures through franchise agreements to long-term supply contracts.49 Business control without an ownership relationship can be a beneficial arrangement, especially when a company has a broad suppliers’ network in multiple countries or when it seeks limitation of liability. The organizational function of contracts is typical for supply chains with an economically strong, Western-based focal company and its suppliers from other usually developing countries. It was already pointed out a long time ago that standardized contracts used throughout the whole supply chain help to build up and strengthen industrial empires.50 An example of such a standardized contract may be a suppliers’ code of conduct developed by the focal company, which spreads up the supply chain by means of bilateral agreements. In this way, SCCs serve not only as regulation of bilateral transactions but also as coordination and control tool among businesses, which, however, maintain their autonomous legal personalities. However, a question then arises: i.e., how is liability to be distributed between the parties, based on the power balance? If the buyer unilaterally prescribes conditions of cooperation and reserves the right to conduct unexpected audits of the seller’s premises, including all documents, does the relationship now move from an arm’s-length transaction to closer cooperation, resembling a joint venture or a parent company-subsidiary relationship?51 And should the focal company not be then responsible for controlling the performance of its direct suppliers or maybe even the whole supply chain? When speaking about organizational contracting, it is not only chains of bilateral agreements which should be mentioned but also initiatives and organizations based on corporate membership that have the aim of reaching a common objective. This kind of organization is common within the CSR area, without being labeled “contracting” and maybe without anyone even truly appreciating that some commitments can be classified as contractual and the whole organization as a multilateral contract. The Business Social Compliance Initiative (BSCI) may serve as an example.52 Companies that become members of the BSCI have to sign the Declaration of Liability Regarding Compliance with the BSCI 48 Teubner, Collins, supra note 47, p. 73. An exception may be found, for example, in Italy, where the concept was established in 2009 under the Small Business Act, Italian law of 9 April 2009, N. 33, Co. 4-ter. See also Ferrari, C., 2010, “The Italian “Network Contract”: A New Tool for the Growth of Enterprises within the Framework of the ‘Small Business Act’?,” The Columbia Journal of European Law, 16, 77–83. 49 Geis, note 123 (chapter 2), p. 247. 50 Kessler, F., 1943, “Contracts of Adhesion – Some Thoughts About Freedom of Contract,” Columbia Law Review, 43(5), 629–642, p. 632. 51 According to an empirical study conducted by Geis, 75% of outsourcing contracts include clauses on client monitoring. See Geis, note 123 (chapter 2), p. 272. (NB the study was based on contracts available in the SEC, which, therefore, may therefore raise several biases). 52 www.bsci-intl.org (last accessed 12/7/2014).

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Code of Conduct, under which they undertake among other things to adhere to the BSCI Code of Conduct and to ensure that their subcontractors comply as well.53 They further state that they understand consequences of breaching this statement. Although the document is labeled as a unilateral “declaration”, the content suggests that there is a contractual commitment, as it entails an exchange of performance: the participating company complies with the standards of the Initiative, ensures that its subcontractors apply those standards, and pays a membership fee; the Initiative provides for auditing services and support in implementing the standards, as well as the possibility for the company to state that it is a member of the BSCI, thereby giving the information (similar to a quality label) that it fulfills the BSCI’s CSR standards. We could thus see the cooperation as a multilateral private contract with the possibility of the members to enforce the contract on each other. However, this is not the case in practice. In case of non-compliance, a member can be merely excluded from the Initiative.54 In summary, contracting with the objective to organize several independent subjects either in the industry or in the same supply chain is commonly used for CSR purposes. It thus seems that in the CSR area, companies try to take the advantages of both insourcing and outsourcing. The question that then arises is: where are the limits between a company and a contract?55 Would it be appropriate here to extend the traditional legal notion of company closer to the economic perspective, i.e., to extend the perception of a company based on its ownership and factual control over other legally separate entities?56 Although these questions are extremely interesting, answering them goes beyond the scope of this book. Therefore, these issues are merely acknowledged here but are not included in the further analysis.

4.2.3

Regulatory contracts

Finally, contracts are increasingly used for regulatory objectives.57 They respond to market and regulatory failures by means of standardization and/or forming new hybrid regulation on the border between the law and social norms.58 One of the consequences of contractual 53 Available at http://bsci-intl.org/resources (last accessed 12/7/2014). 54 See more details on BSCI infra subsection 6.2.8. 55 The question why companies arise in market-based economies was famously posed and answered (due to transaction costs) by Coase, R. H., 1937, “The nature of the firm,” Economica, 4, 386–405. 56 See, e.g., Iacobucci, E. M., Triantis, G. G., 2007, “Economic and Legal Boundaries of Firms,” Virginia Law Review, 93(3), 515–570; Holden, R., Malani, A., 2012, “Contracts versus Assets and the Boundary of the Firm,” working paper, available at http://ssrn.com/abstract=1990550 (last accessed 12/7/2014) (summarizing various theories). 57 See, e.g., Collins, note 91 (chapter 2); Cafaggi, F., Muir–Watt, H., 2008, Making European Private Law: Governance Design, Edward Elgar, UK: Cheltenham, p. 2; Cafaggi, note 48 (chapter 2), p. 3. 58 Callies and Renner, note 42 (chapter 2), p. 271 (examining the interface between law and social norms in relation to the example of lex mercatoria, the Uniform Domain Name Dispute Resolution Policy, and CSR).

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regulation is the creation of new industrial and business standards. In future, those standards may be looked at by courts when searching and arguing for an existence of a trade usage.59 Generally, we may claim that legislative failures allow for the regulatory effects of SCCs.60 Regulatory contracts (or, as Vandenberg describes them, “second-order agreements”) may be used by companies to avoid the adoption of new legislation or, on the contrary, to remedy a lack, softness, or unsuitability of existing legislation.61 Inclusion of social and environmental issues in business contracts and other documents, such as codes of conducts or CSR reports, may lull governments and the public into a false sense of security that the problems have been dealt with and no further regulation is needed.62 On the other hand, it would be wrong to assign only evasive motives to SCCs. In other situations, contracts are the result of weak governmental protection of social and environmental concerns and to a certain extent substitute or coexist with national legislation. Substitution of the state by contractual regulation often emerges in developing countries where the national government does not provide sufficient protection for CSR issues. The coexistence of the state and contractual regulation appears in many different forms: for example, contracts may detail general statutory provisions, complement them in places where they are insufficient, or make soft state regulation binding. Contractual regulation is not only driven by various motives but takes various forms. Scott recognizes two types of regulatory contracts: “individual contractual regulation” and “collective contractual self-regulation.”63 “Individual contractual regulation” refers to bilateral contracts under which one party unilaterally imposes on the other certain standards or when standards developed (and possibly also monitored and enforced) by a third party are incorporated into a bilateral contract by reference. The term “collective contractual self-regulation” is used by Scott to describe associations of subjects organized under a contract to achieve a common goal; this type of contracting overlaps with the abovementioned organizational contracting. The resemblance between contractual and public regulation is observable, for example, from the sanctions: contract termination or the threat of expulsion from the multilateral contractual association is reminiscent of revocation of an operation license. Both result in a loss of business.64 59 For further analysis of this argument, see infra subsection 7.1.2. 60 “Failures” are here used in order to describe inefficient regulation as well as a lack of regulation, whether this is caused by inability of regulators to agree on the rules or by the regulators’ negligence, indifference, or inadequate knowledge. 61 Vandenbergh, note 97 (chapter 1), pp. 2059–2060. 62 Reich, R. B., 2008, “The Case Against Corporate Social Responsibility,” Goldman School of Public Policy Working Paper No. GSPP08-003 (showing the involvement of enterprises in lobbying against adoption of new regulation within the CSR area). 63 Scott, C., “Self-Regulation and the Meta-Regulatory State,” in Cafaggi, F. (ed.), 2006, Reframing Self-Regulation in European Private Law, The Netherlands: Kluwer Law International, Chapter 4, p. 134. 64 Scott, C., “Regulating private legislation,” in Cafaggi and Muir-Watt, supra note 57, p. 258.

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It should be noted here that the idea of contracts having regulatory effects is not new. It has been argued that freedom of contract, a leading principle of contract law, causes decentralization of the legislative function where strong companies have the power to impose contractual terms and conditions on their weaker partners. Already in 1943, Kessler wrote: “Freedom of contract enables enterprises to legislate by contract and, what is even more important, to legislate in a substantially authoritarian manner without using the appearance of authoritarian forms.”65 Such a power imbalance is characteristic of international supply chains, especially if the sourcing company is based in a developed and the selling company in a developing country. The regulatory effects of contracts are well known. However, due to the lack of public regulation, they are more obvious in the CSR area than in relation to other issues. The task for research now is to assess what the position of regulatory contracts in the multifaceted regulatory environment of CSR is.

4.3

Conclusion on contract theories

Based on the above, it seems that general theories of contract do not provide a sufficient theoretical basis for analyzing SCCs. They provide only partial explanations of contract and appear as failing when confronted with the typical features of SCCs. However, this does not mean that they do not serve any purpose. The traditional theories still form the basis of current contract law and as such determine what the main purposes of contract law are: keeping promises, protection of reasonable reliance, and exchange efficiency. Unless contract law becomes changed based on the modern theories of contract, the traditional theories constitute the framework in which SCCs’ legal effects are assessed. The three discussed changes in understanding business contracts are all highly relevant for the studied topic. As described, business contracts, next to the traditional function of an exchange of mutual enforceable promises, take on other roles: the roles of relational tool, organizational structure, and regulatory means. We may observe one or more of the shifts in a number of international business contracts. But it is in CSR that all of them are present in one single contract or in specific contractual provisions. As a more general comment, we may say that by using SCCs, the discreteness of contracts recedes into the background, opening up room for relational, organizational, and regulatory effects. As it was argued by Zumbansen, this leads to de-legalization of contracts, while contractual

65 Kessler, supra note 50, p. 640.

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66 Zumbansen, note 1 (chapter 1), p. 185.

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Literature review

Chapter 4 showed SCCs through the lenses of traditional theories of contract as well as through the perspective of three shifts in the contract paradigm that are increasingly important in transnational contracting. Chapter 5 reviews legal scholarship on SCCs to see if and eventually how the authors applied the theories and to identify any gaps in the current literature. Legal scholarship that focuses on the use of private contracting for sustainability objectives is scarce. The literature that does exist clearly struggles with the complexity of the issues, as well as the fact that the connection between the law and CSR is still doubted by those who see CSR in purely voluntary terms.1 The two problems may interestingly lead to contradictory solutions when writing on this topic. The complexity can be handled by the choice of one specific perspective to look into the topic, such as contract law, public regulation, or the corporate governance perspective. A positive side to this approach is that such a piece is specialized and cohesive and the author can maintain coherence and operate within his or her expertise. The negative side is that exclusion of other perspectives from the analysis may take the issue out of its context and expose the conclusions to the risk of being irrelevant or even wrong. The second problem – the uncertain legal basis of CSR – may on the contrary be overcome by connecting legal considerations to other aspects of SCCs, for instance, management or accounting. Legal scholars often claim that all the different aspects are embedded in a legal system: that they exist against the background of the law. Therefore, these writers try to put the legal side of CSR into its full context, which means that they cover perspectives other than legal ones. This approach usually shows a more realistic picture of sustainability clauses in private contracts but may also lead the authors into excessively intricate elaborations, sometimes comprising issues out of the specialization of an author or drifting too far from a legal research. Therefore, it proves to be a very demanding and complicated task to balance the necessity for a specialized approach and the effort to grasp the complexity of the topic. The existing literature thus varies to a great extent. When doing a literature review on SCCs, one faces multiple difficulties, which stem from the abovementioned points. It is challenging to find all relevant writings when the literature is scarce and scattered. The writings often do not even refer to each other, despite being published within only a few years of each other. The tension between the complexity and specialization, particularly in the case of the legal scholarship striving to capture the whole context of the topic, also means that the scholarship is distributed across publications

1

See supra subsection 1.3.1.

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from many legal areas (including contract law, company law, commercial law, international law, transnational law, socio-legal studies, and legal theory) as well as non-legal areas (including management, accounting, supply chain studies, business ethics, corporate governance, and political science). Moreover, contracts are frequently seen as a tool for other more central objectives. It is not uncommon that a piece of writing deals, for example, with transnational private CSR initiatives and marginally mentions contracts as a solution to their voluntary and non-binding character, however without following through the idea or providing analysis of why that is so.2 Should such literature be taken into account? On contrary, some articles appear to deal with highly specific issues without an obvious connection to contract law, such as climate change, but in fact are focused on governance through contracts.3 Given the foregoing, a thorough search of databases has to be performed, and a careful line delimitating which literature will be taken into consideration and which left out must be drawn and strictly adhered to. Keeping that in mind, this section is based on a review of the legal scholarship (journal articles and books), addressing specifically the role of international private contracts within CSR as the main topic. Interest in the governance of CSR issues through private contracts has mirrored the economic growth of enterprises.4 Emerging during the 1990s, this trend accelerated after 2005 following the extensive publication of sustainability strategies and codes of conduct of leading multinational enterprises, such as Wal-Mart, Inc. (hereinafter referred to by its brand name Walmart). The writings referred to herein represent the major thoughts on the matter that have been developed since 2005, when sustainability clauses in business contracts started to appear more often as a separate topic in legal scholarship. The objective of this review is to introduce thoughts, theories, and approaches forming building blocks of the further analysis, but not to give a comprehensive overview of all the relevant literature. Papers containing an analysis of contract law or contracts in CSR only as a marginal issue or mainly from perspectives other than the legal one or geographically limited case study papers are not included in this literature review, but are referred to as the results of a broader literature review throughout this book via citations of relevant literature where appropriate.

2

3 4

See, e.g., Cronstedt, C., “Some Legal Dimensions of Corporate Codes of Conduct,” in Brennan, D., et al. (ed. Mullerat, R.), 2011, Corporate social responsibility; the corporate governance of the 21st century, 2nd edition, The Netherlands: Wolters Kluwer International (discussing the objective of codes of conducts to influence the behavior of suppliers; he suggests that this objective may be achieved by inclusion of a code of conduct in a supply contract, but does not follow this idea through in further analysis); O’Rourke, D., “Outsourcing regulation: Analyzing nongovernmental systems of labor standards and monitoring,” Policy Studies Journal, 31(1), 1–29. An example is Vandenbergh and Cohen, note 120 (chapter 1) (the authors focus on climate change regulation, especially transparency requirements, labeling, and supply chain contracts). Mayer and Gereffi, note 112 (chapter 1), p. 5.

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5.1

Literature review

Overview of fundamental literature

There are various possible methods of systematizing the literature on SCCs: for instance, classifying the literature into theoretical and empirical research, a timeline approach, or a content-based approach. I have chosen the third one as it best shows the various features and functions of SCCs.

5.1.1

Legal and contractual aspects of codes of conduct

Contracts were not the first legal area to be discussed in relation to the ethics of corporate behavior. A link between contract law and CSR arose when the legal effects of corporate codes of conduct, voluntarily self-imposed rules of corporate behavior, started to be questioned. Such questioning was based on public criticism that such rules were being used for marketing purposes only, without checking or enforcing compliance.5 In order to close this gap, legal scholars started to look into possible binding aspects of codes of conduct. Sobczak sees two possible consequences in national law.6 He discusses firstly usage of codes of conduct by judges to interpret vague laws and, secondly, enforcement of codes of conduct if they are precise and directed to the general public by means of advertising law.7 A more direct link to contracts, namely, the question of whether codes of conduct can create contractual obligations, was tested in the Walmart case.8 This class action brought by the International Labor Rights Fund against Walmart, claimed that Walmart’s Suppliers Code of Conduct had created direct third-party beneficiaries’ rights between Walmart and its suppliers’ employees. The plaintiffs claimed that Walmart had breached its obligation duly to inspect compliance of the suppliers with the code of conduct. The court did not support the view of the employees and ruled that Walmart did not have an obligation but merely a right to inspect its suppliers’ compliance. Employees could enforce the contract only on the promisor thereof, which according to the court was the supplier in this case. However, the court did not refute the idea that a code of conduct could in theory constitute a contract. By analyzing the Walmart suit, Kenny addressed the contractual implications of codes of conduct from the US perspective and concluded that in line with US case law a code of conduct may constitute a contract if (i) it contains a promise clear enough to be an offer, (2) it is disseminated in a manner that employees

5

6 7 8

Lin, note 17 (chapter 1), p. 714 (defining suppliers’ codes of conduct: “Codes of vendor conduct refer to a set of supplier eligibility criteria structured with social and environmental standards established internally by a buyer company itself or externally by NGOs;…”). Sobczak, note 5 (chapter 1), p. 168. Kasky v. Nike, Inc., note 161 (chapter 7). See note 107 (chapter 2).

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knew of its contents and reasonably relied on it, and (3) employees accepted the offer either by commencing or continuing to work.9 Such analysis is missing from the EU perspective.10

5.1.2

Contract law perspective

The discussion moved forward from codes of conduct to contracts when companies that wanted to avoid questions over the legal status of their codes of conduct and those who wanted to show their genuine intent factually to secure ethical labor conditions and environmental performance of their foreign suppliers hardened their soft expectation by making such considerations a part of commercial contracts.11 The contractual form of requirements of public interest has triggered many questions regarding the purpose and consequences of these provisions. The first perspective at hand to look at the new contractual provisions is that of the international or national law of contracts. The former approach was adopted by Schwenzer and Leisinger, who analyze the applicability of the CISG on SCCs.12 They claim that although SCCs are not typical contractual clauses, it is possible to answer some of the questions by referring to the applicable public law (which in international contractual relations is likely to be the CISG). The authors discuss three problematic issues: a way of incorporating an SCC into a contract, remedies for contractual breach, and hardship. In the same direction, Schlechtriem discusses the possibility to claim damages in relation to ethically tainted goods.13 Quite surprisingly, the two papers reach the opposite conclusions. Vytopil looks into contractual control in supply chains from a national (Dutch) legal perspective. She discusses the applicability of international private law, the notion of contract, and standard terms and conditions in relation to codes of conduct under Dutch law.14 The article combines this traditional legal dogmatic approach with empirical methods

9

10 11

12 13 14

Kenny, K. E., 2007, “Code or Conduct: Whether Wal-Mart’s Code of Conduct Creates a Contractual Obligation between Wal-Mart and the Employees of Its Foreign Suppliers,” Northwestern Journal of International Law & Business, 27(2), 453–474, p. 463. See infra subsection 7.3.1. The “hardening” function of contracts in relation to codes of conduct has been highlighted by a number of scholars. See, e.g., Lin, note 17 (chapter 1), or Cafaggi, F. (ed.), 2012, Enforcement of Transnational Regulation: Ensuring Compliance in a Global World, Ensuring Compliance in a Global World, Private Regulation series, Edward Elgar, p. 10. Schwenzer and Leisinger, note 6 (chapter 1). Schlechtriem, P., 2007, “Non-Material Damages – Recovery Under the CISG?,” Pace International Law Review, 19(1), 89–102. Vytopil, note 119 (chapter 1) (the author omits to reflect on the fact that since the Netherlands is a CISG member state, the national courts would apply CISG as a governing law in disputes on international contracts as a part of domestic law).

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of investigation, resulting in a description of current Dutch best practice in disseminating codes of conduct through supply chains.15 The theoretical discussions offered by the authors raise highly interesting issues from a contract law perspective, but they offer less help in understanding the purposes, practical questions, and legal effects of SCCs.

5.1.3

Functional approach

The purely contract law analysis is academically interesting and may prove itself in future, but for now companies do not resolve disputes over SCCs at courts or tribunals applying international contract law but use other means to secure suppliers’ compliance. In order to understand the other means and their relationship to the legal institution of a contract, it seems vital to broaden the discussion. This can be achieved, as many authors have, by discussing SCCs from the functionalist perspective, looking into the functions of these clauses in the regulatory environment, and therefore substantiating the use of the contractual form for out-of-contractual relationship-based goals. First and foremost, SCCs are discussed as a new type of legislation. As already stated in relation to the shift of contract paradigm towards regulatory tool, the idea of contracts as a legislation is not new. It has been argued that freedom of contracts, a leading principle of contract law, causes decentralization of legislative function where strong companies have the power to impose contracts’ terms and conditions on their weaker partners. Kessler points out the potential misuse of contracts to dictate unfavorable conditions to a weaker party,16 but authors analyzing the legislative role of contracts in the CSR area usually take the other point of view, namely, looking at the positive influence of contracts not only on contractual parties but also third-party beneficiaries in areas where public regulation is inadequate, not enforced, or missing. This trend can be observed in the discussion on implicit incorporation of SCCs into contracts using the trade usage concept in already mentioned paper of Schwenzer and Leisinger.17 By a widespread use of environmental and social requirements in international business contracts, a new trade usage can be created that is binding upon contractual parties if they have established such a practice between them or if it can be regarded as a usage of international trade, which the parties ought to have known and which is regularly observed within a particular trade area.18 This implies that the regulatory function would

15 16 17 18

The empirical part is referred to further in section 5.1.4. See note 65 (chapter 4). Schwenzer and Leisinger, note 6 (chapter 1), p. 263–264. CISG, Article 9(1) and 9(2).

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not be embedded directly in the contracts but rather in a new set of rules that evolves based on contracts’ content. However, private contracts can also be seen as direct legislation of its own, setting new standards for companies’ suppliers and other subjects affected by companies’ activities.19 Backer analyzes the legislative function of SCCs using Walmart as an example, saying that the company uses “contractual relationships to legislate behavior among its suppliers.”20 The legislative character of Walmart’s contracts stems from the company’s economic power. However, although this power allows the company to affect its suppliers’ behavior, it does not do so in a vacuum. Backer highlights other emerging powers that influence the effects of social and environmental standards’ proliferation through contracts, namely, civil society and information diffusion.21 Bringing the various powers together, he concludes that multinational enterprises may via their SCCs evoke the development of a selfenforcing international customary business law system beyond states, based on the essential role of private lawmaking through contracts, controlled by civil society using transparency and disclosure tools, and enforced by combined civil and public forces. Even though the authors mentioned above speak of companies as legislators, this view may be slightly misleading, since in most cases the companies do not actually create new rules, but rather transfer, operationalize, or enforce already existing law, soft law, various non-state rules, and technical standards to the corporate level. As the empirical data show, a majority of CSR issues covered by SCCs (or codes of conduct) are already legal obligations.22 Having a legally binding character, contracts are then seen as a means used to enforce existing (but not efficiently enforced) soft and hard law. Nevertheless, the line between the position of internationally operating companies as new types of legislators (introducing new rules), rule enforcers (enforcing or operationalizing existing rules), or regulators (influencing the behavior of private entities to align it with public interests) is blurred. All these roles are intertwined both in practice and in the literature. An example interconnecting the three roles is given by Lin, who discusses SCCs as legal transplants of vendors’ codes of conduct and international law.23 Her thesis is that international law, which is not directly applicable to private subjects, as well as the domestic law of sourcing companies and international standards are transmitted by private contracts to developing countries where the legal standards are lower or not enforced. Based on China as an example, Lin points out that there is still a large gap between the law in contracts and the law in practice but concludes that transplanted law may initiate some 19 20 21 22

Backer, note 78 (chapter 2), p. 14. Ibid., abstract and p. 24. Ibid., p. 36. McBarnet and Kurkchiyan, note 17 (chapter 1). The authors conducted an analysis of the potential of private contracts in enhancing CSR within international supply chains based on empirical data obtained from interviews, case studies, and empirical desk research. 23 Lin, note 17 (chapter 1).

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changes in suppliers’ domestic governmental policies, which in turn positively affects the acceptance of the transplanted standards.24 In this sense, bottom-up lawmaking through contracts may lead to new top-down policies. A parallel but slightly differently oriented discussion approaches contracts as a means of governance, focusing more on the operational side of SCCs than is the case with the legislation-related discussion. One of the most extensive works in this field has been produced by Vandenbergh, who has written on the topic of private contracts’ interaction with public regulation and public policies, especially in the environmental and more specifically the climate change area.25 In papers from 2005 and 2006, Vandenbergh combines deep theoretical analysis with empirical investigations of contractual texts.26 He examines the relationship between administrative state and private regulation through contracts (secondorder agreements), looking into various types of private agreements, including supply chain agreements, in various industry sectors. Based on the empirical data, he raises the questions of accountability and effectiveness of governance through private contracts and concludes that private agreements are indeed an important part of the global environmental governance.27 In this respect, he discusses two generally recognized features of public governance and compares them to the features of private contracting.28 One of them is the accountability of rule-makers. In the case of a government regulation, the rule-makers are accountable to state institutions. In the case of a private contract, this accountability is missing. Nevertheless, another type is present: accountability to companies’ stakeholders (mainly to consumers and investors). This type of accountability is also referred to as the social license to operate.29 The other discussed feature is the collaborative approach in governance, meaning that regulation, whether it is a government regulation or transnational private regulation, addresses common problems via group decision-making.30 This feature is generally absent in private contracts concluded merely between two private parties but according to Vandenbergh may be present when private contracts incorporate collective standards. In my view, the collaborative aspect is embedded into all SCCs based on the fact that companies thereby respond to a rather specific pressure of their stakeholders who thus participate in shaping the SCCs’ content. In the later articles of 2008, 2010, and 2013, Vandenbergh describes the role of private contracting in the climate change global regula24 Ibid., p. 741. 25 Vandenbergh, note 97 (chapter 1); Vandenbergh, note 19 (chapter 1); Vandenbergh, M., 2008, “Climate Change: The China Problem,” Southern California Law Review, 81(5), 905–958; Vandenbergh and Cohen, note 120 (chapter 1); Vandenbergh, note 36 (chapter 2). 26 The author provides analysis of SCCs in various types of business contracts based on empirical data collected from publicly available sources: SEC and CSR reports. 27 Vandenbergh, note 19 (chapter 1), p. 970. 28 Vandenbergh, note 97 (chapter 1), pp. 2068 et seq.; Vandenbergh, note 19 (chapter 1), pp. 941 et seq. 29 He develops the discussion on social license to operate in his later work with Cohen, note 120 (chapter 1). 30 For a discussion on collective governance within CSR, see, e.g., Rasche, A., 2010, “Collaborative Governance 2.0,” Corporate Governance: The International Journal of Business in Society, 10(4), pp. 500–511, p. 500.

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tory system. He builds upon the findings from the previous work and applies them in relation to a subject area known for problems of its global governance. He generally concludes that the regulatory systems of such complex issues as climate change is have to be formed by different types of public and private regulation, including private contracting, complementing, and reinforcing each other. Governance and the regulatory effects of SCCs are also extensively addressed by Cafaggi, who has written extensively on the topic of transnational private regulation and connected this topic to transnational commercial contracts in several works on contractual networks within CSR as a mode of transnational private regulation,31 the regulatory function of commercial contracts,32 or the role of contracting in the regulation and production of global public goods.33 He recognizes two main legal purposes of contracts containing SCCs: complementing state regulation and the enforcement of existing public and private regulation.34 While admitting that private contracts have always contained regulatory elements, Cafaggi claims that nowadays contracts are different because they implement whole transnational regimes,35 which increases the tension between the transactional and regulatory characters of commercial contracts. This tension is materialized through the use of enforcement strategies: the transactional character calls for redressing the aggrieved party; the regulatory character focuses on restoration of compliance rather than punishment.36 Despite the stated importance of supply chain contracting in global regulation, Cafaggi also emphasizes the limitations of bilateral contracts effectively to regulate performance of international supply chains beyond the first tier. He suggests that better results may be achieved by using contractual networks involving all tiers of a specific supply chain.37 These contractual networks adopt common monitoring and relational enforcement mechanisms and as such resemble regulation more than bilateral contracts. McBarnet and Kurkchiyan, based on empirical data obtained from interviews, case studies, and empirical desk research, analyze various functions of private contracts in enhancing global CSR. In similar line with other authors studying SCCs from a functional perspective, they discuss how contracts interact with other regulations – enforcing, complementing, or substituting them. However, they also point out another dimension of SCCs that has no ambition to interfere with regulation but rather positively to motivate

31 Cafaggi, note 96 (chapter 1). 32 Cafaggi, note 48 (chapter 2). 33 Cafaggi, F., 2012, “Transnational Private Regulation and the Production of Global Public Goods and Private ‘Bads’,” European Journal of International Law, 23(3), 695–718. 34 Cafaggi 2012, note 48 (chapter 2), p. 5 (discussing that inclusion of public regulation into private contracts secures its horizontal effects between private parties that are impossible to achieve through the traditional international law regime). 35 Ibid., p. 4. 36 Ibid., p. 31. 37 Cafaggi, note 96 (chapter 1), p. 13; Cafaggi, supra note 11, p. 14.

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parties’ compliance and strengthen the mutual contractual relationship between the focal company and its suppliers. While they stress the significance of “soft contracts” (relational contracts, partnership) and the flexibility and practicability they offer to the parties,38 they also draw attention to the many limitations of such contracts.39 The relational facet of SCCs is also emphasized in the abovementioned article by Backer, who considers the power of these provisions to deploy business relationships by harmonizing the values and norms of the parties.40 It is one of the building blocks of his concept of a self-enforcing international customary business law system beyond states.

5.1.4

Best practice

In addition to theoretical and conceptual papers, some authors examine the practice of SCCs. These empirical studies are difficult to carry out due to the already mentioned difficulty of accessing the relevant documents.41 Basically, there are three methods of empirical research available here: surveys, reviews of contractual texts, and reviews of secondary documents and information, such as sustainability reports and companies’ public statements. Until now, empirical studies in relation to SSCs have been limited to descriptive research, trying to understand and describe best practice.42 The International Association for Contract and Commercial Management (IACCM) conducted, in cooperation with researchers from the Pace University, a survey of 66 companies in relation to their use of sustainability requirements in supply contracts.43 The survey included companies of different sizes and coming from different world regions as well as industry sectors. The focus was on the range of issues covered by SCCs, the subjective significance companies assign to these types of clauses, the regional differences in attitude towards SCCs, and the use of enforcement mechanisms. The results showed that almost 80% of the investigated companies have previously included SCCs in their contracts and almost 70% consider these clauses to be highly or very important.44 The highest demand for sustainability clauses comes from the European companies (ca. 42%), followed by companies from North America (ca. 34%).45 Other regions have substantially lower demand for inclusion of sustainability topics in their private contracts. The best implementation 38 39 40 41 42

McBarnet and Kurkchiyan, note 17 (chapter 1), pp. 68–74. Ibid., pp. 81–86. Backer, note 78 (chapter 2), p. 1755–1756. See supra subsection 2.3.2.2. McBarnet, note 74 (chapter 1), p. 42 (“While the market power of large companies vis-àvis suppliers is itself clearly an important factor in any influence accomplished, it is becoming regarded in business as best practice to formalize this as a legal obligation”). 43 See note 46 (chapter 1). 44 Ibid., p. 26. 45 Ibid., p. 27.

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and enforcement practice then starts already in the pre-contractual phase, when clear sustainability requirements should be presented and included in the contract, and follows through the whole contract term via rewarding compliance, self-reporting, and auditing, secured by the ultimate possibility of terminating the contract.46 Although extremely interesting and unique, this research has several limitations. These include the relatively low number of respondents and their high variability, the fact that participants are members of the IACCM and thus proactive in their contract management (therefore they are not an unbiased representative sample), and the limited amount of analysis of the data. Another description of best practice is provided in the already mentioned article by Vytopil on the use of contracts and codes of conduct in international supply chains.47 However, her study is limited to Dutch multinational companies. Based on interviews with corporate personnel of 16 selected companies and a review of the companies’ internal documents (including contracts that are not publicly available), the author classifies codes of conduct into three categories: weak, moderate, and strong.48 The character of a code of conduct is among other features classified on the basis of the strength of the contractual commitment involved, i.e., whether a code of conduct is merely guidance or whether it is signed by the supplier or included in the actual contractual text by reference or expressly.49

5.1.5

Juridical tool

Innovative ways are to be found and tested to tackle obstacles to effective private contracting in relation to CSR issues. An interesting project has been announced and submitted to John Ruggie, UN Special Representative on business and human rights in January 2010 by the Sherpa Association. The project aims to develop a juridical tool, namely, the sustainable contract. According to Sherpa’s director Yann Queinnec, the tool will consist of standards for public-private as well as business contracts “which object and execution terms combine economic, social and environmental aspects, with the purpose of supporting fundamental rights and environmental protection.”50 The sustainable contract is to serve as an interpretation tool for judges and arbitrators, a decision-support tool for companies when facing CSR issues, and a full contractual tool providing sample contractual provisions and guidance for drafting sustainable contracts. This project aims to fill the legal gap between

46 47 48 49

Ibid., pp. 28–29. Vytopil, note 119 (chapter 1). Ibid., pp. 165–166. Ibid. (according to the results, strong codes of conduct are typically signed by suppliers, which suggests their contractual form). 50 www.asso-sherpa.org/; Queinnec, Y., 2010, “Sustainable Contracts. Concept’s outlines and exploration tracks,” available at: http://198.170.85.29/Sherpa-on-sustainable-contracts-Jan-2010.pdf (last accessed 12/7/2014), p. 2.

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the impacts of private contracting on public concerns for society and environment on the one hand and the corresponding responsibilities of companies towards their stakeholders and those companies’ private interests on the other hand. The major challenge for this project may be to find the position of this new legal form of rules – a hybrid between contractual freedom of the parties and a regulatory act51 – within the established legal order in order to reach the intended “synthesis between typical CSR soft and hard-law tools.”52 However, so far no results of the project have been registered.53

5.2

Some reflections on the literature review

The literature review has revealed some patterns in the research on SCCs. Firstly, as was already discussed in the introduction to this chapter, legal literature focusing on SCCs is rare; there are few specialized writings. The important question to ask is why. Does the reason lie in the technical difficulties of this research, including the complexity of the topic,54 difficult access to contractual texts, and problems of conceptualization,55 or its actual irrelevance to lawyers or regulation of global problems as such?56 If the second group of reasons were true, then the lack of legal literature would be justified, but irrelevance does not appear to be the problem. The undertaken research builds up the case for the first group of reasons to apply, showing the relevance of the topic to legal research and lawmaking and providing recommendations as to how the conceptual and practical problems could be overcome. Taking into account the fact that the literature is rare, even within this scarce literature, we can see that theoretical research prevails. Empirical research is limited to a description of (best) practice without drawing many normative conclusions from the findings. This can be seen as problematic due to the fact that SCCs are a typical example of law in action; therefore, we ought to be extending our understanding of this phenomenon through empirical findings and amending the regulation accordingly. I try to join those authors

51 Interview with Queinnec, Y., director of Sherpa in Business – Community – La revue des relations ONG – Entreprises, October 2010, available at: http://asso-sherpa.org//sherpa-content/docs/newsroom/Contributions/BCBRIEF8.pdf. 52 www.asso-sherpa.org/; Queinnec, supra note 50, p. 2. 53 The concept was mentioned marginally in Queinnec, Y., Bourdon, W., Regulating Transnational Companies, 46 proposals, Forum for a new World Governance, December□2010, http://asso-sherpa.org/sherpa-content/docs/programmes/GDH/CDP_english.pdf (last accessed 14/03/2013). 54 See introduction to this chapter. 55 Vandenbergh, note 97 (chapter 1), pp. 2041–2042 (noting that second-order agreements, i.e., purely private contracts used for achieving public goals, had been overlooked “because they do not fall neatly into the domain of public or private law scholars”). 56 Vandenbergh, supra note 25, pp. 46–58 (analyzing the relevance of research on regulation through contracts to lawyers).

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Sustainability Clauses in International Business Contracts who connect the theoretical and empirical research methods57 and extend this type of research by synthesizing the perspectives of theory of law (seeing contracts as types of regulation) and contract law (seeing contracts as frameworks of private exchange operating on the background of contract law). Finally, although theoretical research prevails in the literature, interestingly a contract law perspective is almost missing (provided only in three articles), and, thus, the effects of SCCs inter partes are generally omitted. SCCs are mainly addressed as types of regulation and/or governance. Once again, the question to ask is why. The first answer at hand may be that SCCs do not differ substantially from other contractual provisions. However, as described above, this is not the case.58 SCCs are characterized by a combination of features (protection of public interests, disconnectedness from subject matter of a contract, regulatory effects, process rather than product focus, etc.) that distinguishes them from other contractual clauses. This does not mean that we cannot find some of the features in other contractual provisions and thus find parallels in the regulation of these clauses under international contract law, but it is the unique combination of all of the features that justifies the special treatment of SCCs. The second answer may be that there is no obvious problem to be discussed under international contract law, since there is no case law on the topic. Even though the lack of case law is a fact, it does not mean that there are no problems with compliance and enforcement of such clauses. Therefore, this book provides both the contract law and theory of law perspectives.

57 Vandenbergh, notes 19 and 97 (chapter 1); McBarnet and Kurkchiyan, note 17 (chapter 1); Vytopil, note 119 (chapter 1). 58 Supra chapter 3.

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Part III Regulation of Sustainability Contractual Clauses Part II has introduced the definition of SCCs and identified their characteristic features, examined if and how the mainstream theories of contract can explain this phenomenon, and presented recent legal scholarship on SCCs. On the background of Part II, this part describes the legal framework of SCCs and analyzes the characteristic features of SCCs under international contract law in order to see if the applicable legal regulation enhances or hinders their use and effects.

6

Legal framework

There is an ever-increasing number of rules requiring companies to ensure sustainable behavior on the part of their foreign suppliers. The legal framework of sustainability contractual clauses is, as described in chapter 2, formed by a mixture of soft and hard, public and private, and state-made and non-state regulations. The usual first step in dogmatic legal research is to identify the sources of law applicable to a given problem, the second step is then to systematize these sources, and the third and final step is to analyze the problem while applying the legal sources. This chapter focuses on the first two steps, providing an overview of the relevant regulations and systematizing them, while the third step is undertaken in chapter 7. There are three main groups of law that influence the usage and practice of SCCs. These three groups are: international law on human rights, labor conditions, protection of environment, and corruption; international contract law; and CSR regulation. The first group of laws influences the content of the provisions. For example, SCCs concerning labor conditions often basically copy rules stipulated in various ILO conventions. However, the individual rules are not particularly important for the purposes of this book, which investigates operationalization of SCCs rather than their content. Therefore, substantive international law is excluded from the discussion in this book.1 The other two groups of applicable laws are central to the topic of this research and are further described and analyzed. They are both relevant to SCC but each in a different way. While international contract law provides general default rules applicable to international contracts and thus also to SCCs contained in them, CSR regulation provides rules and guidance on when SCCs should be used and how. Therefore, we can say that the former consists of operational rules, meaning rules on the formation of a contract, its interpretation, the obligations of the parties, and the remedies, and it is focused on facilitating an efficient exchange between subjects and protecting their interests. The latter consists of normative rules on sustainable development and the use of contracts as tools for achieving it. Their main objective is to protect public values. The general idea behind CSR regulation in relation to SCCs is to use the default contract law rules to protect public values, which is normally alien to the contract law theory.2

1 2

See supra section 1.5. Nevertheless, contract law protects next to private interests also some public values, such as fairness or reasonableness.

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6.1

Contract law

Although sustainability concerns are not dealt with in the general law of contract, we must analyze it to see how the default rules apply to sustainability provisions and in particular look at the question of whether they support or undermine SCCs’ usage and effectiveness in the context of sustainable development.

6.1.1

The 1980 United Nations Convention on Contracts for the International Sale of Goods

The most important binding law applicable to international supply agreements is without doubt the 1980 UN Convention on Contracts for the International Sale of Goods (CISG).3 The Convention has four parts and provides rules on the application and interpretation of the Convention, contract formation, and rights and obligations of the contractual parties. When adopting the Convention, the aim of the legislators was to agree on uniform rules for the international sale of goods applicable to contracts concluded between parties with places of business in different states, without the need to have recourse to international private law to determine the governing law of the contract.4 The Convention thus adds to the predictability and legal certainty of parties to an international sale and, by this, promotes friendly relations among states and the development of international trade.5 The CISG has gained global acceptance. To date, it has been ratified by 83 contracting states and covers more than two-thirds of global trade.6 This worldwide acceptance was, however, only achieved by significant compromises between various national contract law rules and systems (not only due to different legal traditions but also due to the social and economic stage of development of the participating countries). For this reason, some contract types and certain issues had to be excluded from the scope of the agreement. For example, the CISG does not cover the use of standard terms and conditions in international contracts, which are of interest to this book. Nevertheless, there is no reason per se why the Convention should not apply to SCCs that form part of a contract if7 (i) the parties have their places of business in different CISG contracting states or if the rules of private international law lead to the application of the 3 4 5 6 7

www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html (last accessed 10/5/2013). CISG does also apply on mixed contracts for sale of goods and provision of services under certain circumstances; see CISG, Article 3. CISG, Preamble. Bernstein, H., Lookofsky, J. M., 2003, Understanding the CISG in Europe, 2nd edition (revised), Kluwer Law International, p. 1. Parts I, II, and III can be relevant to SCCs: Part I with respect to interpreting the provisions and establishing their content, Part II in evaluating whether the provisions have become part of a contract, and Part III with respect to available remedies in the event of a breach.

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law of a contracting state, (ii) the contract constitutes a sale of goods, (iii) the issue in question is covered by the Convention or is governed but not settled, and (iv) if the parties have not opted out of the CISG.8 Once applicable, the CISG may help to answer the question of whether sustainability requirements have become a valid part of a contract, how they should be interpreted, whether or not their breach causes a non-conformity in the delivered goods, what remedies may the parties claim in the event of breach, or when a supplier can avoid liability for a breach. However, we should bear in mind that many developing countries, which are considered problematic from the social and environmental business conduct perspective, are not contracting states to the CISG and as such may not be covered by the Convention if Article 1(b) applies, i.e., if only one contractual party is a CISG contracting state.9 Not only because of this reason also other instruments of international contract law, although of soft nature, may become important and applicable.

6.1.2

UNIDROIT Principles of International Commercial Contracts

Another instrument to consider in relation to international supply agreements is the UNIDROIT Principles of International Commercial Contracts (hereinafter the “UNIDROIT Principles”).10 First adopted in 1994, the UNIDROIT Principles were revised in 2004 and 2010. The Principles were prepared by a group of experts from the major legal traditions as well as various geo-political regions, with the aim of re-stating international contract law in the form of a non-binding instrument.11 The soft character allowed the authors also to cover those issues that were excluded from or only marginally regulated in the CISG.12 For instance, the provisions on third parties’ rights, which are excluded from the CISG but covered by the UNIDROIT Principles, are of importance in relation to SCCs. As a soft law instrument, the applicability of the UNIDROIT Principles is more complex than in the case of CISG. The Principles do not constitute a part of national legal systems in the way that the CISG does (after its ratification) but may be still applied by courts and other dispute resolution bodies, such as arbitration tribunals, in certain situations.13 The first case is when contracting parties make an express choice to apply the UNIDROIT

8 9

10 11 12 13

CISG, Article 1, Articles 2 and 3, Article 4 and 5, Article 7(2), and Article 6, respectively. Only 41 of 145 countries of the BSCI list of risk countries (as of 1 January 2011) are CISG contracting states (compare www.bsci-intl.org/resources/rules-functioning and www.uncitral.org/ uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html, both last accessed 10/5/2013). www.unidroit.org/english/principles/contracts/main.htm (last accessed 9/5/2013). Bonell, M. J., 2008–2009, “The CISG and the UNIDROIT Principles of International Commercial Contracts: Two Complementary Instruments,” International Law Review of Wuhan University, 10, 100–117, p. 103. Ibid. UNIDROIT Principles, Preamble.

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Sustainability Clauses in International Business Contracts Principles, lex mercatoria,14 or general principles of contract law or similar as the governing law of their contract.15 In the first of these situations, the applicability is evident; in the other two, the UNIDROIT Principles will most probably be considered as an authoritative expression of universal contract rules.16 The Principles have also sometimes been applied in situations where the contracting parties have failed to make any choice of law.17 Secondly, the UNIDROIT Principles may be used to interpret other applicable international and national laws, including the CISG.18 As stated above, the CISG does not cover certain issues, such as contracting under standard terms or if there is inconsistent behavior by the parties. When a deciding authority applies the CISG and comes across these issues, it may take inspiration from the UNIDROIT Principles. As in the case of CISG, there is no formal barrier to the UNIDROIT Principles applying to SCCs, although they were not drafted with this purpose in mind.

6.1.3

Principles of European Contract Law

A similar instrument to the UNIDROIT Principles has also been prepared in the European context. The Principles of European Contract Law (PECL) were drafted by the Commission on European Contract Law and published in three parts from 1995 to 2002. They are in many respects reminiscent of the UNIDROIT Principles; in fact the basic principles, both relating to the use of instruments and their content, are the same. The main difference is the scope of application. While the UNIDROIT Principles cover only international con14 Berger, K. P., 1996–1997, “The Lex Mercatoria doctrine and the UNIDROIT principles of international commercial contracts,” Law and Policy in International Business, 28(4), 943–990 (discussing the legal status of the UNIDROIT Principles, their character as a new lex mercatoria, and their consequences on the practice of transnational contract law); O’Malley, N., Bench Nieuwveld, L., 2007, “The UNIDROIT Principles: Are They Law?,” Vindobona Journal of International Commercial Law & Arbitration, 11(2), 299–304, p. 303 (“… arbitrators have accepted them as fair representations of lex mercatoria. Now, however, it would seem that arbitral tribunals are willing to go further and regard the UNIDROIT Principles as a law in their own right”). 15 Bonell, supra note 11, pp. 105–109 (citing relevant case law and arbitration awards); however, national courts will probably be reluctant to apply the UNIDROIT Principles, since they are often bound to apply the “law of a country”; see Ferrari, F., 2005, “What Sources of Law for Contracts for the International Sale of Goods?: Why One has to Look Beyond the CISG,” 25(3), 314–341, p. 332. 16 International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation, 05.06.1997, No. 229/1996 (the arbitration court filled in a gap in the CISG by recourse to the UNIDROIT Principles, justifying it on the ground that they reflect usages of which the parties knew or ought to have known and which are widely known in international trade and are therefore applicable pursuant to Article 9(2) CISG). 17 For example, ICC International Court of Arbitration, November 1996, Award No. 8502 of 1996. 18 For the use of the UNIDROIT Principles to interpret the CISG, see, e.g., Chandrasenan, A., 2007, “UNIDROIT Principles to Interpret and Supplement the CISG: An Analysis of the Gap-filling Role of the UNIDROIT Principles,” Vindobona Journal of International Commercial Law and Arbitration, 11, 65–80; for the opposite view, see Sica, L. C., 2006, “Gap-filling in the CISG: May the UNIDROIT Principles Supplement the Gaps in the Convention?,” Nordic Journal of Commercial Law, 1 (concluding that it is not permissible).

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tracts, PECL also covers domestic contracts. Moreover, while the UNIDROIT Principles only apply to commercial contracts, PECL does not contain any such limitation and can thus theoretically also apply to consumer contracts.19 For the purpose of this book, PECL will be less significant than the UNIDROIT Principles due to their European focus. However, PECL may still become important in connection with sustainability issues in international supply chains, for example, in the case of western European companies dealing with suppliers from eastern or southern European countries, where respect for human rights and environmental protection is in general still lower.

6.1.4

Common European Sales Law

Already from the late 1990s, the EU called for harmonization of European contract law in a Common Frame of Reference. Soon enough, the Study Group on a European Civil Code suggested that PECL should become a part of the new codification. And PECL did in fact influence the draft of European contract law codification prepared by a group of academics, the Draft Common Frame of Reference (DCFR).20 However, this influence then disappeared from the Proposal for a Regulation on a Common European Sales Law (CESL),21 another soft law instrument applicable upon contractual parties’ choice.22 For now, CESL remains only a proposal for a legislative act. Nevertheless, it has already led to vivid discussions, not only about its content but mostly about the role it should play among other instruments of contract law in Europe. These discussions go beyond the scope of this book. However, it should be noted that if CESL is adopted, it will have one distinct advantage over other international contract law instruments, including the CISG. It will be subject to one central interpretation body, the Court of Justice of the EU. As in case of the contract law instruments above, CESL is theoretically applicable to SCCs and may provide help in understanding how these provisions work. What is more,

19 Lando, O., 2002, “Principles of European Contract Law and Unidroit Principles: Similarities, Differences and Perspectives,” Centro di studi e ricerche di diritto comparator e straniero, Saggi. 20 Study Group on a European Civil Code and the Research Group on EC Private Law (Acquis Group), 2009, Principles, Definitions and Model Rules of European Private Law, Draft Common Frame of Reference (DCFR), Outline Edition, Based in part on a revised version of the Principles of European Contract Law; see also Clive, E., 2008, “European Initiatives (CFR) and Reform of Civil Law in New Member States: Differences between the Draft Common Frame of Reference and the Principles of European Contract Law,” Juridica International, XIV, 18–26. 21 Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law, 11.10.2011, COM(2011) 635 final (the CESL deals only with sales contracts while the DCFR deals with all types of contracts); Smits, J. M., 2012, “The Common European Sales Law (CESL) Beyond Party Choice,” Zeitschrift für Europäisches Privatrecht, 20, 904–917, p. 13. 22 CESL, Article 3.

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CESL can be used not only in relation to purely European transactions but also in relation to transactions between European companies and companies from third countries.23

6.2

CSR regulation

Given the wide scope of existing regulation in the CSR area, it is not possible to exhaustively scrutinize all effective laws and regulations. Instead, this section focuses on the ones most widely discussed, recognized, and accepted within international business with relevance to sustainability in supply chain contracts.24 Since the author does not limit the analysis to any specific industry or country, only cross-sectoral instruments and instruments with global applicability are included. From the vast number of national meta-regulations, the California Transparency in Supply Chains Act of 2010 is presented as an example of a law directly relevant to SCCs and affecting a large number of globally operating companies. The instruments are systematized according to the type of legal source, as listed in subsection 2.2.

6.2.1

UN Human Rights Council

In 2003, the UN Sub-Commission on the Promotion and Protection of Human Rights presented Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with regard to Human Rights (hereinafter the “UN Norms”).25 The UN Norms were an effort to adopt authoritative rules.26 However, this effort turned to be unsuccessful; the document was not adopted on the UN ground27 and instead the Special Representative 23 CESL, Preamble, para. 14 and Article 4 (2). 24 The number of instruments is greater than presented in this section; in particular, there are many types of private instruments. The provided overview follows an established understanding of generally recognized standards and regulations, as reflected in the academic literature; see, e.g., Schimanski, C., March 2013, “An Analysis of Policy References made by large EU Companies to Internationally Recognised CSR Guidelines and Principles,” European Commission (Directorate-General for Enterprise and Industry); Mares, R., 2010, “The Limits of Supply Chain Responsibility: A Critical Analysis of Corporate Responsibility Instruments,” Nordic Journal of International Law, 79(2), 193–244. 25 UN Sub-Commission on the Promotion and Protection of Human Rights, Economic, Social and Cultural Rights: Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, U.N. Doc. E/CN.4/Sub.2/2003/12/Rev.2, 26 August 2003. 26 Weissbrodt, D., Kruger, M., 2003, “Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with regard to Human Rights,” American Journal of International Law, 97(4), 901–922, p. 913 (“The legal authority of the Norms derives principally from their sources in treaties and customary international law, as a restatement of international legal principles applicable to companies”). 27 Kinley, D., Nolan, J., Zerial, N., “‘The Norms are dead! Long live the Norms!’ The politics behind the UN Human Rights Norms for corporations,” in McBarnet, Voiculescu and Campbell, note 17 (chapter 1), pp. 459–475 (discussing critique of the UN Norms); Bachmann, S.-D., Miretski, P. P., 2012, “Global Business and Human Rights: The UN ‘Norms on the Responsibility of Transnational Corporations and Other Business

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of the Secretary-General (SRSG) mandate was created to “identify and clarify standards of corporate responsibility and accountability for transnational corporations and other business enterprises with regard to human rights”; elaborate on the states’ role in effective regulation of the issue; clarify the relevant concepts, namely, the concepts of “complicity” and “sphere of influence”; develop a methodology for companies to conduct their human rights impact assessment; and compile a compendium of best practices in this area.28 The SRSG Professor Ruggie then rejected the UN Norms entirely. He conducted extensive research, stakeholders’ consultations, and an analysis of various documents and finally drafted the “Protect, Respect and Remedy” Framework,29 laying down a new conceptual outline for the division of responsibilities between corporations and states in the human rights area. The Framework was unanimously welcomed by the UN Human Rights Council, which thereafter prolonged the SRSG’s mandate to implement the Framework.30 Three years later, in 2011, the “Protect, Respect and Remedy” Framework was supplemented by the Guiding Principles for its implementation.31 The Guiding Principles were again unanimously endorsed by the UN Human Rights Council.32 6.2.1.1

Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights Although the original UN Norms were not adopted, they should not be omitted when discussing international supply chains in particular, since they present what is probably the strongest rhetoric in this context and build a clear link to contractual governance. Their broad applicability throughout international supply chains is already established in the wide definition of a transnational corporation as “an economic entity operating in more than one country or a cluster of economic entities operating in two or more countries – whatever their legal form….”33 Moreover, the UN Norms are intended to apply also to “other business enterprises,” which includes among others contractors, subcontractors,

28 29 30

31 32 33

Enterprises with Regard to Human Rights’ A Requiem,” Deakin Law Review, 17(1), 5–41, p. 38 (summarizing reasons for the UN Norms’ failure into three categories of arguments: “… the novel character and the large scope of new legal concepts within the framework of the Norms broke with traditional roles of subjects under international law… the scope of the Norms went too far in blurring the distinction between public and private law frameworks… the legal vagueness of the Norms and the contradictions within the Norms …”). UN Commission on Human Rights resolution: Human rights and transnational corporations and other business enterprises, U.N. Doc. E/CN.4/RES/2005/69, 20 April 2005. See note 2 (chapter 1). UN Human Rights Council resolution: Mandate of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, U.N. Doc. A/HRC/RES/8/7, 18 June 2008. See note 10 (chapter 1). UN GA, Human Rights Council resolution: Human rights and transnational corporations and other business enterprises, U.N. Doc. A/HRC/RES/17/4, 6 July 2011. UN Norms, para. 20.

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Sustainability Clauses in International Business Contracts and suppliers when dealing with a transnational corporation.34 This alone is not considerably different from other CSR instruments, but the UN Norms go further later in the text. Even though the Norms claim to recognize the primary responsibility of states for the protection of human rights, they shift the responsibility to a significant extent to companies. According to the first provision, companies have within their spheres of activity and influence exactly the same responsibility as states to “promote, secure the fulfillment of, respect, ensure respect of and protect human rights.”35 Under the Norms, the sphere of influence is understood as flexible, bigger in case of multinationals and smaller in case of SMEs.36 However, the connection of the responsibility to the sphere of activity and influence does not delimit clearly the scope of the responsibility, and more guidance is not provided either by the Commentary to the UN Norms.37 Although the Commentary uses the concepts of due diligence, direct and indirect contribution to a human rights abuse, and benefits from such an abuse, which have all become parts of the SRSG discourse, they are not developed into operational details.38 The General provisions of implementation nevertheless state that companies shall “… adopt, disseminate and implement internal rules of operation in compliance with the Norms…,” “… periodically report on and take other measures fully to implement the Norms…,” and “… apply and incorporate these Norms in their contracts or other arrangements and dealings with contractors, subcontractors, suppliers, licensees, distributors, or natural or other legal persons….”39 The Commentary then elaborates more on the contractual relationships by stating that companies “… shall ensure that they only do business with (including purchasing from and selling to) contractors, subcontractors, suppliers … that follow these or substantially similar norms.”40 If a company contracts with an entity that does not follow such norms, then they should try to work with the business partner to mitigate the violation, and if it is not possible to achieve mitigation, the company should terminate the relationship.41 However, the UN Norms fail to provide any practical guidelines other than in relation to contracts and in particular fail to provide guidance on monitoring and enforcement tools. 34 UN Norms, para. 21. 35 UN Norms, para. 1. 36 Weissbrodt and Kruger, supra note 26, p. 912 (“… larger businesses, which generally engage in broader activities and enjoy more influence, have greater responsibility for promoting and protecting human rights…”); Hillemanns, C. F., 2003, “UN Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with regard to Human Rights,” German Law Journal, 4(10), 1065–1080, p. 1072 (noting the practical difficulties in establishing responsibility depending on the companies; size). 37 UN Sub-Commission on the Promotion and Protection of Human Rights, Commentary on the Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, U.N. Doc. E/CN.4/Sub.2/2003/38/Rev.2, 26 August 2003 (hereinafter “Commentary to the UN Norms”). 38 Mares, supra note 24, p. 209. 39 UN Norms, para. 15. 40 Commentary to the UN Norms, para. 15 (c). 41 Ibid.

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Regardless of the extensive critique and the failure to gain support, the UN Norms have played an important role in opening a discussion in the area of CSR in supply chains and promoting a more legalized approach towards it.42 The instrument is unique in its effort to establish a direct obligation to implement the UN Norms into business contracts and the obligation to terminate contracts where there is a persistent breach. Unsurprisingly, this interference with the parties’ contractual freedom to select a business partner has raised concerns in the business community and was one of the criticized points. However, it has also reinforced the importance of contractual governance in the CSR area. 6.2.1.2 “Protect, Respect and Remedy” Framework and the Guiding Principles During his SRSG mandate on the issues of human rights and transnational corporations and other business enterprises, Professor Ruggie conducted extensive research and drafted multiple documents with relevance also to the use of contractual governance as a CSR tool.43 The final findings were summarized in two major reports: the “Protect, Respect and Remedy” Framework and the implementing Guiding Principles, which were both endorsed by the UN Human Rights Council. The non-binding documents offer a new conceptual framework for the transnational protection of human rights and the role of transnational corporations within it. The starting point of the SRSG was innovative in the CSR discourse: rather than stressing a gradual sway of corporate social responsibilities into the public sphere with the growing economic power of MNEs (as other instruments previously had), he emphasized the economic purpose of companies and thus distinguished their role from the role of public interest institutions while concurrently accepting their character as “organs of society.”44 Based on the distinct interests and purposes of states and corporations, Professor Ruggie presented a new conceptual understanding for the transnational protection of human rights based on three pillars: states’ responsibility to protect, corporations’ responsibility to respect, and accessibility of remedies to those whose rights were breached. The second pillar is the most relevant to supply chain contracting and will be discussed here. Although the words “suppliers,” “contract,” and “supply/value chain” do not appear often within the SRSG’s main reports,45 indirect references throughout the texts suggest

42 Kinley, Nolan and Zerial, supra note 27, pp. 461–462, 465–470 (discussing the legal status and reactions to the legalese in the text of the UN Norms). 43 The complete information on the SRSG mandate is available at: www.business-humanrights.org/SpecialRepPortal/Home (last accessed 7/5/2013). 44 Protect, Respect and Remedy Framework, para. 53 (“While corporations may be considered ‘organs of society’, they are specialized economic organs, not democratic public interest institutions. As such, their responsibilities cannot and should not simply mirror the duties of States”). 45 In this context, the Protect, Respect and Remedy Framework includes the term “supplier” only three times, and the terms “contract” and “supply/value chains” are not used at all. The Guiding Principles include the terms “contract” twice, “supplier” once, and “chain” twice in this respect.

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that supply chains and the use of contractual leverage are in the focus of the companies’ responsibility to respect human rights. More guidance and details in relation to these issues can be found in a separate report on “Clarifying the Concepts of ‘Sphere of influence’ and ‘Complicity’” and a discussion paper on the “Corporate Responsibility to Respect Human Rights in Supply Chains.”46 The SRSG recognizes practical and legal boundaries for assigning liability to companies for wrongful acts of separate legal entities, such as suppliers,47 but suggests that companies are obliged as a minimum to respect human rights, which covers also a negative obligation to avoid contributing to adverse impacts on human rights, including those directly caused by others. The principal tool to avoid contributing to negative impacts is conducting due diligence, which is basically similar to due diligence in the sphere of financial risks.48 Due diligence is generally undertaken before entering into any new agreement, and, thus, it is the first step where a buyer may influence its future suppliers’ sustainability performance. As described in the SRSG documents, due diligence will typically consist of three steps.49 The first step is to assess the environment of the country of operation (or supplier’s operation), to understand the legal context, and to analyze whether there are potential gaps between national regulation and international obligations. The second step is to assess the company’s own activities and policies and their potential negative impact, meaning its direct causation of any negative impact. Finally, the third step is to check that the company does not contribute to negative impacts on human rights through its business relationships, including relationships with suppliers: in other words, to assess potential complicity (indirect involvement) in human rights abuses. The SRSG is explicit in stating that the scope of due diligence does not depend on the scope of companies’ influence, but rather on “the potential and actual human rights impacts resulting from a company’s business activities and the relationships connected to those activities.”50 The complicity is understood in the Framework as having both a legal and a non-legal pedigree,51 therefore giving rise not only to legal liability but also to a responsibility towards society generally that can bring other negative implications than legal sanctions, for instance reputational damage. In his texts,

46 UN GA, Human Rights Council, Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and other Business Enterprises, John Ruggie: Promotion and Protection of all Human Rights, Civil, Political, Economic, Social and Cultural Rights, Including the Right to Development: Clarifying the Concepts of “Sphere of influence” and “Complicity,” U.N. Doc. A/HRC/8/16, 15 May 2008; UN Mandate of the Special Representative of the Secretary-General on Human Rights and Transnational Corporations and other Business Enterprises, The Corporate Responsibility to Respect Human Rights in Supply Chains, 10th OECD Roundtable on Corporate Responsibility, discussion paper, 30 June 2010. 47 “Protect, Respect and Remedy” Framework, para. 13. 48 “Protect, Respect and Remedy” Framework, para. 56. 49 “Protect, Respect and Remedy” Framework, para. 57; SRSG, supra note 46, p. 7. 50 “Protect, Respect and Remedy” Framework, para. 72. 51 “Protect, Respect and Remedy” Framework, para. 73.

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the SRSG acknowledges that the term “complicity” is rather unclear and its use not uniform;52 however, it still serves as the best guidance for describing the scope of the companies’ responsibility to protect human rights. Overall, we may say that while the concept of sphere of influence relied upon by the UN Norms is rejected by the SRSG as being too vague for determining the scope of corporate responsibilities,53 the concept of complicity becomes pivotal in this discourse. It may seem ironic that it was Professor Ruggie who introduced the concept of sphere of influence within the UN Global Compact (UNGC) but also he who rejected that concept within the “Protect, Respect and Remedy” Framework. However, this attitude shift stems from the purpose the concept is used for. While the SRSG considered it appropriate to use the term loosely within the UNGC to help companies “support and respect the protection” of human rights, he vehemently rejected it as a determining factor for establishing legal liability for human rights abuses.54 He distinguishes two meanings of “influence”: influence as an impact and influence as leverage. While the first forms an inherent part of companies’ responsibility to respect human rights, the latter will be considered relevant only under certain circumstances.55 In other words, the existence of influence does not give automatically rise to the obligation to use it.56 The underlying idea is that tying liability to the presence of any influence alone would mean shifting the obligation to protect from states to companies, which would be unfair and undesirable.57 There may be situations where a company has leverage over a supplier that is implicated in an abuse of human rights, but this abuse is not in any way connected to the original company, its products, or operations. An example can be when a multinational company sourcing product A from a supplier and constituting a major buyer of this supplier becomes aware of a human rights abuse by the supplier that arises in the manufacturing of product B for another buyer. In such situation, it seems exaggerated to hold the company liable for such an abuse, although it might in practice be able to affect the supplier’s behavior by a simple threat of terminating the business relationship. Therefore, basing responsibility on the concept of sphere of influence is not suitable. That is why the SRSG only considers the companies’ responsibility if a negative impact is caused by their activities and policies (including, e.g., last-minute

52 53 54 55 56

UN Human Rights Council, supra note 46, p. 21. “Protect, Respect and Remedy” Framework, para. 67. UN Human Rights Council, supra note 46, para. 4. “Protect, Respect and Remedy” Framework, para. 68. Similarly in ISO 26000; see relevant discussion in 6.1.4, FN 74–80; Mares calls attention to the fact that the “Protect, Respect and Remedy” Framework does not provide for architecture to properly account for companies’ obligation to protect (not only respect) human rights; see Mares, supra note 24, p. 235. However, this is not surprising, since Prof. Ruggie rejected the notion that companies would have this obligation. 57 “Protect, Respect and Remedy” Framework, para. 69; see also Muchlinski, P., “Human Rights and Multinational Enterprises,” in McBarnet, Voiculescu and Campbell, note 17 (chapter 1), pp. 448–449.

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Sustainability Clauses in International Business Contracts changes without adjusting the price or delivery dates)58 or linked directly to the products or services provided to them.59 Although the sphere of influence is rejected as the determining factor of legal liability, the presence of leverage is decisive for choosing the practical response of companies to risks of complicity in negative impacts on human rights. It is at this point that contractual governance enters the equation. Contractual terms may provide a company with the necessary leverage over its supplier’s behavior.60 According to SRSG, the combination of a company’s leverage over its supplier, i.e., the ability to effect a change in its behavior, and the importance of the supplier for the company’s business decides the action to be taken to address any identified negative impacts.61 The decision logic was illustrated by the following matrix (Figure 6.1).

58 Casey, R., 2006, “Meaningful Change: Raising the Bar in Supply Chain Workplace Standards,” Corporate Social Responsibility Initiative, working paper no. 29, Cambridge, MA: John F. Kennedy School of Government, Harvard University, briefing paper for Professor Ruggie, p. 24 (describing the finding of Nike about the link between their own business practices and the negative impacts on labor conditions: “Terms of the standards supply agreement generally specify that the factory pays air freight if the factory cannot make delivery by a certain date; when orders arrive late, factories will choose to work more hours rather than be burdened by the obligation to pay a costly air freight bill. The push to meet production goals within the time constraints directly lead to compliance issues and abuse of workforce rights”). 59 Guiding Principles, para. 13; compare also with ISO 26000, para. 5.2.3. 60 SRSG, supra note 46, p. 3. 61 The SRSG also includes the severity of the abuse and consideration of whether terminating the relationship with the entity itself would have adverse human rights consequences as decisive factors for choosing the right action to be undertaken; however, he only uses the leverage and importance of the business relationship in question to build the decision matrix; Guiding Principles, para. 19.

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Figure 6.1 Buyers decision logic matrix*

* SRSG, supra note 46, p. 5.

Basically, only two options are available to companies, if they become aware of an actual or potential negative impact on human rights caused by their suppliers and in connection with the products or services provided to the company: to mitigate the negative impact or to terminate the relationship. Even though an inclusion of relevant demands into contracts is stated to be an insufficient effort to mitigate negative effects,62 it is evident that the Framework relies on contractual sanctions to exercise companies’ leverage. Termination of a business relationship basically means termination of the relevant contract; however, this cannot be done in every situation.63 Other mitigation actions include among other things capacity-building support to suppliers or collaboration with other entities to incentivize an improvement in suppliers’ performance.64 Nevertheless, contracts form the

62 SRSG, supra note 46, p. 2. 63 See the discussion in subsection 7.4.2.2. 64 SRSG, supra note 46, p. 3–4.

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backdrop to any mitigation effort, providing the ultimate incentive of losing the business relationship. We may further find references to contractual governance not only in connection with mitigation tools but also in the context of due diligence and operational principles for companies’ responsibility. Each company should, as a starting point for conducting due diligence, have a clear statement of its commitments in the human rights area. This statement should be detailed enough to provide a standard against which the company can assess possible negative impacts65 and be consistent with operational procedures, such as procurement strategies.66 For example, if a company commits to having zero tolerance of child labor, avoidance of child labor should be a condition in the suppliers’ selection process, and correspondingly due diligence in this respect should be conducted before any business relationship is established. The pre-contractual phase, where the company has the leverage of deciding whether or not to enter into the business relationship, thus presents a perfect opportunity for the first mitigation efforts.67 To summarize, the Framework has several important implications. First and foremost, it has introduced a new conceptual understanding of the company-state interaction in the human rights area. The Framework has largely influenced other non-binding CSR instruments, especially the OECD Guidelines, the UNGC, and ISO 26000. They have all been amended based on the recommendations or work of the SRSG.68 This also shows that the Framework can be easily transferred to other areas of public interest than human rights, such as environmental protection or anti-corruption efforts. The Framework has also impacted and probably will keep influencing the future work of public regulators, such as the EU. The reasons for this success are numerous: probably the main one is that the Framework reinstates in a clear fashion the primary responsibility of states for human rights protection and raises a “stop” sign to an excessively extensive understanding of companies’ responsibilities, as suggested by the previous issues of the UN Norms or the OECD Guidelines. It is very difficult to argue against this logical division of responsibilities, although it remains to be seen whether the Framework provides enough assurance that human rights will be respected and that the transnational situation in this respect will improve. In my opinion, one drawback could be that the Guiding Principles do not quite fulfill their ambition to offer companies practical tools for their responsibility to respect human rights. The necessity to use due diligence is a natural one, but not much detailed guidance is provided to address the situations in which mitigation is appropriate and the tools which can be deployed. Furthermore, the focal concept of complicity is not delineated clearly; on the contrary, the vagueness of the concept is confirmed. Thus, its use as a sup65 66 67 68

“Protect, Respect and Remedy” Framework, para. 60. Guiding Principles, para. 16. Guiding Principles, para. 17. See in infra respective subsections 6.2.2, 6.2.3, and 6.2.4.

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portive pillar of the Framework can once again be questioned. As stated by Professor Ruggie himself, follow-up research and development of the Framework is needed to achieve its successful operationalization.

6.2.2

OECD Guidelines

The OECD Guidelines were first adopted in 1976 and have since been amended five times, most recently in 2011.69 They are a non-binding set of recommendations regarding responsible business conduct addressed by governments to the multinational enterprises that operate in or from countries that are participating in the OECD Declaration on International Investment and Multinational Enterprises. Because they originate from public institutions but their character is legally non-binding, they can be qualified as international soft law. The content reflects substantive international law and globally recognized business standards in the areas of general business conduct, disclosure, human rights, employment and industrial relations, environment, combating bribery, consumers’ interests, science and technology, competition, and taxation. The OECD Guidelines establish unique enforcement bodies: the national contact points (NCPs). NCPs are established by states adhering to the Guidelines and offer a mediation and conciliation platform for dealing with issues regarding implementation of the Guidelines, which are in practice often complaints against companies for contravening the standards.70 Although NCPs’ decisions are not legally binding, they may have an important adverse reputational effect. For example, the Dutch NCP publishes a statistic about the companies that are involved in the complaints, and this essentially serves as a public shaming list.71 From their adoption, the OECD Guidelines stated that no precise definition of multinational enterprises (MNEs) is needed for the purpose of the Guidelines’ implementation and, therefore, they operate with a loose concept of “companies or other entities established in more than one country and so linked that they may co-ordinate their operations in various ways.”72 This seemed to include international supply chains connected through contractual arrangements and, thus, to form the basis for a broad responsibility of MNEs for their suppliers’ conduct. However, this inclusive understanding caused much controversy in the business and political community and was consequently more or less abandoned in the official Commentary to the 2000 amendment, which limited the applicability of the

69 OECD (2011), OECD Guidelines for Multinational Enterprises, OECD Publishing, www.oecd.org/daf/inv/mne/ (last accessed 25/03/2013). 70 A list of NCPs can be found at http://www.oecd.org/investment/mne/NCPContactDetails.pdf (last accessed 12/7/2014). 71 www.tuacoecdmneguidelines.org/multinationals.asp (last accessed 12/7/2014), Unilever Plc. and Nestlé currently lead the list. 72 OECD (2011), supra note 69, Concepts and Principles, para. 4, p. 17.

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Sustainability Clauses in International Business Contracts Guidelines to “established or direct business relationships,”73 and in a subsequent interpretation of this provision by NCPs, excluding contract-based relationships altogether.74 The restrictive scope of application of the OECD Guidelines has changed considerably as a result of the latest amendment in 2011. This revision of the Guidelines took inspiration from the Guiding Principles and not only included a new chapter on human rights and strengthened the position of NCPs75 but primarily implemented “a new and comprehensive approach to due diligence and responsible supply chain management representing significant progress relative to earlier approaches.”76 According to the current wording of the Guidelines, enterprises should “(a)void causing or contributing to adverse impacts on matters covered by the Guidelines, through their own activities…,”77 as well as “(s)eek to prevent or mitigate an adverse impact where they have not contributed to that impact, when the impact is nevertheless directly linked to their operations, products or services by a business relationship.”78 The OECD Guidelines thus expressly cover not only adverse impacts caused directly by MNEs but also those caused by other entities (e.g., suppliers) to which MNEs indirectly contribute. Although the Guidelines specify that this does not shift the actual responsibility from the company causing the adverse impact to the MNE,79 the MNE should act upon awareness of a potential or actual adverse impact caused by its supply chains.80 The question of what constitutes a contribution to an adverse impact is crucial here for establishing MNEs’ responsibility to act in response to a relevant piece of conduct by a member of their supply chains. The commentaries to the Guidelines provide an interpretation that the contribution must be substantial, meaning that the specific company “causes, facilitates or incentivises another entity to cause an adverse impact.”81 Even though this is helpful guidance, some questions remain. For example, if an MNE based in the USA orders a delivery of shoes from its Indian supplier and requests a tight delivery date and low costs of production, although it is aware of the child labor issue and frequent breaches of labor law regarding wages in the region, should we consider this as an incentive or even a cause

73 OECD (2008), OECD Guidelines for Multinational Enterprises, OECD Publishing, Commentaries, para. 10, p. 41. 74 Mares, supra note 24, p. 201. 75 In order to strengthen the NCP’s position, Denmark has adopted a new law (note 77 (chapter 2)), which establishes the NCP as a mediation platform, where potential breaches of international standards by Danish companies can be formally investigated, www.businessconduct.dk (last accessed 12/7/2014); a similar mechanism of formal mediation procedure applies in the Netherlands, www.tuacoecdmneguidelines.org/companydetails3.asp?organisationID=22902 (last accessed 12/7/2014). 76 OECD (2011), supra note 69, Foreword, p. 4. 77 Ibid., General Policies, A.11, p. 20. 78 Ibid., General Policies, A.12, p. 20. 79 Ibid. 80 Ibid., Commentary on General Policies, paras. 18 and 19, p. 24. 81 Ibid., Commentary on General Policies, para. 14, p. 23.

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for employment of children and payment of lower than legal minimum wages to the workers?82 Any adverse impact should primarily be addressed through a risk-based due diligence process, which should be an “integral part of business decision-making and risk management systems” and during which companies should identify, prevent, and mitigate both actual and potential adverse impacts.83 However, the nature and extent of the due diligence process is conditional upon the “…size of the enterprise, context of its operations, the specific recommendations in the Guidelines, and the severity of its adverse impacts…,” and companies with a large base of suppliers should prioritize suppliers for due diligence based on the risk assessment process.84 This context-bounded approach to due diligence reflects the reality of the business world and the fact that non-compliance can be of varying levels of severity, but it leaves MNEs with a wide discretion on the one hand and yet a heavy responsibility on the other hand to decide when due diligence should be conducted and to assess the severity of any adverse impacts. Nevertheless, if a company identifies a potential or actual adverse impact in its supply chain that can be directly attributed to the company’s activities, it must take all necessary steps to cease or prevent it, and if it identifies an adverse impact that may be caused with an indirect contribution from the company, it must take all necessary steps to prevent it and exercise its leverage to mitigate its consequences.85 The term “leverage” is further explained as the ability of a company to influence the wrongful behavior of the business partner in question,86 for example, through contractual arrangements.87 Contractual arrangements may even overcome the practical limitation of MNEs’ ability to influence behavior of their suppliers.88 Therefore, this part of the commentaries to the OECD Guidelines directly refers to the practice of SCCs as a means of exercising leverage where the sourcing company has the negotiating power to require sustainability requirements of its suppliers. Similarly to the “Protect, Respect and Remedy” Framework, this presumes that the due diligence will already have been conducted prior to the conclusion of a contract.89 If a problem manifests itself during the contractual term, the Guidelines expect the company to implement risk mitigation efforts and eventually to temporarily suspend the business relationship and in the most severe cases to terminate the contract.90 82 McBarnet and Kurkchiyan, note 17 (chapter 1), p. 88 (noting that Nike found that half of the cases of serious suppliers’ non-compliances with the company’s CSR policy could be traced back to the company’s own demands, such as flexible production, fast turnaround, or changed orders). 83 Ibid., Commentary on General Policies, para. 14, p. 23; General Policies, A.10, p. 20. 84 Ibid., Commentary on General Policies, para. 15, p. 24. 85 Ibid., Commentary on General Policies, paras. 18 and 19, p. 24. 86 Ibid., Commentary on General Policies, para. 19, p. 24. 87 Ibid., Commentary on General Policies, para. 21, p. 24. 88 Ibid., Commentary on General Policies, para. 21, p. 24. 89 Ibid. (referring to pre-qualification requirements for potential suppliers). 90 Ibid., Commentary on General Policies, para. 22, p. 25.

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In addition to dealing with adverse impacts, MNEs should “encourage” observance of the OECD Guidelines by their business partners, including their suppliers and sub-suppliers.91 This includes participation in various multi-stakeholder initiatives, sharing experience and information with peers, and coordinated supply chain efforts.92 To summarize, although the Guidelines reject a shift in responsibility for adverse impacts from the supplier companies which causes them onto MNEs, they expressly impose upon MNEs the responsibility of acting in the event that they are aware that an adverse impact may occur or is occurring. Since their last amendment in 2011, the OECD Guidelines fully embrace the possibility of MNEs affecting business conduct in their supply chains and put contractual arrangements to the fore as a means of exercising the necessary leverage.

6.2.3

UN Global Compact

Since its launch in 2000, the UNGC has become probably the best-known (over 10,000 corporate participants)93 and most often cited CSR initiative.94 It contains 10 vaguely formulated Principles for responsible corporate behavior in the areas of human rights, labor conditions, environmental protection, and anti-corruption efforts. The requirements were drafted broadly, inter alia in order to be usable by the widest possible audience across nations, cultures, and jurisdictions. The UNGC is a non-binding, voluntary-participationbased, public-private initiative, benefiting both from the moral authority of the United Nations and the expertise of the corporate members.95 Although the 10 UNGC principles do not expressly refer to supply chains in the text, responsibility within supply chains is an inherent part of the UNGC framework, and supply chain contracts are implicitly relied upon as one of the driving implementation tools. The UNGC covers supply chains through the concepts of “sphere of influence” and “complicity.”96 This indirect inclusion is further developed in various accompanying instruments prepared by the UNGC.

91 Ibid., General Policies, A.13, p. 20. 92 Ibid., Commentary on General Policies, paras. 23 and 24, p. 25. 93 UNGC, Overview of the UN Global Compact, www.unglobalcompact.org/AboutTheGC/index.html (last accessed 27/03/2013). 94 According to the European Commission’s findings, over 30% of the investigated EU companies refer to the UN Global Compact on their websites, sustainability reports, or publicly available corporate policies; see Schimanski, supra note 24, p. 7. This is the highest reference rate among the studied CSR initiatives. The second most often referred to is the Universal Declaration of Human Rights (with ca. 23%), followed by the ILO instruments (with ca. 18%). 95 Supra note 93. 96 Mares, supra note 24, p. 205.

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The UNGC asks its corporate participants to “… embrace, support and enact, within their sphere of influence, a set of core values…” in the four areas mentioned above.97 It was the first instrument to introduce the concept of “sphere of influence” with the intention of delineating the scope of companies’ possibilities to positively impact beyond their corporate boundaries. The concept was originally included in the first UNGC principle; however, later it was dropped and moved into the Preamble.98 Since its introduction, the term has triggered many passionate debates among scholars and regulators, some arguing that it is a helpful and intuitive concept for companies, others pointing out the ambiguity of the concept and its susceptibility to strategic manipulation.99,100 It should also be noted that the concept has been retained in some regulatory instruments (e.g., UNGC), introduced in new ones (e.g., ISO 26000), and eliminated from others (e.g., the “Protect, Respect and Remedy” Framework). In the UNGC, the notion of a sphere of influence is currently used primarily to map possible positive impacts of corporate behavior beyond the legal boundaries of firms, rather than to describe the legal responsibility of companies for their supply chains’ conduct. In reaction to the Guiding Principles, the UNGC provided a clarification of the sphere of influence concept as an analytical tool for companies to understand their potential for positive influence,101 although this is limited by the context companies operate in: “The concept of ‘sphere of influence’ can help map the scope of a company’s opportunities to support human rights and make the greatest positive impact. While these opportunities may be greatest with respect to a company’s own operations and workers, the ability to act gradually declines as consideration moves outward to the supply chain, to local communities, and beyond….”102 97 UNGC, The Ten Principles, www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html (last accessed 20/03/2013). 98 See The Global Compact Critics blog, “How ‘sphere of influence’ was introduced into the Global Compact,” http://globalcompactcritics.blogspot.dk/2010/05/global-compacts-principle-one-subject.html (last accessed 12/7/2014). 99 See, e.g., UN Human Rights Council, Clarifying the Concepts of “Sphere of influence” and “Complicity,” supra note 46; Wood, S., 2010, “In Defence of the Sphere of Influence: Why the WGSR should Not Follow Professor Ruggie’s Advice on Defining the Scope of Social Responsibility,” working paper, York University, Osgoode Hall Law Journal, Institute for Research and Innovation in Sustainability, available at SSRN: http://ssrn.com/abstract=1607438 or http://dx.doi.org/10.2139/ssrn.1607438 (last accessed 12/7/2014); Wood, S., “Meaning of ‘Sphere of Influence’ in ISO 26000,” in Understanding ISO 26000: A Practical Approach to Social Responsibility, London, UK: British Standards Institution, pp. 115–130. 100 For further discussion on the implications of the concept for the SCCs, see section 7.3.2. 101 See also Baab, M., Jungk, M., 2009, “The arc of human rights priorities: A new model for managing business risk,” The human rights and business project, Danish Institute for Human Rights, p. 2. www.unglobalcompact.org/docs/issues_doc/human_rights/Human_Rights_Working_Group/ 9June09_Arc_of_Human_Rights_Priorities_-_Road_Testing_Version.pdf (last accessed 27/03/2013). 102 www.unglobalcompact.org/Issues/human_rights/The_UN_SRSG_and_the_UN_Global_Compact.html, (last accessed 27/03/2013).

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As the concept of “sphere of influence” is used in the UNGC mainly to delineate the area of possible positive impacts of companies, the concept of “complicity” is used to describe the scope of companies’ obligation not to knowingly cause or contribute to the causing of any negative impact. The complicity issue is mentioned only in relation to human rights in Principle 2, which states that businesses should “make sure they are not complicit in human rights abuses.”103 The Commentary to Principle 2 describes complicity in a broader than solely legal sense, saying that “(a)llegations of complicity are not confined to situations in which a company could be held legally liable….”104 This wide understanding of complicity does always need to incorporate two elements: an act or omission by a company, by which it provides practical assistance, encouragement, or moral support to a human rights abuse, and the knowledge that the act or omission provides assistance, encouragement, or moral support to a human rights abuse.105 Similarly to the OECD Guidelines, the UNGC requires that the act or omission in question should have “a substantial effect on perpetration of the abuse.”106 The requirement for “substantial effect” reflects well the practical limitations of companies’ ability to exercise influence over their suppliers but provides ambiguous and loose guidance for companies to assess the risk of being accused of complicity. For example, should a buying company, which is a weaker player in a business relationship but continues sourcing goods from a supplier known for using child labor, be considered as providing encouragement (in the form of ongoing business) to the breach of UNGC Principle 5 by the supplier? Such behavior could be classified as “silent activity” (as described in the Commentary to Principle 2), since the company is inactive although it is aware of a continuous human rights abuse.107 Under a more extensive interpretation, it could alternatively be classified as “beneficial complicity,” because the company keeps earning profit from a supplier abusing human rights. However, does the activity have a “substantial effect” on the supplier? Probably not, since the supplier would not suffer much from losing the company as a buyer. But should we consider the size of its other buyers? If it has many buyers but they are all small, does it mean that they have no influence over the supplier whatsoever? This and similar questions remain open, but one should remember that the purpose of the UNGC is only to guide, not prescribe, business behavior. Regardless of the lack of clarity of the “sphere of influence” and “complicity” concepts, it is evident from the UNGC (throughout the Commentary to the principles and in followup works and publications) that contractual governance is considered to be one of the basic tools for tackling human rights, labor conditions, environmental protection, and

103 UNGC, Commentary to Principle 2, www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/Principle2.html (last accessed 3/4/2013). 104 Ibid.; see also Mares, supra note 24, p. 205. 105 UNGC, supra note 103. 106 Ibid. 107 Ibid.

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anti-corruption issues. The first hint of this point is found in the UNGC Preamble, which expects companies to “… embrace, support and enact…” the UNGC core values within their sphere of influence.108 While the words “embrace” and “support” carry a notion of informal and voluntary action, the word “enact” evokes a connotation of a formal and structured approach usually associated with the establishment of an obligation. Internally, companies may enact the UNGC principles in the form of various corporate policies and codes applicable to the companies’ directors and employees. However, the question is how companies may enact (i.e., establish) an obligation within their sphere of influence beyond their legal boundaries. A common tool is to adopt a type of suppliers’ code of conduct.109 The actual development and adoption of such a policy may satisfy our understating of the expectation to “enact”; however, it fails to provide any assurance that it will actually be observed. Nevertheless, in various places, the UNGC expresses the expectation of companies’ active involvement with their suppliers to increase such assurance. For example, the Commentary to Principle 5 lists in the “What companies can do” section the possibility to “(e)xercise influence on subcontractors, suppliers and other business affiliates to combat child labour.”110 In relation to environmental protection, the Commentary to Principle 8 says something similar in another words: companies can “(w)ork with suppliers to improve environmental performance, extending responsibility up the product chain and down the supply chain.” Both these excerpts assume that companies have a degree of influence over their business partners, i.e., that they may affect the business partners’ behavior. Further, the latter excerpt assumes that companies may “extend responsibility,” meaning that they may hold their business partners responsible for not adhering to the UNGC principles. There are many possibilities for business entities to influence others; however, the most straightforward, and probably also most powerful, is to exercise influence through the actual bilateral link between two parties, which is demonstrated in a corresponding contractual arrangement.111 Operationalizing corporate policies through business contracts is described as a basic step in the UNGC practical guide on supply chain sustainability.112 The guide advises companies clearly to formulate their CSR expectations towards their suppliers in a code of conduct and subsequently implement the code through its “integration

108 UNGC, supra note 97. 109 The name may vary; possible names include “suppliers code of conduct,” “vendors code of conduct,” “responsible sourcing principles,” “suppliers guidelines,” “responsible standards for suppliers,” or “suppliers conduct principles.” 110 UNGC, Commentary to Principle 5, www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/principle5.html, (last accessed 3/4/2013). 111 Unfair or illegal means of influence are not considered here. 112 UN Global Compact Office and Business for Social Responsibility, 2010, Supply Chain Sustainability: A Practical Guide for Continuous Improvement.

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Sustainability Clauses in International Business Contracts … into supplier contracts.”113 This should be the first level of a development towards sustainability in international supply chains.114 Overall, the UNGC accounts for companies’ possibility positively to influence their suppliers’ behavior in the CSR area through the concept of “sphere of influence,” as well as their obligation to avoid contributing to unethical behavior within their supply chains through the concept of “complicity.” However, similarly to the case of other CSR initiatives, these two concepts do not provide clear guidance to establish or delineate corporate obligations and responsibilities. In the actual text of the UNGC principles, the concepts are not used systematically: for example, although its application can potentially be extended, the concept of complicity is mentioned only in relation to human rights. Nevertheless, further publications of the Global Compact promote contracts as a basic implementation means of the UNGC within international supply chains.

6.2.4

ISO 26000

In 2010 the International Organization for Standardization adopted long-awaited guidance on social responsibility in the form of ISO 26000.115 The ISO 26000 standard provides detailed guidance for organizations (both public and private) in the CSR area. Unlike many other ISO standards, ISO 26000 is not a certifiable standard but only a management guideline. It is also not intended for contractual or regulatory use.116 This statement seems rather confusing, since any CSR standard or guidance’s aim is to regulate behavior, to help to align corporate behavior with internationally recognized standards. It appears that the purpose of this clause is to declare that ISO does not anticipate replacing national governments in lawmaking and that as such the standard is not legally enforceable.117 As far as the contractual use of this standard is concerned, the text may state that it is not considered suitable for contractual use; however, based on the principle of contractual freedom, it is up to parties entering into a contract if they include the standard or its parts into a particular contractual arrangement or not. Overall, the instrument appears to be a recommendation for addressing the responsibility of companies towards society and the environment they operate in and seems to serve exactly this purpose. Although an empirical study of corporate sustainability reports revealed only a low proliferation of the standard among

113 114 115 116 117

Ibid., p. 23. Ibid., p. 33. ISO 26000:2010, www.iso.org/iso/home/standards/iso26000.htm (last accessed 3/4/2013). ISO 26000, para. 1. For discussion of the public policy dimensions of ISO 26000, see Ward, H., 2010, “The ISO 26000 international guidance standard on social responsibility: implications for public policy and transnational democracy,” 2nd draft, Foundation for Democracy and Sustainable Development.

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the investigated companies,118 a broader adoption level can be expected in the future, since the standard is still very new and in comparison to other CSR regulations it provides a more detailed and practical approach towards implementing CSR into organizations’ operations. The standard devotes a significant amount of attention to CSR issues within organizations’ supply chains. Similarly to the UNGC, ISO 26000 works with both the notions of “sphere of influence” and “complicity.” The basic definitions of the concepts do not differ much from the text of other CSR instruments, but their use throughout the standard is more profound, provides more detailed explanations, and develops their different variations. Sphere of influence is defined as a “range/extent of political, contractual, economic or other relationships through which an organization has the ability to affect the decisions or activities of individuals or organizations.” However, the boundaries of the concept are delineated in an accompanying note, which states that “(t)he ability to influence does not, in itself, imply a responsibility to exercise influence.”119 The limits of the concept are further described in clause 5.2.3, which ties companies’ responsibility to exercise influence to the causal relationship between the companies’ decisions and activities and the impact in question.120 This can be interpreted in such a way that, for example, Company A should exercise influence over its supplier to reduce its carbon emissions in relation to production of Company A’s products but does not need to interfere if a high amount of carbon is emitted by the same supplier during production for Company B. This seems very logical, but there are many situations where a supplier manufactures products for several buyers at the same time. How should responsibility for carbon emissions be allocated among the buyers in such a case?121 One answer could be to look at the proportional quantity of products bought by the individual buyers. This would be consistent with further interpretation of sphere of influence in clause 5.2.3 of ISO 26000, which states that a company may have the responsibility to exercise influence even when a causal relationship between its actions and a negative impact is missing to “the extent to which an organization’s relationship

118 Only two companies refer to the standard in their sustainability reports, and none of them reported using the standard in their contractual arrangements with suppliers. This corresponds with the finding of the European Commission that only approximately 7% of the European companies refer to the ISO 26000 on their websites, sustainability reports, or publicly available corporate policies: see Schimanski, supra note 24, p. 7. 119 ISO 26000, para. 2.19; compare to the relevant discussion in the context of SRSG’s work; supra note 56. 120 ISO 26000, para. 5.2.3 (“For instance, it cannot be held responsible for the impacts of other organizations over which it may have some influence if the impact is not a result of its decisions and activities. However, there will be situations where an organization will have a responsibility to exercise influence. These situations are determined by the extent to which an organization’s relationship is contributing to negative impacts”). 121 For guidance on allocation of carbon emissions, see Greenhouse Gas Protocol, 2010, Corporate Value Chain (Scope 3) Accounting and Reporting Standard: Supplement to the GHG Protocol Corporate Accounting and Reporting Standard, chapter 8, available at: www.ghgprotocol.org/standards/scope-3-standard (last accessed 4/4/2013).

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Sustainability Clauses in International Business Contracts is contributing to negative impacts.”122 Another answer could be to look at the power distribution among the companies, with the prediction that a stronger buyer has greater potential and, thus also greater responsibility, to influence the supplier’s behavior, and therefore also its relationship contributes more to the negative impact. This would correspond to the idea that the stronger a company is, the bigger influence it has.123 The choice to be made is thus between impact- and leverage-based responsibilities. Although ISO 26000 does not entirely reject the second answer in its text, it (being influenced by the “Protect, Respect and Remedy” Framework) is more inclined towards the first option.124 Nevertheless, either answer only provides companies with intuitive guidance: they do not provide any specific tools to assess the extent of the actual risks. In line with the UNGC, “complicity” is defined in both the legal and non-legal senses and appears in three variations: direct, beneficial, and silent.125 Unlike the concept of “sphere of influence,” which is used 34 times in various places throughout the text of the standard, the concept of complicity is (except for the initial definition) used in only two clauses, both in relation to human rights.126 But although it does not appear frequently in the text, complicity is still a central concept that the ISO 26000 is built on, since it is inherently connected to notions of causing and contributing to negative impacts. In the standard, both “sphere of influence” and “complicity” are tightly connected to business contracts. This connection is first established in clause 2.19, which lists contractual next to political, economic, and other relationships through which a company may exercise its influence over another entity. By this, ISO 26000 expressly acknowledges the power of contracts in the CSR area. This is further developed in several places in the text. First and foremost, one of the strongest powers a company has is to decide with whom it wishes to contract.127 The standard expressly asks companies to use this power in clause 6.3.5.2, stating that “… organization should not enter into a formal or informal partnership 122 Supra note 120. 123 ISO 26000 clause 7.3.3.1 Assessing an organization’s sphere of influence (“This includes the extent of the economic relationship and the relative importance of that relationship for either organization; greater importance for one organization can create greater influence for the other organization”) and clause 6.4.3.2 (“… recognizing that a high level of influence is likely to correspond to a high level of responsibility to exercise that influence …”). 124 For discussion of the influence of the UN Framework on ISO 26000, see Wood, Stepan, 2012, “The Case for Leverage-Based Corporate Human Rights Responsibility,” Business Ethics Quarterly, 22(1), 63–98, pp. 69–70. 125 ISO 26000, para. 4.7 (“Complicity has both legal and non-legal meanings … Complicity is associated with the concept of aiding and abetting an illegal act or omission. In a non-legal context, complicity derives from broad societal expectations of behaviour. In this context, an organization may be considered complicit when it assists in the commission of wrongful acts of others that are inconsistent with, or disrespectful of, international norms of behavior … An organization may also be considered complicit where it stays silent about or benefits from such wrongful acts”). 126 ISO 26000, paras. 6.3.5.1 and 6.3.5.2. 127 ISO 26000, para. 5.2.3 (“An organization may decide whether to have a relationship with another organization and the nature and extent of this relationship”).

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or contractual relationship with a partner that commits human rights abuses in the context of the partnership or in the execution of the contracted work.” Since, as described above, it is often not possible in practice to easily allocate negative impacts between various buyers of one supplier (e.g., if a supplier using both child and adult workers produces various products at the same time in the same factory, a buyer cannot be sure which individual worker will be working on its products), companies should avoid contracting with a particular supplier if a suspicion arises that the supplier is causing negative impacts on society or the environment even if this arises in connection with production for other buyers. In line with the theory of freedom to choose a contractual partner, companies may use the legal authority of existing contractual relationships to enforce desired behavior on another entity through the threat of terminating the contract.128 Second, ISO 26000 expects companies not only to avoid complicity in unethical behavior by not contracting with risky partners but also to influence their suppliers by imposing SCCs upon them. Clause 7.3.3.2 mentions “setting contractual provisions or incentives” first in enumerating the possible ways of exercising influence. Similarly, clause 6.4.3.2 addresses this issue in relation to labor practices.129 Finally, in clause 6.6.6 the standard recognizes not only the bilateral effects of contracting, but also its general regulatory side,130 although it is careful to state that such regulatory effects should not be considered as a substitute for public rules. The actively political role of contracts in promoting social responsibility within international supply chains is stressed by requiring companies to “integrate ethical, social, environmental and gender equality criteria, and health and safety, in [their] purchasing, distribution and contracting policies and practices to improve consistency with social responsibility objectives.”131 ISO 26000 provides the greatest number of details and guidance on the use of contracts in the CSR area. Once again, the vague terms “sphere of influence” and “complicity” are taken as starting points in addressing sustainability in international supply chains, but there is also a plenty of practical guidance, offering companies actual tools to tackle current global problems. Time will tell whether companies manage to use this instrument in a meaningful way or if it is just one in a long row of other non-state regulations of questionable authority and practical use.

128 ISO 26000, para. 7.3.3.1. 129 ISO 26000, para. 6.4.3.2 (“… An organization should make reasonable efforts to encourage organizations in its sphere of influence to follow responsible labour practices …. Depending upon the situation and influence, reasonable efforts could include: establishing contractual obligations on suppliers and subcontractors;…”). 130 ISO 260000, para. 6.6.6.1 (“An organization can influence other organizations through its procurement and purchasing decisions. Through leadership and mentorship along the value chain, it can promote adoption and support of the principles and practices of social responsibility”). 131 ISO 26000, para. 6.6.6.2.

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6.2.5

EU: A renewed strategy for corporate social responsibility

The European Union works with corporate social responsibility at various levels. The core policy statement is the European Commission’s Communication entitled “Renewed EU Strategy 2011–2014 for Corporate Social Responsibility from 2011” (EU Renewed CSR Strategy).132 This interinstitutional communication replaced the previous Green Paper entitled “Promoting a European framework for Corporate Social Responsibility.”133 Both the Communication and the Green Paper are soft law instruments used solely by the European Commission to express its view on a certain issue and possibly to indicate what actions could be taken or to formulate proposals.134 Although they do not have binding power, they offer an important indication of the direction in which future legislation may go. One of the important changes brought in by the EU Renewed Strategy is a new definition of CSR. While in the Green Paper of 2001 CSR was defined strictly as a voluntary concept, the new definition states that “(r)espect for applicable legislation…is a prerequisite for meeting … responsibility.”135 This definition discards the previous dichotomy between the voluntary and compulsory concepts of CSR and comes closer to the understanding of the concept laid down in the “Protect, Respect and Remedy” Framework, based on the three main pillars: states’ responsibility to protect, companies’ responsibility to respect, and access to remedies. The Commission’s definition reflects the second pillar, taking the responsibility to respect to consist both of legal compliance and voluntary initiatives beyond the law.136 However, the overall impact of the EU Renewed Strategy is rather soft, especially in relation to the responsibilities of core companies for behavior in their international supply chains. The Commission has greatly softened its rhetoric in this connection since the 2001 Green Paper. While the 2001 Green Paper spoke of “acquired additional corporate social responsibility” of outsourcing companies,137 the EU Renewed CSR Strategy avoids the word “responsibility” and merely “encourages” companies to apply due diligence in their supply chains.138 This development was not unexpected: the Commission has consistently been

132 See note 121 (chapter 1). 133 Commission of the European Communities, Green Paper: Promoting a European framework for Corporate Social Responsibility, 18.7.2001, COM(2001) 366 final. 134 Senden, L., 2004, Soft Law in European Community Law, Oxford and Portland Oregon: Hart Publishing, pp. 124–126, 133–135. 135 EU Renewed CSR Strategy, section 3.1. 136 European Parliament, Report of 28 January 2013 on corporate social responsibility: accountable, transparent and responsible business behaviour and sustainable growth (2012/2098(INI)), para.5; European Parliament, Report of 29 January 2013 on Corporate Social Responsibility: promoting society’s interests and a route to sustainable and inclusive recovery (2012/2097(INI)), para. 11. 137 Commission of the European Communities, supra note 133, para. 48. 138 EU Renewed CSR Strategy, section 3.1.

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a proponent of a non-legally binding approach to CSR for a number of years.139 The European Parliament, on the other hand, has steadily supported a more stringent notion of companies’ responsibility for the effects of their activities in supply chains. In 2006, it called on the Commission “to regulate joint and several liability on the part of general or principal undertakings in order to deal with abuses in the subcontracting and outsourcing of workers.”140 The notion of responsibility extending beyond legal corporate boundaries, including subcontractors, has been upheld in the Parliament’s most recent documents, although the wording has softened in the sense of abandoning use of the term “liability.” The European Parliament “(n)otes that, in assessing a company’s social responsibility, account must be taken of the conduct of those companies forming part of its supply chain as well as that of any subcontractors,”141 “(s)tresses that CSR should apply to the entire global supply chain, including all levels of subcontracting,”142 and “(c)alls on the Commission … to put forward proposals for better facilitating access to justice in EU courts for the most extreme, egregious cases of human or labour rights violations by European-based businesses or their subsidiaries, subcontractors or business partners, as recommended by the UN Secretary-General’s Special Representative on Business and Human Rights.”143 As Mares has pointed out, only three years ago, the differences between the Commission’s and the Parliament’s perception of buyers’ responsibility seemed irreconcilable, but since the last development, this no longer seems to be the case.144 Although the two institutions retain different levels of stringency towards the issue, both the Commission and Parliament have drawn back from their attitude and appear to be reaching the common ground offered by the approach in the “Protect, Respect and Remedy” Framework. The Commission has adopted a new definition and a risk-based concept of due diligence for the identification, prevention, and mitigation of negative impacts of companies in international supply chains. The Parliament has withdrawn from its demand for strict legal liability of buyers for their subsidiaries’ and subcontractors’ conduct, moving more towards corporate governance responsibilities in stating that “the concept of Responsible Supply Chain Management needs to be further elaborated as a mechanism for delivering CSR.”145 Still, the Parliament remains a proponent of stricter rules for buyers’ responsibility. Since CSR is approached by the EU institutions and especially by the Commission as the most influential EU policymaker, primarily as a managerial responsibility, the concepts of “sphere of influence” and “complicity” are not developed. Therefore, the use of contracts 139 Mares, supra note 24, p. 216. 140 European Parliament, Report on corporate social responsibility: a new partnership (2006/2133(INI)), A60471/2006 final, para. 37. 141 European Parliament, (2012/2097(INI)), supra note 136, para. 20. 142 Ibid., para. 81. 143 Ibid., para. 39. 144 Mares, supra note 24, p. 220. 145 European Parliament, (2012/2098(INI)), supra note 136, para. 15.

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to meet CSR goals is also not dealt with in the official documents, except for an indirect reference to it through the Responsible Supply Chain Mechanism mentioned above and the Commission’s marginal note in the EU Renewed CSR Strategy that “(t)he promotion of social and environmental responsibility through the supply-chain” is an important crosscutting issue.146 Nor, somewhat surprisingly, is contractual governance tackled in the study on responsible supply chain management prepared for the EU, examining the practice of EU-based companies.147

6.2.6

California Transparency in Supply Chains Act of 2010

In 2010, California became the first state in the USA to enact a law on obligatory disclosure regarding human trafficking in the supply chains of large enterprises.148 Retail sellers and manufacturers operating within the Californian borders and having over USD 100 million in annual worldwide gross receipts have from 1 January 2012 been obliged to publish on their corporate website information on what actions they take to eradicate slavery and human trafficking in their supply chains. The disclosure should include as a minimum information on actions taken to assess the risks of slavery and human trafficking in a company’s supply chain, audit suppliers’ compliance with the company’s relevant standards, require suppliers’ certification that materials incorporated into the products comply with relevant laws, maintain internal accountability standards and procedures for employees and contractors, and train employees and management responsible for supply chain management on these issues.149 The companies are not actually required to take any specific actions, and it may well be that they do not take any such actions. However, if that is the case, they still have to inform their consumers and other stakeholders accordingly online. The law, inducing desired behavior indirectly via regulating companies’ self-regulation, is thus a typical example of a national meta-regulation with extraterritorial effect.150 Neither the legal text nor the accompanying brief explanatory note mentions the concepts of “sphere of influence” or “complicity.” However, section 2 acknowledges the power of businesses to affect slavery and human trafficking when stating that “(c)onsumers and businesses are inadvertently promoting and sanctioning these crimes through the purchase

146 EU Renewed CSR Strategy, section 3.3. 147 Opijnen, van M., Oldenziel, J., 2011, Responsible Supply Chain management: Potential Success Factors and Challenges for Addressing Prevailing Human Rights and Other CSR Issues in Supply Chains of EU-based Companies, CREM and SOMO for the EU. 148 California Transparency in Supply Chains Act of 2010, CA Senate Bill No. 657 (California, USA). 149 California Transparency in Supply Chains Act of 2010, section 3. 150 Parker, C., “Meta-regulation: legal accountability for corporate social responsibility,” in McBarnet, Voiculescu and Campbell, note 17 (chapter 1), p. 208 (describing meta-regulation as “the proliferation of different forms of regulation (whether tools of state law or non-law mechanisms) each regulating one another”).

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of goods and products that have been tainted in the supply chain.”151 Targeting the largest companies, the regulators also appear to support the view that the level of responsibility is derived from companies’ size and thus their economic leverage. The question of their actual contribution to slavery and human trafficking is not addressed. Although the Act does not expressly request companies to include SCCs in their international supply contracts, this seems to be one of its effects in practice. Firstly, the Act presumes that companies will adopt and maintain “internal accountability standards and procedures for employees and contractors.” In order for the standards to invoke suppliers’ accountability, meaning that non-compliance may result in a negative consequence for a supplier (such as a loss of business), they must possess some formal power. Such power may relatively easily be achieved by contractual means. The same applies to the expectation that companies should require a certification regarding used materials. They may require this certification outside of a contractual relationship, but it is likely to be easiest to make it a condition of entering into, or an actual provision of, a contract. Finally, if a company is to have the right to access its suppliers’ premises, the right must be established formally between the parties, or the supplier may refuse cooperation. Once again, the contractual form seems appropriate here. Introducing contractual conditions is also recommended by practitioners to companies that are subjected to the law.152

6.2.7

International Framework Agreements

As introduced in chapter 2 (research design), IFAs are bilateral (or multilateral) agreements concluded between global union federations and MNEs, whose legal status, although they have a form of a binding contract, is not absolutely clear due to the lack of transnational rules on collective bargaining. Nevertheless, they constitute a type of global CSR regulation with an effect on the use of SCCs in business contracts.153 It could be said that they predefine the content of business contracts in this respect through provisions on the applicability of IFAs on sub-suppliers. A study from 2009 found that 70% of all IFAs refer to suppliers

151 California Transparency in Supply Chains Act of 2010, section 2 (h). 152 See, e.g., Lupo, A. V., Bruno, S. L. and Pulliam, E. J., 2012, “The California Transparency in Supply Chains Act of 2010,” The Computer & Internet Lawyer, 29(4), 13–14, p. 14 (advising companies to include the following text on their websites: “[Company Name] is opposed to human trafficking and slavery and takes steps to ensure that these illegal behaviors are not incorporated into the [Company Name] supply chain. These steps include agreements with vendors that they will not engage in this type of behavior and will comply with local laws”). 153 Sobczak, A., 2012, “Ensuring the effective implementation of transnational company agreements,” European Journal of Industrial relations, 18(2), 139–151, p. 141 (stressing that an unclear legal status may not mean lower effectiveness than in the case of a hard law instrument).

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Sustainability Clauses in International Business Contracts and subcontractors.154 Forty-six percent merely oblige companies to inform their business partners about and/or encourage them to follow an IFA, 14% include some measures to ensure suppliers’ compliance, and only 9% require the applicability of IFA on the whole supply chain.155 The variety of strength of the commitments is thus similar to the case of corporate codes of conduct or SCCs. They range from not mentioning suppliers at all,156 through vague recommendations, 157 to implementation of the IFAs’ requirements on suppliers in the pre-contractual process 158 or in the contract itself.159 Several questions arise in connection with the commitments regarding suppliers in IFAs. Firstly, how strong are these and how do they interact with other corporate CSR policies? Naturally, if an IFA binds a company to implement the agreement within the company’s supply chain, it usually reflects and strengthens the rhetoric of the corporate CSR commitments. However, it may not strengthen their binding power since the implementation and enforcement mechanisms included in IFAs are generally weak. For example, Siemens’ IFA includes three implementation and enforcement tools:160 a whistle-blowing policy, corporate self-assessment, and a meeting of the central works council with employees and employees’ representatives.161 All these mechanisms are at the level of corporate governance and do not involve any external authority. As such, the agreement is just as vulnerable to criticism for its weak enforcement as unilateral codes of conduct. Another question is how IFAs interact with SCCs in business contracts. There is no issue in cases where an IFA does not mention SCCs, but a company nevertheless includes

154 Telljohann, V., da Costa, I., Müller, T., Rehfeldt, U., Zimmer, R., 2009, European and international framework agreements: Practical experiences and strategic approaches, European Foundation for the Improvement of Living and Working Conditions, p. 1. 155 Ibid. 156 For example, Anglogold (2009), available at: www.industriall-union.org/sites/default/files/uploads/documents/GFAs/AngloGold/anglo-ashanti-global_agreement.pdf (last accessed 12/7/2014). 157 For example, Ford (2012), available at: www.industriall-union.org/sites/default/fies/uploads/documents/GFAs/Ford/gfa_ford.pdf (last accessed 29/4/2013) (“Ford will encourage business partners to adopt and enforce similar policies to those contained in these Principles, as the basis for establishing mutual and durable business relationships”). 158 For example, EADS (2005), available at: www.industriall-union.org/sites/default/files/uploads/documents/GFAs/EADS/eads-gfa-english.pdf (last accessed 29/4/2013) (“Compliance with EADS standards serves as a criterion for selecting suppliers”). 159 For example, EDF (2008), available at: www.industriall-union.org/sites/default/files/uploads/documents/GFAs/EDF/edf-gfa-english.pdf (last accessed 29/4/2013) (“These requirements shall be conveyed to the subcontractors. Any serious failure, not remedied following notification, to comply with legislation, the rules concerning employee health and safety, the principles governing relations with customers and the regulations in force with regard to the environment, shall result in the termination of our relations with the subcontracting company, in accordance with contractual obligations … Subcontractors must apply the requirements set out by EDF Group to any other subcontractor whom they may have hired for the job in question”). 160 Siemens (2012), available at: www.industriall-union.org/industriall-signs-global-agreement-with-siemenson-principles-of-social-responsibility (last accessed 30/4/2013), Article 2.10. 161 The term “Central Works Council” is used in the EU for a body representing employees of a company with several establishments.

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them in its contracts. A more interesting situation is when an IFA requires inclusion of SCCs into contracts, but a company does not follow this requirement, or when the content or scope of the sustainability requirements in an IFA and business contracts differ or even contradict each other. Taking the aim of IFAs into account, they should be superior to individual supply contracts concluded by companies. But does that also mean that third parties may rely on IFAs against individual supply contracts? Probably not, because the parties and beneficiaries to each of the two agreements and the rights vested in and obligations imposed on them are different. For example, if an IFA states that a company must include requirements for a minimum legal wage into its supply chain contracts, an employee of a company’s supplier cannot enforce this, since he does not have any relationship with the IFA. In summary, IFAs form an increasingly used CSR regulatory tool. However, they do not successfully deal with the critique of other transnational forms of private regulation, despite their contractual character. Furthermore, there is no unified attitude towards the use of SCCs, and thus each IFA needs to be analyzed separately.

6.2.8

Multi-party business-driven initiatives

In order to jointly face the expectations regarding their ethical behavior, companies are increasingly associating to develop common CSR rules and procedures. These rules and procedures are a typical example of transnational private regulation. There are large differences among these business-driven initiatives regarding the number of participants, the scope of their activities, the level of coordination, the industry affiliation, etc. It goes beyond the capacity of this book to analyze or even list all of them. Therefore, the BSCI is selected as a representative regulation to manifest how these initiatives may look like and operate and how they may view the use of SCCs. The Business Social Compliance Initiative (BSCI) is a European-based business-driven voluntary initiative that offers processes for companies to improve working conditions in their supply chains.162 The Initiative was founded in 2003 by the Foreign Trade Association and has over 1 000 members from different countries.163 The BSCI is based on the ILO Conventions, the Universal Declaration of Human Rights, the UNGC, and the OECD 162 http://fta-intl.org/sites/fta-intl.org/files/file/BSCI-Information-Sheet-EN.pdf (last accessed 9/5/2013); the initiative focuses on selected labor conditions (freedom of association, right to collective bargaining, prohibition of discrimination, fair compensation, working hours, health and safety issues, prohibition of child labor, forced and compulsory labor, and disciplinary measures) and to a very limited and vague extent protection of environment. 163 www.bsci-intl.org/about-bsci/participants-intro (last accessed 9/5/2013); while in some countries the BSCI is a major instrument for ethical business (e.g., Germany, Belgium, Netherlands), companies from other countries use it seldom or not at all (e.g., the BSCI has no members from the USA, Greece, or Czech Republic and only a few from Italy or France).

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Guidelines. Extracting the core principles from these documents, the BSCI has adopted a concise Code of Conduct.164 When a company becomes a member, it must sign the Code of Conduct and commit to implementing it within its sphere of influence. The concept of “sphere of influence” is not described or defined in further detail, but it is clear from the purpose and text of the Code of Conduct that contractual relationships fall within its scope. When becoming a member, each company has to sign a declaration that forms an integral part of the Code of Conduct. In the declaration, members commit to informing all their subcontractors about the requirements of the Code of Conduct and commit that they will “ensure” that their subcontractors will comply with the requirements.165 The Preamble to the Code furthermore states that members’ suppliers must “ensure” that the Code is also observed by subcontractors. The commitments are very strong and confirmed by a signature, although it is questionable whether this signature can entail legal liability for the content. Since the declaration is signed solely by a member, it seems that the commitments should be no more binding than other publicly made statements, such as corporate codes of conduct published on companies’ websites. It might be very different if both the member and a BSCI representative were to sign the declaration: in such a case, the declaration could be deemed to constitute a contract between the BSCI and the company, with the possibility of being enforced through the courts.166 Moreover, the commitment also declares that the BSCI may carry out audits both at the facilities of a specific member and also of its suppliers. This basically means that the member binds its business partners to allow access by thirdparty auditors to their premises. However, this is against the doctrine of “privity of contract,” i.e., the principle that only the original parties to a contract are bound by and may enforce the contractual terms.167 The implementation terms of the Code are detailed in the relevant annex. Each member company has the obligation to inform its suppliers and subcontractors of the content of the Code and make compliance with it a condition of all supply agreements. This is the strongest recognition of the importance of contractual governance that one could expect. Suppliers’ compliance is monitored by suppliers’ self-assessment and audits conducted by the BSCI or its representatives. Cases of non-compliance are resolved through corrective actions implemented within a maximum of 12 months, if necessary by applying contractual sanctions under which a buyer can halt current production, cancel corresponding contracts (probably in cases where non-compliance is connected with certain specific contracts), suspend future contracts, or terminate the business relationship. 164 www.bsci-intl.org/our-work/bsci-code-conduct (last accessed 9/5/2013). 165 The BSCI Code of Conduct uses the terms “subcontractor” and “supplier” to address both first- and secondtier suppliers. 166 As the commitment is only unilateral without conferring any rights to the BSCI, non-compliant members are sanctioned by suspension of membership or their exclusion from the initiative: see BSCI System: Rules and Functioning, Version 3, November 2009, Article 2 b). 167 Graw, S., 2002, An Introduction to the Law of Contract, Sydney: Lawbook Co., 4th edition, p. 175.

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The BSCI has certain positive aspects, probably the most important being the sharing of experience and audit results among buyers, which lowers the auditing costs of all subjects by avoiding duplication.168 Another positive aspect is the connection with other voluntary instruments. In addition to inspiration taken from major guidelines (such as the UNGC or the OECD Guidelines), it expressly accepts SA8000 certification to relieve suppliers from being audited under the BSCI.169 However, it has also been harshly criticized for the varying quality of audits, for being just one more initiative “without teeth,” and for increasing the importance and power of auditing firms.170 For the purpose of this book, the most interesting feature is the commitment and contractual interlinkage of subjects involved in the Initiative. If the Code worked ideally, meaning that each tier of a supply chain would enforce it on its own suppliers, it would be entirely self-enforcing and implemented throughout the supply chains. However, as the adoption, monitoring, and enforcement are dependent on voluntary actions by BSCI members and their suppliers, the results can be questioned.

6.2.9

Multi-party business agreements

The BSCI is one of many multi-party private initiatives. These initiatives are characterized by voluntary participation, the establishment of codes of conduct, cooperation on the monitoring of conduct through supply chains, and also limited possibilities on the part of third parties to enforce the statements these initiatives make. The latter leads to doubts about the actual positive effects of the initiatives, which is also a typical concern in the case of individual corporate CSR codes of conduct. These doubts proved to be apposite after a series of fire accidents in Bangladesh in 2012 and 2013. A fire in the Tazreen Fashions factory reopened the discussion on the effectiveness of CSR regulatory instruments beyond the first tier of supply chains.171 And this discussions remained “on fire” after the collapse of another garment factory in Savar, Bangladesh, which with over 1,100 victims was the deadliest garment-factory accident in history.172 The accidents cast a shadow over Western garment companies’ CSR strategies. To mitigate the consequences, the companies joined with trade unions to prepare and sign the Accord on Fire and Building Safety in Bangladesh (hereinafter the “Bangladesh 168 This was confirmed in the interviews conducted with three Danish companies in the first part of the project. 169 Social Accountability International, SA 8000 Standard, www.sa-intl.org/index.cfm?fuseaction=Page.ViewPage& PageID=937 (last accessed 12/7/2014). 170 Merk, J., Zeldenrust, I., 2005, “The Business Social Compliance Initiative (BSCI): A Critical Perspective,” Clean Clothes Campaign. 171 See, e.g., www.cbc.ca/news/world/story/2012/11/25/bangladesh-garment-factory-fire.html (last accessed 12/7/2014). 172 See, e.g., http://news.yahoo.com/bangladesh-collapse-search-over-death-toll-1-127-122554495.html (last accessed 12/7/2014).

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Sustainability Clauses in International Business Contracts Accord”).173 While the majority of European retailers and brands have joined the agreement, American companies have been more reluctant. For example, both Walmart and GAP decided that they would not participate in the initiative. Both companies are known for their strong CSR strategies and statements, so it comes as a surprise that they refused this collaboration. The reasons are several: those who refused to participate may fear possible law suits based on the agreement174 and the form of dispute resolution, or they may be persuaded that their own CSR program will lead to better results.175 The Bangladesh Accord represents a new type of CSR regulation. On the one hand, its form is reminiscent of IFAs (a formal agreement between companies and trade unions), but on the other hand it has some features of multi-party business-driven initiatives (commitment to common rules for monitoring and enforcement of CSR in supply chains). However, it also has characteristics that have not been seen before. Firstly, the Bangladesh Accord is proclaimed to be a legally binding agreement. Secondly, it provides rules for the resolution of any dispute arising under the terms of the agreement. Thirdly, companies that sign the Bangladesh Accord commit to publishing a list of their suppliers. These aspects look very positive at first sight but must be further examined to assess their implications. The first and second features are closely interconnected. The Bangladesh Accord has the form of a multilateral private agreement between a number of companies and trade unions. It binds them to finance and implement a program improving safety in suppliers’ facilities for the initial period of five years. However, employees of these factories do not have any means of enforcing the Accord, since they are not parties to the agreement; it is only the signatories who can enforce it against each other. In this sense, the Accord does not differ much from the BSCI, which we could also regard as a multilateral contract. But the fact that trade unions are also signatories of the Accord gives us more confidence that the commitments will be enforced by the trade unions, as representatives of the employees. It seems that they have the same right to open a dispute as the signatory companies, although the exact roles of the companies and the trade unions are not clear from the text of the Accord. The Accord sets out the obligation of signatory companies but is silent about the rights and obligations of the trade unions. I believe that more clarification is needed on this point to truly assess whether the trade unions will have the power to enforce the agreement.176 Any dispute between the signatories arising under the terms of the Accord is to be presented as a first step to the Steering Committee established by the Accord.177 173 Available at: www.industriall-union.org/bangladesh-accord-on-fire-and-building-safety-released (last accessed 12/7/2014); the website also contains a list of signatories. 174 American companies face higher risk of class action suits that are generally not used in Europe. 175 www.retail-week.com/in-business/policy/bangladesh-fire-and-building-safety-accord-what-retailers-needto-know/5049187.article?referrer=RSS (last accessed 12/7/2014). 176 There could also be a debate as to the applicable law in relation to the Accord. However, this goes beyond the scope of this short section. 177 Bangladesh Accord, Article 4.

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In the event that the parties are not satisfied with the decision, they may appeal to a final and binding arbitration process.178 Although this is certainly an improvement in comparison to other private CSR initiatives that are frequently criticized for their unclear enforceability, the fate of suppliers’ employees is still in other subjects’ hands. Only time will tell whether the trade unions manage to fight for the enforcement, and manage to achieve the goals, of the agreements. An interesting point will also be what remedies the parties will be able to claim. As the suppliers’ employees are not entitled to initiate a dispute based on the Accord, they will not be able to claim damages. In order to pursue the objectives of the Accord, the parties would have to ask for specific performance.179 The third feature is indeed a unique one. The Steering Committee will regularly publish an updated list of signatory companies’ suppliers. The information must be provided by the companies and must include first- and second-tier suppliers. The purchased volumes from each supplier remain confidential, however.180 Although it is not the first example of publishing a suppliers’ list (e.g., Apple has published a list of its suppliers since 2011)181, it is the first time disclosure of this information has been in relation to CSR issues required by a legally binding regulation. Revealing a list of business partners is a very sensitive issue for companies. In addition to the fact that it may have some consequences for competition among the peer companies, it may also lead to an outburst of “ CSR witch hunts.” It also seems problematic that only two tiers of supply chains are covered. If the goodwill of companies is not sustained or if suppliers are not aligned with the initiative, it may simply lead to the problematic issues being shifted to lower tiers of supply chains. Let us now turn to the implications of the Bangladesh Accord for the use of contractual governance for sustainability purposes. The central focus of the Accord is on inspections of suppliers’ facilities, followed up by possible remediation and education. Once again, it is obvious that companies must reserve the right to audit suppliers in their contracts; otherwise, suppliers may refuse to collaborate.182 An interesting point in the Accord is that the signatory companies must not only require their first-tier suppliers to accept the inspections but in some instances also their second- and third-tier suppliers, depending on the volume bought from the specific supplier.183 It is not clear how this can be achieved 178 Bangladesh Accord, Article 5. 179 However, claiming specific performance in international disputes also poses some issues in relation to the differences in national practice and the enforcement of court decisions and arbitral awards (see, CISG, Article 28: “If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention”). 180 Bangladesh Accord, Article 19 a. 181 www.apple.com/supplier-responsibility/our-suppliers/ (last accessed 12/7/2014). 182 Although non-legal pressures influence suppliers’ behavior as well, contracting about the auditing rights is the only way to make the collaboration binding and unconditional. 183 Bangladesh Accord, Articles 1, 2, and 3. Compare to the obligation of submitting list of suppliers that should include only two tiers of the supply chain.

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if the companies do not have any direct legal link with the lower tiers of their supply chains. We can expect that the companies will pass the requirement through the link of supply contracts, demanding that the first-tier suppliers implement a contractual clause to this effect into the supply agreements between the first- and second-tier suppliers and further down the supply chain. This should result in a self-enforcing contractual network regulation, a design that the BSCI and similar initiatives aim for but cannot necessarily achieve due to their non-binding nature. However, adopting a more critical attitude, we could question whether tying the audits to a minimum volume bought from suppliers will not simply result in a fracturing of the market; certain companies could potentially avoid audits by sourcing a smaller amount from a greater number of suppliers. The Bangladesh Accord furthermore relies on the typical scenario of requiring suppliers to follow the inspection, corrective plan (remediation), and eventual termination of the business relationship in the event of persistent non-compliance.184 This suggests that the terms of supply contracts should once again combine relational enforcement tools with the hard contractual sanction of contract termination. What is new is that the Accord expressly anticipates that some companies may effectively press their suppliers not to comply with the safety standards through the terms of their business, for example, by pushing for lower prices. Therefore, the signatory companies are required to negotiate fair contract terms in this respect.185 It is an interesting concept. One fear is that this requirement will deprive companies of their price competitiveness. Furthermore, it remains to be seen what the consequences will be in terms of competition law, i.e., the agreements could be seen to be anti-competitive. Companies could be accused of forming a cartel agreement, and regulators would have to weigh which benefits are more important for consumers: the social benefits of safe employment conditions or the lower price. We may summarize that the Accord confirms the crucial importance of contracts as CSR tools and follows the already widely used scenario of audits + corrective plans + contract termination and scalability of the contractual control through the supply chain. The most innovative aspect of the use of contracts is then the requirements to avoid negative CSR impacts through tight contractual terms. As the agreement is still relatively new, we will have to see over the next few years how effective it will prove to be (Table 6.1).

184 Bangladesh Accord, Article 21. 185 Bangladesh Accord, Article 22.

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Table 6.1 Overview and classification of CSR regulation Name

Year

Public hard

OECD Guide- 1976 lines (2011)

Public soft

2000

IFAs

Various (after 2000)

UN Norms

2003

x

BSCI

2003

x

RPR Framework

2008

x

ISO 26000

2010

California TSCA

2010

EU Renewed CSR Strategy

2011

x

SRSG Guiding 2011 Principles

x

6.3

Publicprivate soft

Private multiparty soft

Private multiparty hard

x

UNGC

Bangladesh Accord

Publicprivate hard

x x

x

x x

2013

x

Conclusion on legal framework

Two types of regulation are particularly relevant to SCCs: firstly, international contract law, which is applicable as a system of default rules when parties do not agree on some aspect of their contract, and, secondly, various CSR regulations, which discuss SCCs as a tool for the overall goal of CSR and sustainable development. Companies should be aware that there is no reason for international contract law not to apply to SCCs, if the general applicability requirements are fulfilled.186 Therefore, they should consider which rules, principles, and provisions are of interest and whether they should opt out from them. More discussion of the consequences of international contract law follows in chapter 7. As for CSR regulations, the overall conclusion must be that companies are presumed to use contracts to influence the behavior in their supply chains. Although only some regulations are specific in this respect, it can often be deduced from the text of the others 186 Supra note 8.

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as well. Moreover, the regulations presume that companies will use hard clauses, meaning that suppliers’ non-compliance will be punishable through contractual sanctions, ultimately by contract termination.187 Nevertheless, it also seems expected from companies that they will use efforts to remedy any instances of suppliers’ non-compliance through relational tools, such as capacity-building or corrective plans. According to one of the leading principles of contract law (namely, the principle of contractual freedom), parties to a contract not only have the freedom to choose with whom, about what, and how they will contract but also when they will enforce the contract. Thus, the CSR regulations intrude into the principle of contractual freedom by imposing on the parties the obligation to enforce the contract both through hard and soft enforcement mechanisms. The objective of using contracts for sustainability goals is rather clear from the CSR regulations, and its normative as well as practical grounding is logical. But we must investigate whether the underlying international contract law supports or hinders this objective. This is done immediately below.

187 The hard and soft effects of contracts (or other instruments) should be distinguished from the hard law/soft law dichotomy. The former refers to the de facto impacts of the contracts (or other instruments). See Koopmann, H.-M., 2001, Voluntary Action of Business and Industry: A Legal Analysis of Voluntary Agreements and Self-regulation, London: Esperia Publications Ltd, p. 22.

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Sustainability clauses’ anatomy

Chapter 3 presented examples showing that SCCs vary in their form, content, and scope and may be differently enforced. Despite this variability, SCCs have some common features. As outlined above, the common features can also be features of other “normal” contractual clauses, but it is their combination and the use of SCCs, their purpose, and effects that make the provisions special. This chapter analyzes the common features of SCCs through the prism of international contract law in order to answer the question of whether the current legal framework facilitates the use of SCCs or whether it fails to support SCCs as a regulatory means for sustainable development. The essential inquiry will be to examine whether international contract law is applicable to and suitable for SCCs and whether, once enforced, it secures achievement of the underlying sustainability objectives.1 The theoretical analysis is complemented by the results of the empirical study on self-reported CSR information on the use of SCCs.2

7.1

Form

Before entering into an analysis of the content, scope, or effects of SCCs, the question of SCCs’ valid incorporation into contracts should be discussed. Two ways of incorporation are immediately obvious: drafting special provisions into contractual texts and incorporation by reference to another document. However, they may not be the only means of vesting sustainability obligations with a contractually binding character. It may be possible that sustainability obligations become implied terms of international business contracts as a part of international trade usage or the reasonable expectations of consumers. Furthermore, the existence of a contract is not always apparent: some statements may have a contractual character without being labeled as “contract.” And actions taken during contractual negotiations and documents signed within the pre-contractual phase may influence the content or interpretation of the contract. This section discusses all these possibilities after presenting the results of the empirical study in relation to the form and strength of the commitment to sustainability in the sample companies’ supply chains.3 Four types of commitments were observed during the study (see Graph 7.1). First, just over 50% of the investigated companies report putting the requirements directly in their 1 2 3

The sustainability objectives must be differentiated from the economic objectives of the parties. This book assesses the effectiveness of the SCCs only against sustainability objectives. See subsection 1.3.5. See supra subsection 2.3.2.2 and Annex no. 2. Herein presented findings are those relevant to the labor and human rights issues. The results are very similar in relation to environmental issues.

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supply chain contracts. About 35% then report demanding of their suppliers that they comply with certain sustainability requirements (although they do not speak of a binding form; thus, it is classified as a mere business requirement). One-fourth of the sample companies report that they request their suppliers to commit to compliance with sustainability standards in writing prior to entering into a contract or even prior to qualifying as a possible supplier. Some of the companies requiring pre-contractual written commitment then also include the SCCs in the actual contractual text,4 but some do not.5 Finally, approximately 13% of the sample companies only recommend to their suppliers that they consider sustainability issues, but do not put it as a condition of the mutual business relationship at any level.6

4

5

6

For example, see Bayer Group’s Sustainability Development Report 2011, p. 31, available at: www.bayer.com/en/sustainable-development-reports.aspx (last accessed 12/7/2014): “This cooperation is based on our Supplier Code of Conduct, in which we document our sustainability principles and requirements. It is a fixed element of our supplier selection and evaluation process, and is integrated as binding into our electronic ordering systems and contracts throughout the Group through a special clause… To participate in bidding processes in our supplier management system, suppliers must bindingly confirm before submitting an offer that they acknowledge Bayer’s Supplier Code of Conduct” (emphasis added). For example, see Deutsche Telekom’s 2011 Corporate Responsibility Report, Supplier selection, available at: www.cr-report.telekom.com/site12/suppliers/supplier-selection#atn-1401-2340 (last accessed 12/7/2014): “After developing various criteria for assessing the sustainability of proposals in 2009 and 2010, we have been actively encouraging compliance with these criteria during bid processes since 2011. Our goal is to systematically establish sustainability criteria as a permanent component of our bid processes by 2013” (emphasis added). Compare the results regarding all types of CSR codes of conducts (including employee codes) to Bondy, K., Matten, D., Moon, J., 2006, “MNC Codes of Conduct: CSR or Corporate Governance?,” Research Paper Series, International Centre for Corporate Social Responsibility, Nottingham University Business School, No. 40-2006, pp. 11–12, infra note 106 (47.4% stipulative, parallel to contractual commitment; 19% commitment, parallel to business requirement; 19.3% principle, parallel to recommendation; 0.7% information, parallel to recommendation; 13.4% unknown).

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Graph 7.1 Type of commitments (USA x Europe)

7.1.1

Express provisions and incorporation by reference

Sustainability clauses will often be incorporated into business contracts as express contractual provisions (e.g., Verizon or TGB) or by reference to one or more other documents.7 A reference may be given to general terms and conditions (e.g., GE), a corporate code of conduct or other internal policy (e.g., Verizon or HP), a global CSR initiative (e.g., Pressalit), or a separate agreement (e.g., HP). In some cases, it is difficult to subsume a provision under one or other formal type. There are many combinations, such as that one contract contains an express term on one issue and refers to an external document in relation to another (e.g., Verizon) or that an express term cites a CSR global initiative. Often we may see a double reference system, meaning that a contract, for example, refers to standard terms and conditions, which then refer to a code of conduct. Although both forms of incorporation are common, using incorporation by reference seems more common than using express provisions. Which form of SCC is chosen depends on various things, such as the regulated matter or the risk level of non-compliance and its consequences. For example, while anti-bribery clauses are often incorporated into contracts as express provisions,8 clauses on labor issues are more frequently included in a code of

7 8

Vandenbergh speaks of “embedded agreements.” See note 97 (chapter 1), p. 2045. Incorporation of anti-bribery clauses into business contracts is considered as best practice for companies in relation to legal risk management in connection with the US Foreign Corrupt Practice Act and the UK Bribery Act 2010. See, e.g., Ernst & Young, “Keep it clean”, 2009, SCMP’s Supply Chain.

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Sustainability Clauses in International Business Contracts conduct.9 This corresponds with the observation that expressed provisions are used where the legal and commercial risks of non-compliance are high.10 In the USA and the UK, corruption is regulated by national legislation with extraterritorial effects, whose enforcement is rather strict and threatening sanctions are extremely high.11 The inclusion of antibribery clauses in contracts emphasizes the severity of the issue for the business partners on the one hand and demonstrates to the regulators the buyer’s efforts to prevent any breach of law on the other. By contrast, extraterritorial effects of national laws in relation to labor issues are rare. Therefore, labor issues, with territorial applicability of national law and inter-state applicability of international law, are a typical example of an area where a legal gap is created. If any behavior in breach of international standards is detected, companies do not usually face a threat of concrete statutory sanctions, but have to deal with possible business and economic consequences, such as a reputational damage. Although we cannot easily compare the economic risks of non-compliance regarding corruption and labor issues, the risks of legal prosecution are obviously higher in cases of corruption, in relation to which there are laws directly applicable to companies. While the incorporation of express provisions into contracts does not pose any formal problems, the incorporation of a document by reference can sometimes raise concerns as to whether the document becomes validly an integral part of a contract. We can find guidance in international rules regarding standard terms and conditions. Basically, a code of conduct or any other corporate CSR document may qualify as general terms and conditions,12 if it is drafted in advance of the contract, intended for general and repeated use, and used without negotiation of the content by the parties (i.e., it is prepared by one party only).13 The incorporation of standard terms and conditions into a contract is subject to the general rules on contract formation: an acceptance of an offer. Standard terms and conditions do not need to be included within the contractual text, but may be (and most

9

10 11

12 13

Vytopil, note 119 (chapter 1), p. 166 (Vytopil conducted empirical research on the use of SCCs in relation to labor issues in the Netherlands. The results show that in this context the express provision form is not frequently used). Ibid., p. 167. For example, at the beginning of 2011, the United States Department of Justice and Johnson & Johnson with its subsidiaries and its operating companies entered into the Deferred Prosecution Agreement to settle a case of proven bribery of publicly employed health-care providers in Poland, Romania, and Greece by Johnson & Johnson, its subsidiaries, employees, and agents. Under the agreement, in return for full and truthful cooperation, the authorities agreed not to prosecute Johnson & Johnson, and Johnson & Johnson agreed to pay a 21.4 million USD penalty and fulfill all the demands, including implementation and maintenance of a compliance program to detect and prevent violations of the FCPA and other anti-corruption laws. Vytopil, note 119 (chapter 1), p. 166. UNIDROIT Principles, Article 2.1.19; PECL, Article 2.209 (3); CESL, Article 2 (b); the CISG does not contain a special provision on standard terms and conditions; see also McBarnet and Kurkchiyan, note 17 (chapter 1), p. 86 (noting practically non-existent bargaining power of suppliers of MNEs in the context of sustainability requirements).

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often are) in a separate document referred to within a contract or incorporated as implied terms if a practice between the parties or a trade usage to that effect exists.14 In the CSR area, we will most often see incorporation by reference.15 The questions of what the reference to standard terms and conditions should look like and whether or not the party using them has an obligation to provide the text to the other party and when have been the topics of many disputes and academic discussions.16 This section does not aim to offer another opinion or an analysis of the academic discussions and court decisions in this respect, but merely to address issues of importance to CSR documents. 7.1.1.1 Reference to CSR documents Firstly, it is important to address the form and content of the actual reference. International contract law does not provide any specific rules in this respect; therefore, a general rule on interpretation of the parties’ intentions will apply. The reference must be in such form and language that a reasonable person in the position of the parties would comprehend that the mentioned document is intended to form a part of the contract.17 Thus, the reference does not need to be in writing or signed.18 Furthermore, it does not need to be placed directly in the contractual text, but it can, for example, be made clear during pre-contractual negotiations.19 This interpretation is important in relation to the discussion regarding the voluntary/mandatory character of CSR codes of conduct as well as CSR regulatory instruments. Often a buyer requires its supplier to sign or acknowledge its supplier code of conduct or a similar document prior to entering into a contract.20 Increasingly frequently, suppliers are registered in an online system, and while registering, they have to click on a button signaling that they have read, agreed, comply with, or acknowledge some type of the buyer’s CSR standards. Sometimes, this can be a condition to become listed as a potential supplier to a company.21 It could be argued that such requirements constitute a 14 UNIDROIT Principles of International Commercial Contracts 2010, International Institute for the Unification of Private Law, Rome (UNIDROIT Principles 2010 Official Commentary), p. 67. 15 The empirical investigation showed that most of the investigated companies (93%) have an internal policy on suppliers’ CSR behavior, which is either incorporated into their contracts or provided to the suppliers as a recommendation or as guidelines. 16 Schlechtriem & Schwenzer, 2010, Commentary on the UN Convention on the International Sale of Goods (CISG), New York: Oxford University Press, Article 14, paras 37 and 43–60; Vogenauer, S., Kleinheisterkamp, J., 2009, Commentary on the Unidroit Principles of International Commercial Contracts (PICC), New York: Oxford University Press, Article 2.1.19, para. 12–27. 17 Schlechtriem & Schwenzer, supra note 16, Article 14, para. 37. 18 Ibid. 19 Vogenauer and Kleinheisterkamp, supra note 16, Article 2.1.19, para. 13. 20 See, e.g., Heraeus Holding self-assessment form for suppliers of precious metals that must be submitted in the re-contractual phase, available at: http://heraeus-precious-metals.com/media/webmedia_local/media/ein kauf_1/Supplyer_self_assessment.pdf (last accessed 21/8/2013). 21 For example, Suppliers Policy in the Purchasing Process of the Telecom Italia Group states that “…in order to take part in tenders potential suppliers must confirm in advance both their commitment and that of any authorized sub-supplier, subordinate or employee, in observance of the ethical-behavioural principles of the

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reference incorporating the relevant document into subsequently concluded contracts. Thus, supplier codes of conduct and similar documents may in practice have a binding form. In this context it is, however, necessary to examine how the reference is made. The wording of the reference or the context it is given in must show a clear intention that the document is considered a set of binding rules, not solely recommendations or guidelines. Therefore, it is necessary to distinguish whether a buyer: (i) makes the compliance with sustainability standards only one of the suppliers’ selection criteria, (ii) makes its suppliers to commit to them in writing, or (iii) makes the compliance an actual precondition to enter into a contract. While the first case would not fulfill the conditions to include the sustainability standards into contracts by reference, the latter two would most probably do so. Some companies also merely state that they prefer to collaborate with suppliers who fulfill certain CSR standards; such a statement must obviously be understood as a mere recommendation that fails to make the standards a part of any contract.22 The results of the empirical study (Graph 7.2) show that companies engage most often in pre-contractual CSR screening without contractual effects (including CSR compliance among a range of other screening criteria or stating the preference to cooperate with compliant suppliers). In relation to pre-contractual tactics aiming to get binding commitments from suppliers, the study has revealed that a major gap exists between the European and American companies. While the gap is not so evident in making the compliance a precondition to contract (USA 16%, Europe 20%), it is striking in the context of the written pre-contractual commitments (USA 8%, Europe 34%). The reason for this difference could be seen in the common law parol evidence rule, under which evidence extrinsic to the contract cannot be used to vary or interpret the actual contractual text. Thus, American companies could be more prone to include sustainability requirements directly in the contractual text and thereby avoid any dispute regarding their use later on.23 However, this explanation does not seem to stand in relation to the UK companies in the sample

Group’s Code of Ethics.” Serious non-compliance is sanctioned by exclusion from the Qualified Suppliers’ List. The policy is available at: https://suppliersportal.telecomitalia.it/AreaPubblica/pdf/SUPPLIERS% 20POLICY.pdf (last accessed 21/5/2013). 22 Supply Chain Responsibility Policy Telefonica Group, June 2010, p. 8, www.telefonica.com/en/about_telefonica/pdf/suppliers/politica_en_con_firma_def.pdf (last accessed 12/7/2014): “Telefónica will look favourably upon suppliers who: – have an up-to-date, documented Environmental Policy including commitment to environmental protection, prevention of pollution, compliance with environmental legislation, continuous improvement and to procure in line with its Policy. – have a documented Environmental Management System to ensure effective planning, operation and control of environmental aspects. This Environmental Management System shall satisfy the requirements of ISO 14 001 or other internationally recognized standards.” 23 Fontaine and De Ly, note 39 (chapter 3), pp. 134–145 (discussing clauses on the exclusion of pre-contractual documents and the different interpretation of these clauses in common vs. civil law countries).

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and, thus, more research is needed to confirm such an interpretation of the results. The European acceptance of deriving contractual terms from pre-contractual acts and statements has now been confirmed in Article 69(1) of the CESL, which reads as follows: “Where the trader makes a statement before the contract is concluded, either to the other party or publicly, about the characteristics of what is to be supplied by that trader under the contract, the statement is incorporated as a term of the contract unless: (a) the other party was aware, or could be expected to have been aware when the contract was concluded that the statement was incorrect or could not otherwise be relied on as such a term; or (b) the other party’s decision to conclude the contract could not have been influenced by the statement.” In the light of this provision, any suppliers’ commitments regarding the manufacturing process made in the pre-contractual phase are incorporated as terms of the contract, unless the parties include a merger clause under Article 72 (entire agreement clause).24 However, we have to consider situations in which buyers request their suppliers to commit, for example, not to use child labor, even when they know based on pre-contractual screening that child labor occurs in the region in which the supplier is based. If a child labor incident happens during the term of the contract, the supplier could evoke subsection (a) of Article 69, stating that the buyer was expected to be aware that child labor may occur and thus this provision was not part of the contract. Therefore, companies contracting under the CESL should be careful when drafting the text of suppliers’ pre-contractual commitments. A statement that suppliers commit to improve or to execute their best efforts to comply with SCCs, for example, to avoid child labor (i.e., relational approach), could be more appropriate, as they may better reflect the reality and cannot be avoided by the supplier based on subsection (a) of Article 69.25

24 CESL, Article 72 basically copies PECL, Article 2:105. 25 We can see a highly relational approach in the HP CSR Agreement, where the supplier does not commit to fulfilling all CSR requirements, but to work collaboratively with HP to achieve them (“The Parties wish to address in this Agreement how they may work collaboratively to achieve the objectives of the HP Supplier Code of Conduct …”).

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Graph 7.2 Pre-contractual commitments (USA x Europe)

Interesting results can also be observed in relation to the various industries. While chemicals and pharmaceuticals are leading the pack in the frequency of the sustainability screening of potential suppliers (100%, resp. 90%), also the rest of the industries report high results here, with 40% of the metals companies reporting CSR as one of the screening criteria being the lowest point. This result seems to rebut the claim that CSR is only a “windowdressing” strategy.

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Graph 7.3 Pre-contractual commitments (industries)

To conclude this subsection, companies and their suppliers should be aware that CSR standards may become an integral part of a contract not only by their direct implementation into the contractual text, but also by reference, which can be both written or deduced from the context of parties’ actions or their intention. Signing a code of conduct by a supplier in the pre-contractual phase, which, for example, states that the buyer intends to cooperate only with suppliers fulfilling therein stipulated requirements, may be interpreted as incorporation of the CSR requirements as standard terms and conditions into the contract. This casts some light on the discourse on the voluntary/mandatory character of CSR codes of conduct. However, adequate reference is not in itself sufficient. The document referred to must also be made available to the supplier and it must fulfill some requirements regarding its content. These two issues are addressed immediately below. 7.1.1.2 Suppliers’ awareness of CSR documents In the event of incorporation by reference, it is necessary that suppliers become aware of the content of the referred CSR documents.26 Therefore, a mere statement that a supplier must fulfill the requirements stipulated in a buyer’s code of conduct is not generally suffi26 While the CISG and the UNIDROIT Principles do not contain specific provisions in this respect, but derive the obligation from general rules on the formation of contracts, CESL expressly states in Article 70(1) that “(c)ontract terms supplied by one party and not individually negotiated within the meaning of Article 7 may be invoked against the other party only if the other party was aware of them, or if the party supplying them took reasonable steps to draw the other party’s attention to them, before or when the contract was concluded” (emphasis added).

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Sustainability Clauses in International Business Contracts cient;27 the supplier must also be able to retrieve the text.28 The text may be sent to the supplier or given to him during negotiations. It is a little more disputed whether the text can be provided through the Internet. While it is commonly acceptable in the case of contracts concluded online or via e-mail correspondence, it may raise some doubts in the case of contracts in traditional paper form.29 The argument is that merely providing a link to the text of standard terms and conditions burdens the addressee, who must actively seek to find the text.30 If that were the case, a majority of references to CSR documents would not be valid as they are regularly referred to by an Internet link.31 However, this seems inapplicable in an environment where many multinational companies have an online suppliers’ recruitment system and also provide other documents than CSR standards via the Internet. Here we could argue that parties are used to retrieving information from the Internet, and thus, it is reasonable to expect that inserting a link to CSR standards into a contract should be sufficient. Nevertheless, in any event it is important that the provided link leads to an actual text of the document intended to be incorporated into a contract (and not merely to a general website where the addressee may not be sure which document is to be incorporated)32 and that this document can be saved or printed by the addressee.33 Another issue is whether a text containing CSR standards must be made available to a supplier, when a contract refers to generally known regulatory instruments. For example, Pressalit states in its General purchasing terms: “compliance with UN’s Global Compact should be observed.”34 The text of the General terms includes neither a link to the UNGC nor its actual text. Although it could be argued that the UNGC is a widely known set of standards on the one hand, it could be doubted that it is widely observed in the international trade.35 Thus, I presume that a court would have to decide against the incorporation of the UNGC into the contract. 27 It may be sufficient in the event that the supplier has “an actual and positive knowledge” of the code; see Schlechtriem & Schwenzer, supra note 16, Article 14, para. 39. Also some domestic legal systems are less strict than international contract law; see Vogenauer and Kleinheisterkamp, supra note 16, Article 2.1.19, para. 17. 28 The so-called “making available” test was developed in case law on the CISG, mainly in the Machinery Case (BGH, 31 October 2001, VIII ZR 60/01). The obligation of the party using standard terms and conditions to make them available to the other party is based on the principle of good faith and the obligation to cooperate and is furthermore supported by the argument that in the era of electronic communication, it is easier and less costly to send this document than for the obliged party to inquire about the content. 29 Schlechtriem & Schwenzer, supra note 16, Article 14, para. 49. 30 This follows the economic argument of efficiency of exchange that it is less costly to send the terms and conditions than the need to actively search for them; see supra note 28. 31 For example, Article 14(2) of the Verizon Australia Supply Agreement (“Buyer expects its suppliers to share this commitment and has therefore established a Supplier Code of Conduct set forth at http://www22.verizon.com/ethics/ which Company agrees to adhere to”). 32 Schlechtriem & Schwenzer, supra note 16, Article 14, para. 49. 33 Vogenauer and Kleinheisterkamp, supra note 16, Article 2.1.19, para. 22. 34 See example No. 1 in subsection 3 above. 35 Schlechtriem & Schwenzer, supra note 16, Article 14, para. 53–54.

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The above-discussed issues regarding incorporation of CSR standards into supply agreements by reference may be further complicated when the double reference system is used. As a final remark in the discussion on the availability of the referred document to the addressee, it should be noted that the document must be available in a language which the addressee understands.36 Therefore, internationally operating companies should make an effort to translate the policies relevant to their suppliers into the suppliers’ languages or the languages they conclude contracts in, to avoid any doubts as to the validity of the incorporation later on.

7.1.2

Implied provisions

Hitherto, only contractual terms that have been actively drafted or accepted by the contractual parties have been discussed. However, some terms of an international contract can be implied without the necessity of contractual parties expressly acknowledging them. International contract law instruments are united that such implied terms contain usages that the parties have agreed to, practices the parties have established between themselves, and international trade usages that are widely known and regularly observed and of which the parties knew or ought to have known.37 All three types of implied terms may become relevant in the CSR context; however, it is the second and third categories that are of the greatest interest.38 The second type of implied term supposes that parties should be bound to observe any practice established between them. A practice can be established only in a repeated or long-lasting business relationship; thus, a certain frequency and duration is necessary.39 Logically, a situation that is repeated only once would not seem to establish a practice; however, a situation that is repeated twice has been deemed sufficient by some courts.40 In the CSR context, a practice may, for example, be established in relation to the monitoring and enforcement of sustainability requirements. For instance, in its CSR report from 2011 Sanofi S.A., a French pharmaceutical manufacturer, stated that it had adopted a suppliers’

36 Schlechtriem & Schwenzer, supra note 16, Article 14, para. 61–67. 37 CISG, Article 9; UNIDRIOT Principles, Article 1.9; PECL, Article 1:105; CESL, Article 67. 38 The first type presumes that parties will actively agree to use a specific usage; therefore, it does not differ much from the explicit terms. 39 Schlechtriem & Schwenzer, supra note 16, Article 9, para. 8. 40 Handelsgericht Aargau, 26.09.1997, OR.960-0013 (the court found that the buyer had previously in two occasions cancelled or modified orders without the seller objecting to such behavior, which the court recognized as a valid practice established between the parties under Article 9(1) CISG); contradicting decision: Zivilgericht Kanton Basel-Stadt, 03.12.1997, P4 1996/00448 (the court held that two contractual relationships were not sufficient to establish a practice between the parties under Article 9(1) CISG and that a long-lasting contractual relationship involving more sales contracts between the parties would be needed).

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code of conduct, which claims to mean that suppliers have committed to following its requirements and includes a provision on the possibility of conducting third-party audits of suppliers’ compliance.41 The CSR report did not, however, state that the code would be a part of supply agreements. So what happens in a situation in which Sanofi does not require its suppliers to sign or acknowledge the code of conduct, but nevertheless conducts third-party audits of suppliers’ premises? If the suppliers repeatedly allow the audits to take place and consequently accept and follow eventual corrective action plans, we could assume that the compliance monitoring became an established practice between the parties and that this practice also obliges the suppliers to allow third-party audits in the future and possibly also to fulfill the corrective action plans. Under the third type of implied terms, the parties are bound by trade usages that are widely known and regularly observed by traders involved in the particular trade and of which the parties knew or ought to have known.42 Schwenzer and Leisinger suggest that observance of ethical standards constitutes such international trade usage.43 The authors distinguish two possible scenarios: ethical standards pertinent to a specific industry and general ethical standards relevant to all international sale contracts. In the first case, the ethical standards can be documented by industrial codes of conduct; in the second, they can be derived from general private initiatives, such as the UNGC.44 Although this is certainly an intriguing idea, it must be critically assessed. Proving a trade usage will be easier in the context of a specific industry that has adopted a common set of standards which are regularly included in international sale contracts. The pharmaceutical industry and its Principles for Responsible Supply Chain Management serves as an example of such.45 The empirical study showed that 100% of the sample pharmaceutical companies were members of this initiative and that seven out of ten companies implemented the principles into their contracts or requested their suppliers to commit to compliance in writing in the pre-contractual phase. The fact that the majority of pharmaceutical companies claim to adhere to the Principles for Responsible Supply Chain Management would satisfy the requirement that in order to classify certain activity as a trade usage, it must be followed by a majority of the subjects acting in the trade concerned.46 Although the Principles from 2007 are a relatively new initiative,47 I would argue

41 Sustainable partnership: Sanofi-Aventis suppliers code of conduct, available at: www.sanofi.us/l/us/en/layout.jsp?scat=532F024E-E3F6-4D13-B0A6-69F10625B427 (last accessed 12/7/2014). 42 Schlechtriem & Schwenzer, supra note 16, Article 9, para. 16 (note that the dependence on a particular trade makes it necessary to distinguish between various parties, location, and industries). 43 Schwenzer and Leisinger, supra note 6 (chapter 1), p. 264. 44 Ibid. 45 www.pharmaceuticalsupplychain.org/principles/introduction (last accessed 24/5/2013). 46 Oberster Gerichtshof, 21.03.2000, 10 Ob 344/99g. 47 Schlechtriem & Schwenzer, supra note 16, Article 9, para. 16 (stating that a trade usage does not need to be long-established; however, it does need to have progressively evolved).

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that they have already gained the status of being regularly observed.48 However, we must consider what the actual content of the trade usage is. Is it in this case the fact that pharmaceutical companies include the set of principles into their contract or the substantive principles themselves? I believe that we would have to look into the attitude of the pharmaceutical companies towards enforcement of these requirements. As was stated earlier, the enforceability of SCCs may be problematic. They are generally not enforced through traditional review by the courts, but rather through relational enforcement tools.49 Moreover, some companies do not enforce them at all, although they insist on their inclusion in supply agreements. We should thus consider whether courts would enforce the content of these clauses as a part of international trade usage if the companies regularly do not. On the one hand, I would tend to argue that the courts would not support the content of pharmaceutical standards as an international trade usage, since there are many instances of non-compliance on the suppliers’ side, and thus, it cannot be established that a majority of traders observe them. On the other hand, the courts may support the notion that procedural implementation of the principles (e.g., suppliers’ education, audits, corrective action plans) form a part of international trade usage, since pharmaceutical buyers and suppliers regularly engage in these activities. The second scenario, relating to industries where there is no special code of conducts or set of principles, is more complicated. Schwenzer and Leisinger propose that ethical standards form trade usage anyway as they can be documented by various private initiatives, e.g., the UNGC. However, there are some major problems with this assumption. First and foremost, where can we find a list of standards which fall under the concept of “international trade usage”? Although the UNGC is widely recognized, it is still not observed by a majority of companies.50 We may compare all the different public and private initiatives in the CSR field and derive the common standards from them. However, we will still be in the same position as already discussed: the fact that there are some standards that a majority of companies agree would be good to follow does not mean that they are actually followed. Furthermore, even if we accept that, for example, the prohibition of child labor is an international trade usage, we would have to establish what “child labor” actually means, since the age of children allowed to work differs across jurisdictions.

48 Gillette, C. P., 1999, “Harmony and Stasis in Trade Usage for International Sales,” Virginia Journal of International Law, 39(3), 707–741, p. 725 (“Recall that the traditional story posits that a custom emerges only after terms have been negotiated with sufficient frequency and sufficiently similar results that negotiations become superfluous, since all parties understand the outcome that would obtain after costly negotiations occurred”); see also Vogenauer and Kleinheisterkamp, supra note 16, Article 1.9, para. 5 (“… a usage can therefore be defined as a general or at least widespread regular observance of a particular line of conduct amongst those engaged in a particular international trade over at least a short period of time”). 49 See infra subsection 7.4.2.1 below. 50 Schimanski, note 24 (chapter 6), p. (the study found that only 32% of companies refer to the UNGC on their websites, policies, or codes of conduct; however, the UNGC was still the initiative referred to most often).

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In both scenarios, the problematic point is to distinguish between saying and doing. The fact that companies may include CSR standards in their contracts but not enforce them has many consequences not only for the question of establishment of international trade usage but also for the parties’ rights and obligations (in particular the buyers’ right to claim damages in the event of suppliers’ non-compliance).51 In summary, due to the numerous issues, I would argue that we cannot consider general sustainability requirements to form an international trade usage as yet. However, sets of rules specific to individual industries may be found to function as trade usage if they are not only proclaimed by the majority of traders in those industries but also generally enforced and practically observed by the parties.

7.2

Content

The content of SCCs varies greatly in relation to the topic and protected interests as well as the style, length, specificity of language, and already discussed inclusion of implied terms. This section focuses on the variability of SCCs’ content and the consequences thereof under international contract law.

7.2.1

Topic

The content of SCCs reflects the triple-bottom-line basis of CSR, most usually covering environmental protection, employment conditions, health and safety standards, human rights, and business ethics issues.52 Environmental standards, such as the use of hazardous materials, waste disposal, water use, or general legal compliance, were one of the first CSR issues regulated through contracts and remain at or near the top of the list of the most frequently found sustainability clauses. Possible reasons for this are that environmental protection is considered to be the leading issue in the origins of CSR,53 and also the fact that it is fairly easy to measure compliance in particular areas, such as the avoidance of dangerous chemicals. Legal pressure created by numerous obligations imposed on companies by their home state environmental regulations that affect the way products are manufactured or handled not only by the companies themselves but also among their international supply chains is another reason. The EU’s 51 See infra subsection 7.4.2.3. 52 Pace University School of Law and IACCM, note 46 (chapter 1), p. 29 (82.4% of the responding companies include environmental standards into their SCCs, followed by 80.4% including health and safety standards, 76.5% employment laws, and 51% human rights. Other issues were included by less than 32% of responding companies). 53 McBarnet, Voiculescu and Campbell, note 17 (chapter 1), p. 65 (naming the environment as the “vanguard issue in CSR”).

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REACH Regulation is an example, requiring manufacturers and importers of products into the EU to register information on chemical substances contained in their products and their safe use in a central database.54 In order to comply with this requirement, manufacturers and importers have to obtain the relevant information on chemical composition from all subjects in the supply chains.55 Passing such requirements upstream can be done rather easily by means of contractual links between the various tiers of suppliers; however, enforcement of these requirements beyond the first-tier suppliers still poses problems.56 Yet not all environmental requirements are regularly included in SCCs. There are some environmental issues, which are only just starting to be found in business contracts. These include, inter alia, CO2 emissions and energy efficiency monitoring and reduction obligations. There are many explanations as to why these issues are only now being introduced into supply chain contracting. Firstly, unlike the frequently included environmental requirements, these may be difficult to measure.57 International supply chains are often extremely complex, including a number of companies from various jurisdictions. It is not unusual that a buyer does not know which subjects are members of its supply chain.58 Moreover, one company can have a different supply chain for each product. Multinational companies thus frequently have thousands of suppliers. In such cases, suppliers do not manufacture products or components for only one buyer at one time. Therefore, it can be extremely difficult or even impossible to allocate emissions or any manufacturing byproducts among various buyers.59 And even if companies know all supply chain members and overcome the allocation issue, they face the practical obstacle of only having contractual 54 Regulation (EC) No 1907/2006 of the European Parliament and of the Council of 18 December 2006 concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) [2006] OJ L 396/1. 55 For example, the American chemical company DuPont requires not only its direct suppliers but also suppliers beyond the first tier to register substances in accordance with the REACH Regulation (“We are working in close collaboration with our suppliers on fulfilling the requirements of the legislation. In the best interest of getting existing supply chains fully REACH compliant, DuPont expects from its direct and indirect suppliers that all substances, contained in products supplied to DuPont and requiring registration will be pre-registered (between 1 June & 1 December 2008). We also expect our suppliers to ensure that those substances requiring registration will be registered in due time by our supplier / relevant up-stream supplier/s”), www.2.dupont.com/REACH/en_US/Suppliers/index.html (last accessed 25/5/2013). 56 See infra subsection 7.3.2. 57 Although it may be difficult, it is not impossible; see, e.g., Greenhouse Gas Protocol, which has developed guidelines and a methodology for scope 3 emissions’ measurement in Greenhouse Gas Protocol, 2010, Corporate Value Chain (Scope 3) Accounting and Reporting Standard. 58 Walmart describes the problematic of unknown members in its supply chain in the 2012 Global Sustainability Report, Beyond 50 years: Building a sustainable future, p. 41 (“Undisclosed subcontracting is defined as factories in our supply chain that produce merchandise or component items for Walmart in a facility that is improperly disclosed and/or unknown to Walmart. There are signs that this practice may be on the rise in countries including, but not limited to, Indonesia, China and Pakistan. The potential impact of undisclosed subcontracting is that illegal and unethical practices can be more easily hidden”). 59 Greenhouse Gas Protocol, 2010, Corporate Value Chain (Scope 3) Accounting and Reporting Standard, section 8.

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relationships with first-tier suppliers; other tiers are connected only indirectly, and thus, the focal company cannot request information from them and sometimes must rely on secondary data.60 Yet, although difficult, assessing supply chain emissions is not impossible.61 The CDP Corporate Value Chain (Scope 3) Accounting and Reporting Standard provides the most detailed guidelines. The methodology for managing supply chains regarding CO2 emissions could be transplanted also to other areas of CSR. A second reason for introducing new environmental areas into sustainability contracting is that they do not pose an instant and obvious threat to our health. Therefore, we tend not to take them so seriously and to procrastinate over solutions. Moreover, unless there is an enormous related natural catastrophe, they are more difficult to capture in the media than, e.g., corruption scandals, and thus, they do not attract so much attention and do not put companies under such public pressure as in case of human rights issues. Finally, the connection between anthropogenic activities (and especially operations of individual companies) and global negative environmental consequences is hard to see and prove, and as such, its existence and magnitude remain questioned by some researchers,62 politicians,63 and the public.64 Labor conditions and human rights are another widespread area covered by SCCs, being pushed through by the frequent public critique of multinational companies.65 They are often the topic of television programs and newspaper articles.66 The human factor tends to create extensive public pressure on companies, since we are more susceptible to accept claims and react when seeing pictures of working children or suffering workers than when being presented with facts about abstract notions such as global warming. The media 60 Corporate Value Chain (Scope 3) Accounting and Reporting Standard, section 7.3. 61 Nevertheless, some companies prefer not to engage in scope 3 emissions calculations. For example, IBM states on its website that the assumptions necessary to be made for estimation of scope 3 emissions do not allow for an estimate that would be sufficiently credible and of the necessary quality; www.ibm.com/ibm/environment/climate/scope3.shtml (last accessed 12/7/2014). 62 For example, Bjorn Lomborg, www.lomborg.com/ (last accessed 12/7/2014). 63 For example, Klaus, V., “The Global Warming Doctrine is Not a Science: Notes for Cambridge”, The Science and Economics of Climate Change Conference, Howard Theatre at Downing College, University of Cambridge, 10 May 2011. 64 A public opinion poll on perception of the climate change issue in Britain from 2010 showed that 31% of respondents said climate change was “definitely” happening, 29% said it “it’s looking like it could be a reality,” 31% said the problem was exaggerated, 6% said climate change was not happening at all, and 3% said they did not know; www.guardian.co.uk/environment/2010/feb/23/british-public-belief-climate-poll (last accessed 12/7/2014). 65 McBarnet, Voiculescu and Campbell, note 17 (chapter 1), p. 65. 66 For example, documentary on child labor in the Ivory Coast, The Dark Side of Chocolate, www.imdb.com/title/tt1773722/ (last accessed 27/5/2013). From a vast amount of news titles, see, e.g., www.dailymail.co.uk/news/article-2014325/Nike-workers-kicked-slapped-verbally-abused-factories-makingConverse-line-Indonesia.html (last accessed 25/5/2013); www.businessweek.com/stories/2008-10-09/walmart-supplier-accused-of-sweatshop-conditionsbusinessweek-business-news-stock-market-and-financialadvice (last accessed 25/5/2013); or www.dailymail.co.uk/news/article-2092277/Apple-Poor-working-conditions-inside-Chinese-factories-making-iPads.html (last accessed 25/5/2013).

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attention devoted to this issue caused a boom in supply chain CSR strategies and became extensively reflected in suppliers’ codes of conduct. However, due to difficulties in the supervision phase (non-compliance cannot be detected from the product itself, as is the case of some environmental requirements) and the measurement of compliance, it is not always clear that these contractual provisions are effective.67 Business ethics issues cover such areas as relationships with competitors and consumers, treatment of confidential information and personal data, or advertising and marketing. However, it is anti-bribery requirements that are most commonly connected with business ethics and CSR. Companies are required directly by national and indirectly by international law not to bribe or accept bribes.68 The most relevant legislative acts for the situation in international supply chains are the aforementioned American FCPA and British Bribery Act 2010, representing national laws with extraterritorial effects. Given that the two major legislative acts come from the UK and the USA, one might expect that anti-bribery requirements would mostly be used in the supply chains of companies from those two, and less so in the case of companies from other, jurisdictions. However, the empirical evidence shows a different picture: over 90% of the sample companies included anti-corruption in their sustainable supply chain policies and/or contracts. Combating corruption is one of the areas where one can see the redundancy of the discussion as to the voluntary/mandatory basis of CSR.69 Despite the existence of hard legal obligations, companies also include anti-corruption efforts in their CSR strategies. This shows that a definition of CSR as purely voluntary actions does not match the reality.70 All the abovementioned issues have something in common: they represent general public concerns, which are regulated by substantive law, both national and international.71 The legal background to the SCCs is emphasized in their text. Nine out of ten companies from the empirical study require their suppliers to comply with the law. This seems to be senseless as every entity in business is supposed to respect the law. However, that may not be the case in reality if the applicable law fails to be enforced by public institutions in some jurisdictions or if certain laws are not directly applicable to private subjects. (It should be

67 See discussion on monitoring and enforcement in section 7.4 below. 68 As international law is not directly applicable on companies, it binds states to implement it within their jurisdictions. For example, Article 12 of the UN Convention against Corruption, note 25 (chapter 3), prescribes that “Each State Party shall take measures, in accordance with the fundamental principles of its domestic law, to prevent corruption involving the private sector, enhance accounting and auditing standards in the private sector and, where appropriate, provide effective, proportionate and dissuasive civil, administrative or criminal penalties for failure to comply with such measures.” 69 Supra subsection 1.3.1. 70 McBarnet, Voiculescu, and Campbell, note 17 (chapter 1), p. 67. 71 McBarnet, Voiculescu, and Campbell, note 17 (chapter 1), p. 67; Lin, note 17 (chapter 1), p. 716.

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Sustainability Clauses in International Business Contracts noted that in fact only a few of these laws are directly applicable.72) Nevertheless, the standards they include are well known. Therefore, the requirements imposed by SCCs are not new; what is new is the situation that private entities engage in their enforcement through business contracts, instruments traditionally used to facilitate private transactions. Moreover, as the empirical study shows, in almost 40% of cases, companies actually require their suppliers to go beyond the legal requirements. So they expect a higher level of standards than are prescribed in legal rules. If a company does require something other than legal compliance, it may be the case that such requirements differ or even conflict with the legal rules. About every fifth buyer solves this problem by laying down requirements stating which rules suppliers must follow in their decision-making (e.g., the stricter from the two). Usually, buyers will request that suppliers follow the stricter of the rules. Graph 7.4 Interaction with underlying legal rules (US x Europe)

As a final point on the topic of SCCs, I would like to draw attention to the finding of the empirical study showing that companies that decide to incorporate one of the topics (environmental protection, labor conditions and human rights, or anti-corruption) into their supply agreements are likely to include the other two as well, either concurrently or

72 Companies often do not distinguish between international law standards that are not directly applicable to them and directly applicable private national law. Probably due to the pressure from the public for ethical behavior, they treat them in the same way.

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shortly afterwards. In other words, an expertise developed in one area can be duplicated in the other two contexts.73

7.2.2

Implied terms

In addition to the substantive rules, international contracts also contain certain implied terms on the parties’ obligations regarding their mutual relationship. Section 7.1.2 has already explored implied contractual provisions in the context of SCCs’ form. This section aims to discuss them in the context of SCCs’ content. The main principle of international contract law in this area is the principle of good faith. According to the UNIDROIT Principles, the PECL, and the CESL contract, terms additional to the actual text can be derived from good faith and fair dealing.74 Although the CISG does not contain a specific provision on the possibility of implying contractual terms from the principle of good faith, this possibility stems from the fact that good faith is considered a general principle of the Convention.75 The principle of good faith has a general character, underlying all international contracts, as well as a specific application as expressed throughout the international contract law instruments. From that specific application, the parties’ duty to cooperate and the ban on inconsistent behavior are of major interest here. The duty to cooperate is expressly established by Article 5.1.3 of the UNIDROIT Principles. It basically implies that each party should render to the other party the necessary cooperation for it to perform its obligations under the contract. The obligation to cooperate is not unlimited, but should be reasonable. The reasonableness must then be interpreted in the context of all the circumstances of the contract. For example, it is expected that the bigger the information asymmetry between the parties, the more reasonable it is to expect cooperation of the party with the superior knowledge.76 This is relevant in the CSR area, where multinational buyers are often much more advanced in relation to social and environmental issues than their suppliers from developing countries. Thus, it could be expected that the buyers would share their knowledge to make suppliers’ compliance easier. But the

73 The duplicability is not only relevant among the various CSR issues but also other neighboring contractual provisions, most often relating to quality management or financial due diligence, which may inspire the implementation procedures of CSR requirements. 74 UNIDROIT Principles, Articles 1.7 and 5.1.2; PECL, Article 6:102; CESL, Article 68. 75 Magnus, U., “Comparative editorial remarks on the provisions regarding good faith in CISG Article 7(1) and the UNIDROIT Principles Article 1.7”, in Felemegas, J. (ed.), 2007, An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, NY, USA: Cambridge University Press; Vogenauer and Kleinheisterkamp, supra note 16, Article 1.7, para. 2; for more details on the use of good faith in the interpretation international sales contracts, see infra subsection 7.2.4.3. 76 Vogenauer and Kleinheisterkamp, supra note 16, Article 5.1.3, para. 9.

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content of the duty to cooperate is not merely an obligation to act: it can also be an obligation to refrain from certain acts. Once again, the situation where a buyer requests that its suppliers act in an environmentally and socially responsible manner but in reality thwarts compliance by other contractual terms (typically low prices or last-minute changes in orders) becomes relevant. The supplier could then argue that the buyer did not cooperate to allow that supplier to comply with the CSR requirements.77 The principle that the parties should not act inconsistently has a similar effect.78 For example, in the event that a buyer implements a softly formulated code of conduct into a contract by reference, but does not enforce it for a span of several years, the buyer should not be able to enforce it suddenly without letting the supplier know that its position towards the ethical standards has changed.79 In summary, companies including SCCs in their contracts should be aware that by imposing sustainability requirements on their suppliers, they also bind themselves to a certain extent, namely, not to compromise suppliers’ compliance by their own acts and to cooperate in order to facilitate suppliers’ performance.

7.2.3

Disconnectedness from the contract subject matter

The thematic coverage of SCCs leads us to look at the content from another angle, to investigate what the protected interests are. And it becomes quickly obvious that the primary aim of sustainability clauses is to protect third out-of-contractual-relationship parties, such as the suppliers’ employees (e.g., ensuring a minimum wage) or local communities (e.g., monitoring pollution of the environment). SCCs do not, thus, directly relate to the subject matter of a contract: they do not expressly specify the quantity, tangible quality, or manufacturing procedure for the product in question.80 If sustainability requirements are cut out, the contract can still validly exist and the main objective can be carried out. This does not correspond to the common understanding of a contract as a framework for a private transaction stipulating the rights and obligations of the parties to facilitate a specific exchange.81 Compliance with SCCs does not contribute to executing such an exchange, and it does not change the tangible quality of the delivered goods. For example, in the TGB Sourcing Agreement,82 Heeling Sports Limited, TGB’s supplier, undertakes that it will comply with the local labor law while manufacturing the products in question. In the event that it does not fulfill this commitment, e.g., if the supplier were 77 78 79 80 81 82

This could potentially lead to liability exemption based on CISG Article 80. UNIDROIT Principles, Article 1.8. Vogenauer and Kleinheisterkamp, supra note 16, Article 1.8, para. 11. Lin, note 17 (chapter 1), p. 717. Cafaggi, note 33 (chapter 5), p. 711. See note 15 (chapter 3).

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to employ children to manufacture the goods, the tangible quality of the delivered sports equipment would still be in conformity with the product specifications without any physical defect, and thus, the supplier’s core obligation under the contract would be fulfilled. However, the contract would be breached and the buyer would most probably be entitled to some remedies.83 An opposite example has already been outlined in section 3.3.2.1, where Article 9.4. of the Verizon Australia Supply Agreement was analyzed. This provision obliges Verizon’s suppliers to comply with the EU environmental laws for the purposes of marketing products within the EEA.84 Because the requirement has a direct link to the specific use of the products, it cannot be removed from the contract without consequences for the products’ quality and use. Thus, this provision will not fall under the definition of SCCs adopted in this book. The same conclusion would have to be reached in relation to contracts in relation to which suppliers are informed that the delivered products will bear a specific label, e.g., the Fairtrade label.85 Suppliers’ awareness of buyers’ intention to attach a label on the delivered products obliges them to fulfill the quality- and process-related standards necessary to obtain the label in question. However, in order to avoid any dispute, it would be advisable for buyers to present the suppliers with those detailed requirements rather than only stating the name of the label. The separation of sustainability requirements from the core of a business agreement suggests that their main objective is not transaction-specific profit maximization but rather long-term value creation and reputational risk management.86 This may complicate the assessment of supplier’s compliance and also the enforcement of the provisions via traditional remedies, i.e., specific performance and damages. Specific performance cannot generally be used, since the sustainability requirements do not have relevance to the physical product quality, and in relation to damages, it may be extremely difficult to prove the causal relationship and the damage suffered, because they may only become obvious 83 We could argue that the products’ quality is not in conformity with process-related requirements. See infra discussion on remedies in subsection 7.4.2. 84 The Verizon Australia Supply Agreement includes a reference to two specific EU legislative acts to be followed and refers to any other regulation concerning producers’ responsibility, environmental protection, and waste disposal. In relation to the two specifically mentioned legislative acts, we could assume that their listing is enough to make the supplier aware of the particular purpose. However, one could question whether the general reference established the supplier’s awareness of a particular purpose under Article 35(1)(b) CISG as it has been established in case law that a seller should not be obliged to deliver goods conforming to special law requirements in the buyer’s country (BGH, 8 March 1995, VIII ZR 159/94); see also Henschel, R. F., “Art. 35 CISG-UP-PECL”, in Felemegas, supra note 75, p. 171. 85 Fairtrade International provides a certification scheme for various products’ manufacturers. One of the standards that need to be fulfilled to secure the label is the traceability of the majority of the products’ components; www.fairtrade.net/trade-standard.html (27/5/2013). 86 Over 50% of the companies included in the empirical study expressly mention reputational damage, risk management, and/or long-term value creation and relationship management as the reasons for including CSR suppliers’ requirements in their policies and/or contracts.

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Sustainability Clauses in International Business Contracts in the future.87 Some authors point out that the courts have been reluctant to recognize CSR production method-related requirements as product characteristics in consumer cases, and it can be expected that the same would happen in business cases as well.88 We can see that the criterion of connection with or disconnectedness from the subject matter of a contract is also used in more formal contracting processes of public procurement.89 The efforts to ensure fair and transparent public procurement procedures have led the legislators who prepared a proposal for a new EU directive on public procurement only to allow requirements for labels in relation to social and environmental issues in public tenders if they are directly linked to the subject matter of a contract, meaning the procured services or goods.90 The linkage to the subject matter of a contract is helpful in maintaining equality of treatment and transparency in the procurement process, but may be criticized by those who believe that public buyers should look at the social and environmental performance of the tender participants in general and not only in connection with the product/service in question, because therein lies the real need for change in social and environmental area. The requirement that sustainability labels be linked to the subject matter of a contract seems to contradict two other provisions in the proposal: the possibility that the proposal gives to the buyer to exclude the tenderer from the competition if it does not comply with the obligations under EU legislation and the listed international legislation (Annex XI) in the social and environmental area91 and the possibility not to award the

87 Schwenzer and Leisinger, note 6 (chapter 1), p. 265; for further discussion on remedies, see subsection 7.4.2 below. 88 Kocher, note 16 (chapter 1), p. 270 (“… German jurisdiction has been reluctant in recognizing circumstances that are not physically attached to the purchase as characteristics of the good”); Glinski, note 110 (chapter 1), p. 125. 89 Steinicke, M., “New Goals in Regulation”, in Olsen and Sörensen (eds.), note 56 (chapter 2), pp. 109–131, p. 125 (discussing the Concordia Case (Case C-513/99, Concordia Bus Finland Oy Ab v Helsingin kaupunki and HKL-Bussiliikenne, [2002] ECR I-7213), where the European Court of Justice laid down the criterion of a linkage to the subject matter as the first of four conditions for criteria selecting the most economically advantageous tender). 90 Proposal for a Directive of the European Parliament and of the Council on public procurement, 20.12.2011, COM(2011) 0896 final (hereinafter “Proposal for Public Procurement Directive”), Article 41(1)a) (“Where contracting authorities lay down environmental, social or other characteristics of a works, service or supply in terms of performance or functional requirements … they may require that these works, services or supplies bear a specific label, provided that all of the following conditions are fulfilled: (a) the requirements for the label only concern characteristics which are linked to the subject-matter of the contract and are appropriate to define characteristics of the works, supplies or services that are the subject-matter of the contract;…”). 91 Proposal for Public Procurement Directive, Article 54(2) (“Contracting authorities may decide not to award a contract to the tenderer submitting the best tender where they have established that the tender does not comply, at least in an equivalent manner, with obligations established by Union legislation in the field of social and labour law or environmental law or of the international social and environmental law provisions listed in Annex XI.…”).

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contract to the best offer because non-compliance in one of these areas has been established.92 The text of the public procurement proposal shows that the separation of sustainability requirements from the subject matter of a contract causes concerns, and therefore, it is something to be noted. This is true both in the public and private procurement spheres. The most pressing question it presents is why such provisions should be in supply agreements at all; should they not be dealt with in separate documents or contracts? This question is then mirrored in the context of international contract law, where the disconnectedness from the subject matter may cause complications in the use of remedies.

7.2.4

Specificity

The final theme to discuss in this section and also one of the most difficult features of SCCs to grasp is the different level of language specificity that different SCCs exhibit.93 The choice of language may influence the understanding and interpretation of a provision by the contractual parties, thus the scope of the parties’ obligations and potentially rights to remedies in the event of non-compliance. It is therefore important for companies to choose such a level of specificity that the contractual provisions actually cause the effects and bind suppliers to the extent that they require. Not all buyers intend to formally bind their suppliers to adhere to CSR standards. The motivation for inclusion of SCCs in contracts may lie in subjecting suppliers to subconscious pressure caused by the contractual form of a requirement without the intention formally to enforce it, but nevertheless with the intention of inducing specific conduct.94 In such situations, the provision can afford to be more vague than other provisions that are intended to be enforced through the courts. On the other hand, provisions that are to be unconditionally observed and enforced must be formulated with such specificity that they do not allow for ambiguous interpretations. It is not an easy task to find appropriate language in the CSR area, where regulation is quickly changing, a certain level of non-compliance is often expected, and the provisions have to balance relationship and risk management.95 This subsection firstly presents 92 Proposal for Public Procurement Directive, Article 55(3)a) (“A contracting authority may exclude from participation in a public contract any economic operator if one of the following conditions is fulfilled: (a) where it is aware of any violation of obligations established by Union legislation in the field of social and labour law or environmental law or of the international social and environmental law provisions listed in Annex XI. Compliance with Union legislation or with international provisions also includes compliance in an equivalent manner…”). 93 The level of specificity can also be called the level of vagueness or level of completeness. 94 See infra subsection 8.1.1. 95 Coltman, T., Brub, K., Perm-Ajchariyawongc, N., Devinneyd, T. M., Benitoe, G. R. G., 2009, “Supply chain contract evolution”, European Management Journal, 27(6), 388–401, p. 389 (“In the case of complex systems such as a supply chain, it is impossible to provide an exhaustive description of the rights and obligations of all contracting parties for every possible contingency. Governing complex transactions requires that the contracting

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examples of language used, then it outlines the reasons leading to the choice of specific vs. vague language in SCCs,96 and finally, it discusses the implications of the choice under international contract law. 7.2.4.1 Examples In order to demonstrate the different levels of specificity in SCCs, this section presents four examples of environmental SCCs listed from the most to the least specific: “Contractor shall either batch fill their diesel driven equipment or provide complete secondary containment under diesel driven equipment and lines when continuously fueling this equipment.”97 The first example shows a highly specific requirement. The requirement relates to the handling of machinery during the manufacturing process of goods to be supplied under the relevant supply agreement. The formulation of the provision gives the supplier clear and unambiguous instructions as to what is expected of him. “As a requirement of doing business with BT there are 3 minimum expectations from contracted suppliers: - that the supplier has a policy to address the challenge of climate change - that the supplier is actively measuring and reporting carbon and other green house gas emissions - that the supplier has set challenging targets to cut emissions and is reporting on progress.”98 The second example seems to be rather specific, prescribing three requirements for suppliers in relation to carbon emissions: suppliers must have a corporate policy on climate change, measure and report emissions, and set emissions’ reduction targets. However, the content of those requirements may raise some questions. The first one does not specify how supparties use a combination of instruments based on intermediate degrees of contractual completeness to ensure that the parties can adapt to the contingencies that arise in modern business”). 96 The level of vagueness has been linked and defined through the level of verifiability by Triantis, G. G., 2002, “The efficiency of vague contract terms: a response to the Schwartz-Scott theory of U.C.C. article 2”, Louisiana Law Review, 62(4), 1065–1079, p. 1068 (“…three features of vague terms: (a) the failure to fully exploit all verifiable factors, (b) the inclusion of terms whose enforcement invokes non-verifiable factors and (c) uncertainty as to the judicial weight assigned to each among a set of bundled factors”). It is the second factor that is characteristic of SCCs. 97 LyondellBasell Industries, Rules for Contractors, Valid Until 04/30/14, section 6.3, www.lyondellbasell.com/contactandsupport/SupplierInformation/RulesforContractors/ (last accessed 12/7/2014). 98 BT Plc., Generic Standard 20 Climate Change Procurement Standard, www.selling2bt.bt.com/Downloads/GS20v2.pdf (last accessed 27/5/2013).

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pliers’ policies should address climate change, what should it contain, or how should it be adopted. The second requirement does not specify which scope of emissions should be measured (scope 1, 2, and/or 3)99 and where and how the results should be reported (e.g., CSR report, website, or press release). And finally, the third requirement could cause uncertainty regarding interpretation of the term “challenging target.” Nevertheless, all three could most probably be interpreted through the context of other buyers’ documents and the practices of the parties and their peers. “Air emissions of volatile organic chemicals, aerosols, corrosives, particulates, ozone depleting chemicals and combustion by-products generated from operations are to be characterized, monitored, controlled and treated as required prior to discharge.”100 This provision again represents a mixture of some specific and vague wording. While the supplier will clearly know what to pay attention to, it is not so easy to work out what exactly needs to be done. The provision only vaguely prescribes the actions expected of the supplier. The provision is incomplete in laying down how the chemicals should be characterized; where, how, and how often they should be measured; how and with what results they should be controlled; and finally how they should be treated (as required by whom: the buyer or the law?). “Suppliers will be required to: • comply with all relevant environmental legislation (including but not limited to waste, emissions, and noise), acting in a preventive way to avoid pollution…”101 The last provision contains the vaguest requirement. While the first part on compliance with the law is rather clear and unambiguous, the second part does not provide any guidance as to what is actually demanded of the supplier. Some authors have tried to classify the ambiguity in the language of CSR codes of conduct and deduce any implications these may have.102 Kolk and van Tulder developed a model to analyze and compare corporate codes of conduct in relation to the child labor 99 Definitions of scope 1, 2, and 3 emissions, e.g., are available at: www.epa.gov/oaintrnt/ghg/ (last accessed 28/5/2013). 100 HP Electronic Industry Code of Conduct, Version 4.01, 12 June 2012, p. 5, www.hp.com/hpinfo/globalcitizenship/environment/pdf/supcode.pdf (last accessed 27/5/2013). 101 Telefonica Group, Supply Chain Responsibility Policy, June 2010, p. 8, www.telefonica.com/en/about_telefonica/pdf/suppliers/politica_en_con_firma_def.pdf (last accessed 27/5/2013). 102 McBarnet and Kurkchiyan, note 17 (chapter 1), p. 69 (stating that CSR requirements’ formulations are usually at the softest end of the spectrum).

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Sustainability Clauses in International Business Contracts issue, which takes specificity in language as one aspect to examine.103 They combine the specificity of the application provisions and requirements with the specificity of monitoring and enforcement procedures to assess the effectiveness of codes. They found that whereas the investigated EU companies adopt broadly formulated codes while applying highly specific monitoring systems, their American peers did exactly the opposite, having strictly defined requirements combined with vaguely described monitoring systems.104 The authors presume that the European codes would be more effective in combating child labor. The model was then slightly amended and used by Vytopil, who combined an analysis of the specificity of the language used with the form of implementation of codes into business contracts to classify the codes as weak, moderate, or strong.105 Another classification was introduced by Bondy, Matten, and Moon, who evaluate the codes’ style (language), target audience, and content focus to categorize them as stipulative, commitment, principle, information, and unknown. They found that close to 50% of the investigated 150 codes had a stipulative character, meaning that they prescribe the required behavior of the audience (the text includes words such as “shall,” “will,” “not permitted”), and were connected with specific sanctions.106 7.2.4.2 Reasons influencing specificity The conventional economic rationale of contractual parties drafting a commercial contract pushes them towards avoiding the costs and risk of litigation by formulating contractual terms as precisely as possible.107 Under the law and economic approach, contracts should thus be complete and complex. However, it has been pointed out that in many instances this does not correspond to the reality, where parties have various reasons to avoid complexity and leave some aspects of the contractual relationship unregulated or regulated in a vague manner.108 These reasons include, inter alia, negotiation costs, monitoring dynamics, evolutionary pressure, conventions, reliance on trust and reputation, enforcement costs, or renegotiation.109 This subsection discusses some of the reasons in relation to SCCs.

103 Kolk and Tulder Van, note 112 (chapter 1); the authors further developed the classification in Tulder, R. v., Wijk, J. v., Kolk, A., 2009, “From Chain Liability to Chain Responsibility”, Journal of Business Ethics, 85(2), 399–412. 104 Ibid., p. 270. 105 Vytopil, note 119 (chapter 1). 106 Bondy, Matten & Moon, supra note 6, pp. 11–12 (It is important to note that the studied sample of codes covered all types of CSR codes, including codes for employees. Nevertheless, the results do not differ substantially from the finding with respect to corporate supply chain commitments’ types; see supra subsection 7. 107 Triantis, supra note 96, p. 1067; Eggleston, K., Posner, E. A., Zeckhauser, R., 2000, “The design and interpretation of contracts: Why complexity matters”, Northwestern University Law Review, 95(1), 91–132, p. 104–106. 108 Eggleston, Posner, and Zeckhauser, supra 107, p. 92 and 104; Triantis, supra note 96, p. 1071 et seq. 109 Eggleston, Posner, and Zeckhauser, Ibid.

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How concrete sustainability requirements are may firstly be influenced by the size and type of a firm. We see vague formulations more frequently in documents produced by small- and medium-sized companies that do not have the resources to invest in CSR, are not in a negotiating position to impose CSR requirements on their international business partners, or whose primary interests are simply closer to their domestic location. Pressalit’s General Terms and Conditions may serve as an example of vague wording used by a medium-sized Danish company.110 Although Pressalit is rather active in the CSR area, the business and legal risks of unethical behavior are much smaller than in the case of a multinational enterprise such as GE Energy,111 and therefore, Pressalit may afford to implement CSR into its operations in broader terms without exposing itself to a high risk. To compare, Pressalit’s General Terms and Conditions say that “compliance with UN’s Global Compact should be observed” without making compliance a conditio sine qua non of the business relationship and without specifying what the exact performance requirements are and the possible consequences of non-compliance. Even though the UN Global Compact contains the same general requirements in relation to the abolition of child labor as the GE Energy General Terms and Conditions, GE is much more specific and strict about the issue than Pressalit, stating the exact age limits and the ultimate consequence of contract termination in the event that a breach is discovered. The formulation of sustainability requirements furthermore depends on the overall corporate CSR strategy of firms. The decisive point is the motivation and purpose of adopting SCCs. On the one hand, vague wording may be used by companies that are not genuinely pursuing CSR goals, but only proclaiming respect for social and environmental issues without implementing any specific actions. Another motivation for vague wording may be that the companies concerned wish to communicate goals and values to their business partners rather than to future judges.112 On contrary, more specific formulations will be used if companies want to achieve a particular goal, e.g., reduction of their total emissions by a certain percentage. Another example of a reason to use vague wording is the objective of retaining the flexibility and practicability of a contract.113 A broad formulation gives the parties space to adjust the content to the changing regulatory environment, their business needs, and unforeseen events without the necessity to renegotiate. It also allows for using the same wording in various jurisdictions and helps to overcome differences in the parties’ cultural

110 111 112 113

See note 2 (chapter 3). See note 18 (chapter 3). Triantis, supra note 96, p. 1073. McBarnet and Kurkchiyan, note 17 (chapter 1), p. 70; Collins, note 91 (chapter 2), p. 167 et seq.

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and legal understanding of the issues in question. The adaptability and universal application of SCCs lower the (re)negotiation costs.114 The specificity of sustainability contractual requirements is also influenced by the controllability and measurability of the performance. For example, ArcelorMittal requires its suppliers to “… to maintain effective policies, processes and procedures to manage their environmental impact….”115 The code does not provide guidance as to how this should be done, leaving the obligation indistinct, probably because it is difficult to give some benchmark for the respective performance, to quantify it.116 At the other end of the spectrum, LyondellBasell Industries’ Rules for Contractors include some highly detailed requirements, such as: “Contract cleaning, washing, and hydro-blasting of plant process equipment which has been exposed to chemicals, oil, acids, bases or other contaminants shall be performed in runoff contained areas which have drains to the plant wastewater system.”117 Obviously, compliance with this provision is easily controllable, and therefore, the wording may be more detailed. The controllability and verifiability of CSR performance is one of the major problems for corporate contribution to sustainable development. However, some companies try to work through this burden by introducing specific goals for their suppliers. As the empirical study revealed, from the 55 sample companies, 14 report imposing, planning to impose in the near future, or requiring their suppliers to self-impose quantitative objectives in relation to their environmental performance. For example, from 2009 and without any legal pressure, Verizon Communications Inc. has required its suppliers to reduce the energy efficiency of networks components by 20%.118 A final remark in relation to verifiability relates to the monitoring dynamics. One of the SCCs’ features is that they are remote from the subject matter of the contract, but still they are assessed as a part of suppliers’ compliance. Suppliers thus must weigh verifiable factors (usually product quality- and delivery-related) against non-verifiable factors (such as SCCs) to decide which they will

114 Eggleston, Posner, and Zeckhauser, supra note 107, pp. 107–108; Triantis, supra note 96, p. 1071 (noting that “… the ex ante transaction costs of specifying each possible verifiable future state of the world / even if they can all be foreseen and contemplated / may exceed the gains”). 115 ArcelorMittal, Code for Responsible Sourcing, Article 5.4., http://corporate.arcelormittal.com/~/media/Files/A/ArcelorMittal/who-we-are/code-of-responsible/Code-responsible-sourcing-1306.pdf (last accessed 17/6/2013). 116 More guidance is not provided in the implementing document Responsible Sourcing at ArcelorMittal either; a guidance document for ArcelorMittal’s buyers and suppliers, which once again includes mostly vague statements, such as: “This would include monitoring and reducing negative impacts, with targets for improvement. You should have procedures in place to prevent an environmental incident, and to minimise the consequences if one occurs.” 117 LyondellBasell Industries, supra note 97. 118 2011 Annual Report: Financial and Corporate Responsibility Performance, p. 20; available at: http://responsibility.verizon.com/reports (last accessed 12/7/2014).

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primarily follow.119 In order also to include non-verifiable factors into suppliers’ decisions, buyers have to balance the incentives provided in the contract.120 Finally, it would seem that SCCs are more specific where there is the threat of a concrete statutory sanction if a breach is discovered. This occurs mostly in relation to topics regulated by national law with extraterritorial effects, such as the aforementioned topic of corruption (e.g., Verizon Australia Supply Agreement). Since the legal enforcement is stricter, the buyer has to make sure that the supplier understands precisely what is expected of him to avoid any negative consequences. The buyer’s rationale to include a detailed provision is thus to avoid liability.121 In another words, we could as well link the specificity of contracts to the underlying specificity of the law. If the law is based on rules, meaning that they clearly define subjects’ obligations ex ante, contracts will be more detailed. Whereas if the law is based on standards, meaning that the content of the obligations will depend on the ex post discretion of the deciding authority, the contracts will presumably be vaguer.122 For example, on the one hand, the REACH Regulation prescribes detailed rules for the obligation to register chemical substances in products marketed on the EU market. Thus, relevant SCCs will also be more detailed.123 On the other hand, in the climate change area, EU companies are not subjected to any specific rules on emissions’ reductions in their supply chains and the applicable soft law is standards-based. Therefore, the SCCs in this context also tend to be broadly drafted.124 To sum up, the specificity of content and sanctions provided for by the underlying law matter, thus the jurisdiction and type of law involved influence the specificity of SCCs (as do the companies’ intentions when inserting the SCCs into their contracts). 7.2.4.3 Implications under international contract law Leaving SCCs vague or incomplete may be beneficial for the parties and may be more helpful in reaching the overall objective of sustainable development. However, vague terms open up room for ambiguous interpretations, which may cause problems, especially in

119 This situation is called the “agency problem of multitasking.” See Triantis, supra note 96, p. 1072. 120 Eggleston, Posner, and Zeckhauser supra note 107, p. 110. For example, if a buyer requires quick deliveries and low price while implementing vague SCCs supported only vaguely described enforcement means, it will obviously shift the attention of its suppliers to the verifiable aspects. 121 Eggleston, Posner, and Zeckhauser call this reason “political economy” (supra note 107, p. 105). 122 Kaplow, L., 1992, “Rules versus Standards: An Economic Analysis”, Duke Law Journal, 42(3), 557–629, pp. 559–560. It should be noted that hard law tends to be more rule-based, while soft law tends to be more standards-based. See also Posner, note 57 (chapter 1), p. 4 (distinguishing between rules, where “determining whether they have been violated is a relatively mechanical, cut-and-dried process rather than one requiring the exercise of discretion or the determination of numerous facts” as in case of standards) or similarly Abbott et al., note 59 (chapter 2), p. 413. 123 Example in supra note 55. 124 See examples in section 7.2.4.1 above. Note that companies that fear more rule-based future regulation (e.g., carbon tax in the UK) are implementing more precise SCCs as a preventive tool.

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the event of their enforcement through review by the courts. Using vague terms may thus cast doubts on the applicability of the underlying contract law and the enforceability of the terms. Such doubts undermine the notion of the binding nature of the terms, which is an important incentive for compliance even if the parties do not intend actually to use the formal enforcement mechanism. This idea corresponds to the philosophy of Karl Olivecrona that “the binding force of the law is an idea in human minds.”125 Similarly, the literature on the expressive function of the law suggests that individuals align their preferences and morals to the model behavior prescribed by legal norms.126 Thus, if contractual parties suspect that a provision would not be enforceable through the legal system, the level of compliance may be lower. Therefore, when drafting SCCs, companies should weigh the advantages of broad language with regard to flexibility, wide application, and accent on relational tools against the advantages of precise language in relation to the perception of SCCs as legally binding. In order to do that, they must be aware how such vague language would be interpreted if a dispute were to arise and how specific the language used in SCCs needs to be for such clauses to be formally enforceable. Generally speaking, the interpretation of any contract and the parties’ conduct and statements made in connection to the contract will, if necessary, be carried out by courts or arbiters in two steps: firstly, through a subjective step, identifying the intentions of the parties, and then if such intention cannot be determined, an objective test will be applied to establish the meaning that a reasonable person in the same circumstances would assign to the contract, statement, or conduct.127 Although the general rules are the same, the various instruments of international contract law differ slightly. The first difference lies in the elaboration of the provisions. The CISG contains a considerably shorter provision on contract interpretation than the other three major instruments of international contract law – the UNIDROIT Principles, the PECL, and the CESL.128 Nevertheless, the CISG provision probably leads to a similar outcome to those other instruments, given the other provisions of the CISG and its underlying principles (especially good faith and fair dealing) and given that the soft law instruments may be used to help

125 Ratnapala, note 71 (chapter 2). 126 Depoorter, B., Tontrup, S., 2012, “How law frames moral intuitions: the expressive effect of specific performance”, Arizona Law Review, 54(3), 673–717 (experimentally testing the expressive function of specific performance; concluding that although parties may not enforce specific performance, its enactment in law supports compliance with contracts); see further discussion on expressive function of contracts in infra subsection 8.1.2.3. 127 Calling the two stages “subjective” and “objective” may be a little misleading as certain objective criteria pertinent to the contractual relationship (such as the circumstances, trade usages, or commonly given meaning) must be considered in any case (Vogenauer and Kleinheisterkamp, supra note 16, Article 4.1, para.14–16). Nevertheless, I keep the distinction here as it is a helpful and easily understandable conceptualization. 128 CISG, Article 8; UNIDROIT Principles, Articles 4.1–4.8; PECL, Chapter 5, Articles 5:101–5:107; CESL, Chapter 6, Articles 58–65.

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in filling some gaps in the CISG text.129 The second difference is in the object to be interpreted. While the CISG speaks only about statements and conduct of the parties, the European instruments speak only about interpretation of the contract. The UNIDROIT Principles include rules for both: interpretation of the contract as a whole through the common intention of the parties and interpretation of individual statements through the intention of the party making such statement. However, this difference does not pose any problems and it seems logical that the CISG rules can be used for interpretation of the contract as a whole, and equally, the interpretation rules of the European instruments can also be used to interpret individual statements.130 The third difference can be seen in the list of matters to be taken into consideration when interpreting a contract. Unlike the other instruments, the CISG does not expressly mention good faith in this list.131 The scholarship disagrees as to whether good faith should be applied when interpreting individual contracts under the CISG as a general principle that the Convention is based on.132 In order to elaborate on how the interpretation rules work in relation to SCCs, I will once again use Article 14.2 of the Verizon Australia Supply Agreement as an example.133 It reads as follows: “Buyer is committed to conducting its business in an ethical, legal and socially responsible manner. Buyer expects its suppliers to share this commitment and has therefore established a Supplier Code of Conduct set forth at http://www22.verizon.com/ethics/ which Company agrees to adhere to.” The plain meaning of the word “adhere” can be both soft (to give support or maintain loyalty) and hard (to bind oneself to observance).134 Therefore, suppliers could be confused about the level and type of the obligation this provision binds them to. Should the words “agrees to adhere to” be understood as accepting an obligation to comply with the Code or merely to support the values expressed in it?

129 Perrilo, J. M., “Interpretation of the contract: Editorial remarks on the manner in which the UNIDROIT Principles may be used to interpret or supplement CISG Article 8”, in Felemegas, supra note 75, pp. 48–51. 130 Carlson, A., “Art. 9 CISG-PECL”, in Felemegas, supra note 75, p. 273. 131 The UNIDROIT Principles does not list good faith among the circumstances to be considered when interpreting contracts in Article 4.3. But the use of the principle of good faith can be derived from Article 4.8 (2) c). 132 Schlechtriem & Schwenzer, supra note 16, Article 8, para. 31 (firmly stating that the application of the principle of good faith in contract interpretation is incorrect); Magnus, supra note 75, p. 45 (stating that it is commonly acceptable). Applicability of the good faith principle in contract interpretation has also been found in the case law, e.g., Handelsgericht Zürich, 30.11.1998, HG 930634. 133 See note 23 (chapter 3). 134 Merriam-Webster, online dictionary, www.merriam-webster.com/dictionary/adhere?show=0& t=1369923219 (last accessed 30/5/2013).

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To answer the above question, the first step would be to determine the common and individual intentions of the parties while taking into account all the circumstances of the contract, including the preliminary negotiations, the parties’ conduct, usages and practices, the nature and purpose of the contract, the common meaning given to the terms, and possibly good faith.135 An easy way to establish the parties’ common intention is if there is a declaration regarding the effects of the Code in the contract’s preamble or in some pre-contractual documents.136 If we cannot derive a subjective intention from any expressed communication, we should look into the circumstances of the contract. For example, if Verizon has requested that suppliers sign the Code before entering into the contract or states on its website that compliance with the Code is a prerequisite for any business relationship, Verizon’s intention would clearly be to establish binding obligation. However, this is not the case.137 More help can be found from the conduct of the parties, especially the conduct subsequent to the contract’s conclusion. In the Code, Verizon reserves the right to audit suppliers’ compliance. The wording would suggest that the intention was to establish a binding obligation for suppliers. However, in order to conclude that, we should examine whether the company has actually conducted such audits and how it has reacted in relation to any negative findings. If the supplier can prove that the company knew about any non-compliance but did not act upon it (e.g., request remediation or seek formal enforcement), it could be deduced that the intention was towards a non-binding effect.138 This conclusion would be stronger in the event that the company failed to claim remediation repeatedly in the past.139 We could also derive conclusions based on the supplier’s conduct. If the supplier follows the Code and accepts regular audits and implements corrective plans that are imposed, it could be deduced that he intended to assign a binding force to the contractual provision. The question of the parties’ conduct is closely connected to the establishment of contractual practices, which may be examined when interpreting a contract. Therefore, it would be relevant to gather information about previous dealings between the parties. Did they include a similar provision in their previous contracts and how did they treat it? Also, any trade usages can help. In this case, the usages of the telecommunications industry would be of interest. Verizon is a member of the Global e-Sustainability Initiative (GeSI),

135 CISG, Article 8(3); UNIDROIT Principles, Article 4.3; PECL, Article 5:102; CESL, Article 59. 136 Such common intention could, for example, be derived from the HP CSR Agreement; note 17 (chapter 1). 137 The conclusion is made based on the content of the company’s website and the 2011 annual report and its Corporate Social Responsibility Supplement. 138 Vogenauer and Kleinheisterkamp, supra note 16, Article 4.3, para. 9–10 (noting that subsequent conduct cannot of itself establish what the original intention was, but may elucidate it, especially in relation to the intention to be bound by a contract). 139 A company could lose the right to remedies if it repeatedly fails to enforce sustainability requirements that are also based on Article 1.8 of the UNIDROIT principles.

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associating companies and organizations from the information and communication technology sector.140 This initiative is focused mostly on information and knowledge sharing, but does not adopt any common standards in the sustainable supply chain area. Looking at the information provided by companies themselves in CSR reports and through their websites, it is obvious that jurisdiction matters. While European companies tend to elaborate on the monitoring and enforcement procedures of SCCs, American companies provide only scattered information and do not appear to have a common attitude. The difference is obvious from Graph 7.5. Graph 7.5 Monitoring and enforcement tools in telecommunications industry (ten largest telecommunication companies from the 2012 Fortune 500 Global list)*

* http://fortune.com/global500/2012/ (last accessed 30/1/2015)

Although the sample of ten companies is rather small, the difference between European and American companies is major. The graph shows usage of three types of monitoring tools (suppliers self-assessment, internal audits, and external audits) and two types of enforcement tools (corrective action plans and contract termination). Even from this small sample of data, we can derive that there is not a usage of assigning binding effects to SCCs by American telecommunication companies.

140 http://gesi.org/About_ICT_sustainability (last accessed 30/5/2013).

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Looking at the provision from the perspective of the common meaning normally assigned to such provisions, we would have to argue that companies wishing SCCs to have binding effects usually chose more precise formulations and terms.141 Moreover, there is no standard wording used for these purposes that would be recognized internationally. Therefore, neither the common meaning nor the objective test of a reasonable person will help much as we cannot determine a common meaning of the clause and the reasonable person view would differ significantly according to the jurisdiction. The nature and purpose of the contract does not help us much in relation to the SCCs either, as it is one of their main characteristics that they are disconnected from the subject matter of a contract. The main objective of the contract – to have goods or supply services delivered – can be achieved without assigning a binding effect to the provision under discussion. More guidance can be derived when interpreting the provision in the light of the whole contract.142 From a structural point of view, the significance of the provision’s placement within the text has already been discussed in subsection 3.3.2; although such placement can in principle give some clues as to the importance the parties assign to it, in the present case there was no clear conclusion as to the link between the placement and the binding force of the provision. Nevertheless, the fact that the provision appears only after the liability limitation, termination, and indemnification clauses and has no connection to them indicates that the buyer does not assign a high importance to it. We should also look at the document that is incorporated by this provision. The preamble to the Code states that “(i)n all aspects of the Verizon/supplier working relationship, Verizon’s suppliers and their agents and permitted subcontractors shall support Verizon’s core values by conducting business with integrity, by treating others with respect, by striving for performance excellence and by accepting accountability for their conduct.”143 The words “support” and “strive for” point towards soft obligations, i.e., obligations to exercise best efforts rather than to achieve certain concrete goals or full compliance.144 The expression “accept accountability” also does not suggest that the obligation would be absolute. 141 An example can be found in France Telecom Orange Group’s Code of conduct (April 2011 edition, p. 6): “… the France Telecom Orange Group requires and expects any of its partners, suppliers and through them their own sub-contractors to: …adopt, abide, apply and actively pursue conformance with ethical standards and commitments that match our own, for the whole duration of the pre-contractual and contractual relationship across their whole business and within their own supply chain.” 142 Schlechtriem & Schwenzer, supra note 16, Article 8, para. 30; UNIDROIT Principles, Article 4.4; PECL, Article 5:105; CESL, Article 60. 143 Emphasis added. 144 In this respect, Articles 5.1.4 and 5.1.5 of the UNIDROIT Principles come into consideration. According to the Principles, in interpreting the types of obligation involved, regard should be had to the expression of the obligation in the contract, the price and other terms, the risk involved in achieving the results, and the ability of the other party to influence performance of the obligation. In the CSR area, it will be important to look

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Finally, contra proferentem interpretation should be followed in the event that the intention of the parties cannot be deduced. According to this interpretation rule, an ambiguous provision should be interpreted against the party that drafted or supplied it, in this case against Verizon.145 To summarize the example, we can see that in essence all the interpretation rules used in international contract law point towards the unenforceable character of the analyzed provision. The conclusion would have to be that suppliers have the obligation to invest efforts to support the values of Verizon; however, possible non-compliance with any specific rule included in the Suppliers’ Code of Conduct would not constitute a breach of contract. 7.2.4.4 Conclusion on specificity This section showed that the insertion of sustainability requirements into the contractual text does not of itself secure their enforceability. Their binding force can be largely influenced by the language used.146 If such a clause is highly ambiguous, it can result in its ineffectiveness as: the addressees may not perceive it as binding and thus may not align their behavior with the standards the clause aims to implement; and any dispute resolution body would not enforce it.147

7.3

Scope

Another interesting approach to SCCs is to examine the subjects whose business operations are affected by these clauses. Evidently, the buyer and the supplier come first on the list. The buyer usually determines the use and content of sustainability requirements and has the right (or obligation) to control the supplier’s performance. The supplier undertakes to live up to the agreed standards. However, the effect of SCCs does not usually stop at these bilateral relations. This section will study the out-of-contractual extent of SCCs. According to the Roman law principle of privity of contract, a contract may confer rights and impose obligations only on the contractual parties.148 The principle is based on the idea of a personal bond between the contractual parties; a promise made under a contract is made personally only towards the other party and only the promisee can enforce

145 146 147 148

at what attention the buyer gives to compliance and whether other terms (e.g., low price, last-moment changes) prevent suppliers from complying. Schlechtriem & Schwenzer, supra note 16, Article 8, para. 49; UNIDROIT Principles, Article 4.6. See also infra subsection 7.3.1 discussing how choice of language influences enforceability of unilateral promises under contract law. Cf. Glinski, note 110 (chapter 1), p. 123 (suggesting that even from vague formulated codes of conduct, it is possible to extract a binding minimum). The principle alteri stipulari nemo potest was established in Justinian’s Institutes, 3 19 19; see Hallebeek, J., 2007, “Contracts for a third-party beneficiary: a brief sketch from the Corpus Iuris to present-day civil law”, Fundamina: A Journal of Legal History, 13(2), 11–54, p. 12.

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buyers’ customers or suppliers’ employees, try to enforce SCCs in the contract between the buyer and the supplier (Figure 7.1). This category then splits in two: one relates to customers’ reliance on sustainability qualities of the purchased goods (false advertisement claims) and the other relates to third parties whose rights are protected by the SCCs (unilateral promises, third-party beneficiaries). Figure 7.1 Enforcement of SCCs by third parties

The second category concerns the possibility of a buyer to enforce contracts concluded between two other upstream subjects in the supply chain (Figure 7.2). As has already been stated, buyers may enforce compliance on its direct supplier, but will have difficulties enforcing it on distant supply chain tiers with whom they do not have a legal relationship. Figure 7.2 Enforcement of SCCs beyond first-tier suppliers

Both the categories are discussed immediately below.

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7.3.1

Enforcement of SCCs by third parties

Ever since the earliest days of CSR, companies’ CSR policies have been scrutinized and criticized for their “greenwashing” purposes, low effectiveness, and soft nature. Proponents of CSR as well as subjects influenced by ethically questionable behavior have tried to find ways to ensure that companies keep to what they pledge. The main struggle encountered by those wanting to enforce companies’ promises is the lack of a legal relationship between the companies and themselves. Many corporate CSR strategies take the form of unilateral statements. Others (those that are the topic of this book) are part of contracts between companies and their suppliers. Thus, at first sight it seems that external subjects have no legal means to hold companies accountable for their CSR claims. But that is not entirely true. External subjects have (with greater or lesser success) developed creative ways to enforce CSR statements through tort law, unfair competition, labor law, consumer law, and also contract law. The last two are the focus of this book as they are directly or indirectly connected to SCCs. There are essentially three ways to use consumer and contract law for this purpose: (i) consumers may raise false advertising claims; (ii) external subjects may claim breach of a unilateral contract; and (iii) external subjects may pursue rights as thirdparty beneficiaries of a supply contract between a company and its supplier.156 The three possibilities are addressed below.157 7.3.1.1 False advertising Consumers have been partially successful in enforcing corporate CSR policies through false advertisement claims. False advertisement does not have a contractual basis per se;158 however, it has a connection to contract law through the regulation of consumer sales and can be indirectly used to enforce SCCs. False advertising has been claimed to enforce companies’ compliance with their CSR codes of conduct, regardless of whether they were part of companies’ supply contracts or not. It cannot be used directly to enforce SCCs in supply contracts as such contracts are addressed to suppliers, not consumers, and thus cannot be viewed as advertising. However, it can be claimed in order to enforce public statements that sustainability standards are part of supply agreements, whose compliance

156 Gleichman, N., A Union Perspective on Global Framework Agreements and Corporate Social Responsibility Codes, prepared for the Midyear Meeting of the Committee on International Labor and Employment Law, ABA Section of Labor and Employment Law, 13–17 May 2012 – Paris, France, p. 6. 157 Due to the necessity of remaining focused on the main topic, as well as due to constraints relating to the feasibility of the analysis, the author does not discuss the procedural hurdles for bringing claims by third parties. For this topic, see, e.g., Maryanov, D. C., 2010, “Sweatshop liability: corporate codes of conduct and the governance of labor standards in the international supply chain”, Lewis & Clark Law Review, 14(1), 397–450, p. 412–416, discussing the issues of jurisdiction, choice of law, forum non conveniens, prudential doctrines, and extraterritoriality in relation to sweatshop disputes. 158 Rather, it is classified as a business tort.

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is monitored by the company in question.159 Therefore, it is crucial for companies to make good choices as to what they include in their published sustainability reports or websites. This may be one of the reasons why we see some companies not reporting on their use of contracts for sustainable supply chain management, while at the same time, they include SCCs in their standard terms and conditions.160 A landmark case in the use of false advertisement to enforce corporate sustainability statements is Nike, Inc. v. Kasky.161 Although the case was finally settled out of court,162 it opened the door to false advertisement claims in the CSR area. In this case, labor activist Kasky filed a claim in the California state court in 1998 alleging that Nike breached the state law preventing consumer deception (unfair competition and false advertising statutes) by providing false statements in its response to critics of sweatshop labor conditions in its suppliers’ factories. The response took the form of a letter to consumers. While the state court and the Court of Appeal ruled in favor of Nike, the Supreme Court concluded that Nike’s communication to consumers was actionable, but later returned the case to the state court on procedural grounds. Before the state court could decide, the parties settled the dispute. Although Nike, Inc. v. Kasky was a domestic dispute between two American subjects and concerned application of Californian law, it has international relevance. Firstly, even though the object of the dispute was Nike’s communication to its American consumers, substantively it related to labor conditions in the company’s overseas factories. As such, the dispute’s outcome has affected the general attitude of businesses towards sustainability in their international supply chain. Secondly, all legal systems of developed countries provide some protection to consumers against misleading statements by companies regarding their products. Thus, this case can be an inspiration for future actions in other jurisdictions with similar laws. For example, in EU law, the Unfair Commercial Practices Directive could be used by analogy.163 Article 6(1) of the Unfair Commercial Practices Directive provides protection to consumers in relation to misleading actions by companies that contain untruthful information (including factually correct but misrepresented information) and which can 159 See infra note 171. 160 For example, Pfizer Inc., an American multinational pharmaceutical company, reported in 2011 that it strongly encourages suppliers to follow its code of conduct; however, it did not mention that this would be a contractual requirement, while their standard terms and conditions include highly specific provisions on environmental protection, safety, and anti-corruption. 161 Kasky v. Nike, Inc., 45 P.3d 243 (Cal. 2002); Nike, Inc. v. Kasky, 539 U.S. 654 (2003), referred to as “Nike, Inc. v. Kasky.” 162 Nike agreed to pay a settlement of 1.5 million USD to the Fair Labor Association; see Maryanov, supra 157, p. 428. 163 Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market [2005] OJ L 149/22 (hereinafter the “Unfair Commercial Practices Directive”).

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deceive an average consumer in a way that he buys a product that he would not have bought without being presented with this information. The information can relate not only to such aspects as the nature, price, or quality of the product but also the manufacturing method. According to Article 6(2) of the Directive, the requirement of a misleading statement moreover covers the situation where a trader does not comply “with commitments contained in codes of conduct by which the trader has undertaken to be bound, where: (i) the commitment is not aspirational but is firm and is capable of being verified, and (ii) the trader indicates in a commercial practice that he is bound by the code.” Although the provisions seem likely to be effective in stopping “greenwashing” practices through CSR codes of conduct, there are some uncertainties and loopholes in applying Article 6(2). Firstly, the Directive applies only to statements that are “directly connected with the promotion, sale or supply of a product to consumers.”164 This is closely linked to the requirement for the consumer to prove that he bought the product in question based on the information provided by the company. This can be easy to prove in a case where the product carries a CSR label that a consumer instantly sees, which is thus in direct connection to the sale of a product and influences the consumer’s choice. However, it would be rather difficult to prove in the case of statements provided, for example, on a corporate website or even in its CSR report, as these communication channels are not aimed specifically at consumers and are more of a presentation of values than a form of advertising.165 The second major uncertainty relates to the requirement that the statements are verifiable. As analyzed in section 7.2.4, CSR statements, especially in suppliers’ codes of conduct, have various levels of language specificity. Vague statements using expressions such as the aforementioned example of BT (“supplier has set challenging targets to cut emissions and is reporting on progress”166 ) or BASF’s requirements for their suppliers to “fight forced labor, child labor and discrimination at the workplace”167 cannot be verified. Therefore, they could not be claimed to deceive consumers but should be seen as aspirational statements under the Unfair Commercial Practices Directive.168 Nevertheless, there are some cases of partly successful false advertisement claims in Europe resembling the Nike, Inc. v. Kasky case. For example, the European Center for Constitutional and Human Rights and the Clean Clothes Campaign brought an action at the Heilbronn district court in Germany against the German retailer Lidl demanding that the defendant stop deceiving its customers about working conditions at its Bangladeshi .

164 165 166 167

Unfair Commercial Practices Directive, Article 2(d). Glinski, note 110 (chapter 1), p. 128. Supra subsection 7.2.4.1. BASF, The Chemical Company, Suppliers Code of Conduct, available at www.basf.com/group/corporate/en/products-and-industries/procurement/Compliance/Index (last accessed 12/7/2014). 168 A similar conclusion is reached in the American context by Brudney, J. J., 2012, “Envisioning enforcement of freedom of association standards in corporate codes: a journey for Sinbad or Sisyphus?”, Comparative Labor Law & Policy Journal, 33(4), 555–603, p. 585.

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suppliers’ factories.169 Like many of its peers, Lidl is a member of the Business Social Compliance Initiative.170 The company has developed a suppliers’ code of conduct reflecting the BSCI’s standards. In several statements from 2009 and 2010, including its advertisement brochure, the company stated that compliance with the code was mandatory and that contracts were awarded only to compliant suppliers.171 However, the plaintiffs established that working conditions at some of Lidl’s Bangladeshi suppliers did not correspond to the code. After being presented with the facts, Lidl agreed to settle the case out of court and formally agreed that it would cease to use untrue statements in its advertisements.172 Although this is certainly a positive step towards companies’ accountability for their CSR statements, the sanction imposed on the company was very mild and the effects on improving conditions within its supply chain probably non-existent. Furthermore, European courts have been even more restrictive in cases where a consumer relied on statements made by companies’ suppliers and where the statements did not relate to physical qualities of the products but only to production processes.173 Therefore, it seems that false advertisement claims in Europe have not so far been effective in relation to sustainable development goals.174 To conclude, false advertisement claims have been partly successful in both American and European jurisdictions. However, the outcomes of those cases did not lead to direct improvements in labor and environmental conditions within international supply chains as the plaintiffs are consumers and not the subjects factually harmed by unethical corporate conduct. Nevertheless, indirect improvements can be noted as a consequence of companies’ negative advertisement. After experiencing reputational harm from the media exposure

169 Information on the case is available at: www.ecchr.de/working-onditions-in-south-asia.html (last accessed 13/7/2014). 170 See supra subsection 6.2.8. 171 Advertisement brochure, Lidl: “We at Lidl only award non-food contracts to selected producers and suppliers who have already proved they have actively incorporated social responsibility”; see Müller-Hoff, C., SaageMaaß, M., “Fair Competition! Complaint Filed by Consumers in Germany in Defense of Workers’ Rights in South East Asia”, European Center for Constitutional and Human Rights, available through www.ecchr.de/working-onditions-in-south-asia.html (last accessed 13/7/2014), p. 2. 172 www.ecchr.de/working-onditions-in-south-asia.html (last accessed 13/7/2014). 173 Glinski, note 110 (chapter 1), p. 125. 174 The same drawbacks and conclusion can be reached about the use of Article 2(d) of the Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees [1999] OJ L 171/12, which reads as follows: “Consumer goods are presumed to be in conformity with the contract if they: … (d) show the quality and performance which are normal in goods of the same type and which the consumer can reasonably expect, given the nature of the goods and taking into account any public statements on the specific characteristics of the goods made about them by the seller, the producer or his representative, particularly in advertising or on labelling.” Once again, the connection of the statements to the specific products would have to be established. Moreover, a reasonable expectation on the part of an average consumer would have to be established. Finally, the language of the statement would have to be specific in relation to certain characteristics of the product in question. Until now, false advertisement claims seem to have prevailed over claims of non-compliance from consumer contracts.

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in relation to the court proceedings, companies are likely to be more careful in what information they make public; they become more transparent and usually also review their CSR strategies. 7.3.1.2 Unilateral promises A contract is created by an agreement between two or more parties that constitutes mutual rights and obligations. Normally, a contract will be concluded when an offeree accepts an offer.175 Contracts are distinguished from unilateral statements made by a single subject, which only create obligations for the promisor and rights to the promisee. However, even unilateral statements may create a contractual relationship under some circumstances. In the European context, international contract law instruments suggest that unilateral statements may be enforceable if they are intended to create binding effects. Article 2:107 of the PECL lays down that “(a) promise which is intended to be legally binding without acceptance is binding.” The DCFR, which was the inspiration for the CESL, contains a similar but more detailed provision in Article 4.301: “The requirements for a unilateral juridical act are: (a) that the party doing the act intends to be legally bound or to achieve the relevant legal effect; (b) that the act is sufficiently certain; and (c) that notice of the act reaches the person to whom it is addressed or, if the act is addressed to the public, the act is made public by advertisement, public notice or otherwise.” The intention of the subject making such statement is crucial in determining whether its effects are binding. According to the DCFR, the intention is to be determined from how the addressee would reasonably understand it.176 Even though in the end the CESL abandoned the DCFR’s provisions on unilateral acts, it has been suggested that the same results can be reached via rules on the interpretation of unilateral statements in Article 12, stipulating that “(a) unilateral statement indicating intention is to be interpreted in the way in which the person to whom it is addressed could be expected to understand it.”177 If we accept the three conditions of the DCFR, the intention to be bound, sufficient certainty, and reaching the addressee, we see a parallel with the characteristics of an offer in international contract law.178 As international contracts do not generally need to be concluded in writ-

175 For example, CISG, Article 23 (“A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention”). 176 DCFR, Article 4.302. 177 MacQueen, H. L., Eric Clive and Laura Macgregor, “Unilateral statements indicating intention – the DCFR, the CESL and the UK Supreme Court”, European Private Law News, University of Edinburgh, 8 February 2013. 178 CISG, Article 14; UNIDROIT Principles, Article 2.1.2; PECL, Article 2:201; CESL, Article 31.

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ing,179 companies should be careful how they formulate their CSR codes of conducts, reports, and any other published statements, in order to create binding obligations for themselves only where they wish to do so.180 An important issue will again be the wording used. If a concrete obligation can be derived from a supplier code of conduct, for instance, an obligation to conduct yearly audits of working conditions at suppliers’ factories, the companies may find themselves accountable, when lagging behind their statements. In the American context, the courts have developed the so-called theory of “unilateral contract” (or “employee handbook doctrine”),181 under which unilateral statements may have a contractual character although the subjects making them did not intend to extend a contractual offer to the addressees.182 This doctrine has been used to establish an employment contract in situations where there was no written text or to extend the protection of employees based on unilaterally issued rules of employment, promises, or other statements by an employer. Under the unilateral contract theory, a policy or an employee handbook may have contractual binding effects if: (i) it contains a promise that is sufficiently clear that an employee can reasonably believe that an offer has been made;183 (ii) it is disseminated to the employee and the employee is aware of its contents; and (iii) the employee accepts the offer by commencing or continuing to work after learning of the policy statement.184 The applicability of the American theory of unilateral contract in the CSR area was tested in the Walmart case.185 Walmart has developed Standards for Suppliers and they are an integral part of its supply chain contracts. In the Standards, Walmart reserved the right to audit suppliers’ compliance and stated that non-compliance “may” result in disciplinary action. Walmart’s suppliers’ employees sued the company for a breach of contract established by the Standards between Walmart and themselves, claiming that Walmart failed effectively to monitor its suppliers’ compliance. The court dismissed the case, stating

179 CISG, Article 18 (1); UNIDROIT Principles, Article 2.1.2; PECL, Article 2:204 (1); CESL, Article 34. 180 A possible contract type to be created is most probably an employment agreement, an amendment of an employment agreement, or a kind of service agreement (for assuring suppliers’ compliance with ethical standards) between the company and the suppliers’ employees. Since this would neither be a business contract nor a contract for the sale of goods, only PECL could apply to such a contract out of the international contract law instruments. 181 Brudney, supra note 168, p. 577. 182 The unilateral contract theory was first proposed by the Minnesota Supreme Court in Pine River State Bank v. Mettille, 333 N.W.2d 622, 115 L.R.R.M. 4493 (Minn. 1983). 183 Federal District Court in the Northern District of Illinois, Weber Shandwick Worldwide v. Reid, No. 05 C 709, 2005 U.S. Dist. LEXIS 14482 (N.D.Ill. 2005) (“… in order for an employee handbook or other employment policies, such as a code of conduct, to create enforceable contractual rights, the language of the policy must conform to the traditional requirements of contract formation”). 184 The three-step test was developed by the Illinois Supreme Court in Duldulao v. St. Mary of Nazareth Hospital, 505 N.E.2d 314 (Ill. 1987); see also Cooper, C. G., 2007, “The Basics Of Employment Contracts”, GP Solo Law Trends & News, Litigation, 3(1). 185 See note 107 (chapter 2).

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that the language used in the Standards was too vague and did not amount to a contractual promise. It might have been different if the Standards had indicated that any non-compliance would result in a disciplinary action.186 Even if the Standards constituted a promise, the court would have to investigate if it was disseminated to the employees in such a way that they could reasonably rely on the content as an offer. If the company merely posted the Standards on its website, it could most probably not be viewed as sufficient dissemination, since it cannot be presumed that factory employees from developing countries have easy Internet access. To summarize the findings, the case showed that a unilateral statement may give rise to a contractual relationship even if the company does not intend it to do so; however, the language used and the method of dissemination will be essential in establishing the existence of such a contract. Based on the above, we may conclude that the possibility of enforcing CSR statements through the contractual effects of unilateral promises depends to a large extent on the jurisdiction. In any event, the specificity of language will play a crucial role in determining whether a unilateral statement amounted to an offer or not. However, in the European context, the assessment will be stricter in the sense that an intention to be bound must be present, while this is not a condition under the USA “unilateral contract” doctrine, and less strict in the sense that publication on a corporate website would be sufficient, while in the USA such dissemination would not be sufficient. 7.3.1.3 Third-party beneficiaries Neither of the possibilities discussed above – false advertisement claims and enforcement of unilateral promises – directly enforce SCCs in international supply agreements. They aim to influence the sustainable supply chain strategies indirectly. However, subjects external to international supply agreements, such as suppliers’ employees or people living in the vicinity of suppliers’ factories, may also have the possibility of enforcing SCCs directly as third-party beneficiaries.187 The third-party beneficiary doctrine goes hand in hand with the theories of the binding effects of unilateral promises discussed in the preceding subsection. It could even be seen as their specific modification.188 The distinguishing factor is that while a unilateral promise can create a separate contract between a promisor and a promisee, third-party beneficiaries rely on a contract to which they are not parties. The interconnectedness of the two can be seen in the Walmart case mentioned several times earlier in the text.189 In addition to the discussion of whether Walmart’s Standards for Suppliers amounted to a unilateral contract between the company and its suppliers’ employees, the plaintiffs also alleged that the Standards – as an integral part of the compa186 187 188 189

Kenny, note 9 (chapter 5), p. 460. Cafaggi, note 48 (chapter 2), p. 6. Vogenauer and Kleinheisterkamp, supra note 16, Article 5.2.1, para. 8. See note 107 (chapter 2).

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nies’ contract with suppliers – constituted a promise for the benefit of the suppliers’ employees as third parties. The court also dismissed this claim. The reasoning is discussed below where relevant. Overall we may say that international contract law recognizes the possibility of conferring a right to a third party under an international contract. We can find corresponding provisions in Articles 5.2.1–5.2.6 of the UNIDROIT Principles, Article 6:110 of the PECL, and Article 78 of the CESL. The CISG does not provide for third-party beneficiaries’ rights as Article 4 specifies that it only governs the rights and obligations of a seller and a buyer.190 However, it has been argued that this does not mean that third parties’ rights are not admissible under the CISG, but rather that this topic should be treated as falling outside the Convention’s scope.191 Nevertheless, taking the rest of the instruments, we can say that even with some differences, the general conditions for creation of a third party’s right are similar. First and foremost, the contractual parties must intend to confer such a right. It is not enough if the parties have an intention to benefit a third party.192 The intention must be specifically related to conferring a right to a third party. The intention can be expressed or implied in the contract and will be based on an agreement between the contractual parties.193 An express intention does not pose many problems. However, an implied intention may be hard to determine, especially in an unclear area such as CSR. An implied intention will have to be established using the contract interpretation rules.194 Therefore, a third party’s right can be deduced from the contractual text, usages and practices, the principle of good faith, etc.195 Normally, a third party’s right will not be found in situations where a third party benefitted from the contract only incidentally. This was also the ground for dismissal of the third-party beneficiaries’ claim in the Walmart case. The court held that the suppliers’ intention to enter into a contract including the Standards was primarily to benefit themselves;196 thus, it essentially stated that suppliers’ employees were incidental and not intentional beneficiaries.197 However, this conclusion is rather questionable, since 190 But see infra note 225. 191 Schwenzer and Schmidt, supra note 151, p. 114. 192 Vogenauer and Kleinheisterkamp, supra note 16, Article 5.2.1, para. 10; Hatzis, supra note 150, p. 209 (noting that “… a contract’s unintentional beneficial effect for a third party should not be the source of enforceable rights for third parties who benefit from it”); Hallebeek, J., Dondorp, H. (eds.), 2008, Contracts for a Third-party Beneficiary: A Historical and Comparative Account, Legal History Library, Volume 1, Leiden, NLD: Martinus Nijhoff Publishers, p. 145 (“… the mere fact that a contract may benefit a third party in some way or another is generally insufficient to assume that parties have intended that the third party acquires a claim”). 193 Ibid., Article 5.2.1, para. 11. 194 See supra subsection 7.2.4.3. 195 Vogenauer and Kleinheisterkamp, supra note 16, Article 5.2.1, para. 15. 196 Brudney, supra note 168, p. 578. 197 Phillips, J., Lim, S.-J., 2009, “Their brothers’ keeper: global buyers and the legal duty to protect suppliers’ employees”, Rutgers Law Review, 61(2), 333–379, p. 369.

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it is objectively recognized that MNEs’ codes of conduct are made to benefit external subjects, namely, suppliers’ employees or potentially other parties such as people living in the vicinity of suppliers’ factories (depending on the topic of the code).198 In this sense, it has been argued that the “(c)ircumstances surrounding the origination, development, and publication of buyers’ codes indicate an intention to benefit workers.”199 The fact that suppliers’ workers are generally considered as beneficiaries of MNEs’ codes could even amount to a trade usage. Thus, the court’s decision in the Walmart case does not seem to stand on solid ground in this respect. Secondly, the parties must confer a specific right. The right is deduced from the original contract. This was the second reason for dismissal in the Walmart case, since the court held that the plaintiffs failed to prove a clear promise made by Walmart to audit its suppliers’ performance.200 In the court’s opinion, Walmart had merely a right (but not an obligation) to audit its suppliers and thus to protect suppliers’ employees. And if there is no promise or right specified, there can be no breach or damages. An interesting point in this context was also made by Smith, who supports the idea that third parties’ claims arise from promissory obligations to benefit others and not from obligations not to harm others.201 This could be of relevance in the CSR area, especially in relation to environmental and anti-corruption issues. Finally, the third party must be identified. As a rule, it does not need to exist at the time of the contract conclusion but it must be identifiable with adequate certainty, at least as a member of a specific group or class (e.g., suppliers’ employees).202 This requirement proves to be especially complicated in relation to breaches of a contractual duty of care where there is an indefinite number of possible third-party beneficiaries.203 Disputes concerning breaches of the duty of care are on the borderline between tortious and contractual claims.204 There is no universal agreement as to how they should be treated and thus this will depend on each jurisdiction; however, both American and civil law courts have been “… willing in some cases to assume contractual liability vis-à-vis third parties for breaches of contractual 198 Brudney, supra note 168, p. 580. 199 Phillips and Lim, supra note 197, p. 369. 200 In order for a third-party beneficiary claim from a CSR code of conduct to be successful, the plaintiff has to prove that (i) the code was a part of a contract between a buyer and a supplier; (ii) the workers were intended beneficiaries of this contract; (iii) the buyer or the supplier breached the promise towards the third party and caused it damage; see Ibid., p. 367. 201 Smith, supra note 149, p. 646. 202 Vogenauer and Kleinheisterkamp, supra note 16, Article 5.2.2, para. 3–5. 203 A duty to care is a legal obligation in tort law and may also arise in contract law (under which a subject is obliged to exercise reasonable care in performing actions that could result in harm to others). 204 Vogenauer and Kleinheisterkamp, supra note 16, Article 5.2.1, para. 24; in this context, Smith speaks of “contract-as-tort” theory, under which contract law protects those who reasonably rely on the promises of others. He states that under this theory, privity of contract is essentially an anachronism, because if contract law is about the protection of reliance, there are an infinite number of subjects possibly having such a claim (Smith, supra note 149, p. 647).

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duties of care.”205 It has been argued that a duty to care for suppliers’ employees can be established in three ways: by a code of conduct or potentially SCCs, by substantial control of a company over suppliers’ operations, or by public statements in which a company accepts such a duty. The two first were reviewed in the Walmart case, however in both cases with negative conclusions. The first one failed due to the abovementioned inadequate clarity of language. The second was then rejected by the court’s argument that Walmart audited suppliers in order to secure their compliance rather than to direct the daily work activities of suppliers’ employees.206 Therefore, the plaintiffs in sweatshop disputes have yet to establish that a company’s duty to care arises towards suppliers’ workers.207 As duty to care cases pose difficulties in identifying third-party beneficiaries in relation to suppliers’ workers, it is probably even harder to use the duty to care approach in relation to environmental issues, and scarcely imaginable in relation to issues such as carbon emissions that have global consequences, and thus the group of third-party beneficiaries would have to be the global population.208 Except for the three requirements above – parties’ intention, specific right (promise), and identifiable third parties – the international contract law instruments do not impose any further conditions for the creation of a third party’s right. Neither the relationship between the promisor and the promisee nor the promisee’s acceptance of the right or his reliance is necessary.209 In summary, third-party beneficiaries’ claims have not so far been successful in the CSR area. However, they have generally not been entirely rejected by the courts either. The success of such claims will once again largely depend on the formulations used in CSR codes of conduct or SCCs to establish the intention of the parties to confer a right as well as the content of this right. Companies are aware of this “open door” and try to minimize the possible risks by the inclusion of disclaimers in their contracts or codes of conduct. For example, Article 15.8 of the Verizon Australia Supply Agreement states that “(n)o other party shall be considered a third party beneficiary of this Agreement.” Some authors have noted that explicit disclaimers towards third parties may have negative public relations

205 Vogenauer and Kleinheisterkamp, supra note 16, Article 5.2.1, para. 24; the German courts acknowledge the existence of so-called contracts with protective effects for third parties, which seem to be appropriate for use in the CSR area. 206 Maryanov, supra note 157, p. 431. 207 Ibid., p. 430. 208 Geis calls private contracts with an open number of third-party beneficiaries “broadcast contracts” and discusses their use inter alia in the CSR context. He sees the advantages of maximizing private gains while concurrently maximizing transaction costs. See Geis, G. S., 2012, “Broadcast Contracting”, Northwestern University Law Review, 106(3), 1153–1200. 209 Ibid., Article 5.2.1, paras 27–28; compare to the UK Contracts (Rights of Third Parties) Act 1999, under which reliance by a third party is a trigger for contractual liability to that party (Smith, supra note 2 (chapter 4), p. 91).

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Sustainability Clauses in International Business Contracts effects.210 However, this can only be true in the case of codes of conduct, which are publicly accessible, but will be less probable in the case where such a provision is included in a supply agreement. Disclaimer of this content could be rather effective in preventing third parties from claiming the contractual parties’ intention to confer a right. 7.3.1.4 Conclusion on SCCs’ enforcement by third parties The above discussion showed that third parties have tried various tools based in contract law to enforce companies’ CSR promises and statements. Although none of those tools has been particularly successful in the courts (the best results were achieved through false advertisement claims), they have been effective in forcing companies to change their CSR strategies, namely, to become more transparent and honest about them. Therefore, the third parties’ actions can be seen as more of a “stakeholder tactic,” rather than a personal attempt by the plaintiffs to gain financial compensations for their losses.211 In this way, such proceedings are an important tool for holding companies accountable if not in a strictly legal sense then at least in a public relations sense. Companies’ disclaimers in this respect may help to protect them against negative decisions, but cannot protect them against (and may even undermine their position towards) the public.

7.3.2

Extension of SCCs beyond first-tier suppliers

As already discussed above, companies are expected to ensure ethical behavior throughout their whole supply chain, which is easier said than done. This expectation stems firstly from public pressure, since the public does not clearly distinguish whether a company has a legal relationship with another company and, thus, the possibility of influencing its behavior through contract enforcement or not. What is decisive for the public is information that a company’s products were at any stage of their production connected to unethical behavior regardless of which entity acted unethically; the wrongdoing is associated with the brand company. The abovementioned recent fires in Bangladeshi factories illustrate well the problematic position of the sourcing companies. After a fire in the Tazreen Fashions factory leading to 112 deaths, Walmart, which is as mentioned above a major American retailer, was pilloried.212 Although the company distanced itself from the disaster, stating that its supplier contracted the factory as a subsupplier in direct violation of Walmart’s policy,213 the shame and connection of the com210 BSR Conversations with Newsmakers, Call Summary – December 19, 2005, “Legal perspectives and Interpretation of the ILRF v. Wal-Mart Lawsuit”, featuring: Andrew Boling, Philip H. Rudolph, and Dana Veeder. 211 Ibid. 212 See note 172 (chapter 6). 213 www.usatoday.com/story/news/world/2012/11/26/bangladesh-protest-fire-factory/1726453/ (last accessed 13/7/2014).

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pany’s name with the deadly accident remain. Thus, it is crucial for Walmart to avoid such connections with problematic sub-suppliers in the future. The challenge companies face is how to manage remote subjects in their supply chains. The public pressure is mirrored by regulatory pressure. Although there are some variations, CSR regulations generally demand that companies avoid negative impacts and complicity in unethical behavior throughout their sphere of influence.214 In order to secure that, regulators assume that sustainability requirements are passed upstream in supply chains throughout a sequence of contracts. However, the question is how a buyer may ensure that legally distant sub-suppliers will comply with his original contractual requirements. In this context, Cafaggi has suggested that contractual networks have the potential of being more successful than a link of bilateral contracts.215 7.3.2.1 Express and implied warranties Looking at this conundrum, one possibility would be to treat SCCs as a kind of warranty than an ethical production process has formed a part of a particular product’s quality specifications throughout the supply chain, from top to bottom. Such warranty could be express or implied. Express warranties can be made within a supply agreement or issued separately and usually warrant that products are free of any defect in material or craftsmanship for a specific period in time.216 Implied warranties of merchantability for products and of fitness for a particular purpose are in some jurisdictions considered to be automatically transferred with the goods’ ownership on each subsequent buyer as rights in rem.217 A sub-buyer can then enforce the warranty via a direct contractual claim against the original seller.218 However, there are some major issues in applying the warranty approach to sustainability clauses in international supply chain contracts. First and foremost, it is doubtful that CSR standards can create either an express or an implied warranty. SCCs do not influence the tangible quality of goods and are generally disconnected from the products.219 Therefore, they can hardly create claims in rem.220 We could imagine that environmental and social requirements might influence the merchantabil-

214 215 216 217

Infra subsection 6.2. Cafaggi, note 48 (chapter 2), p. 13. Schwenzer and Schmidt, supra note 151, pp. 110. Ibid., pp. 111–113 (noting the position of French, Belgian, Luxembourgish, and US law); Carette, N., 2008, “Direct Contractual Claim of the Sub-buyer and International Sale of Goods: Applicable Law and Applicability of the CISG”, European Review of Private Law, 16(4), 583–605, p. 586 (providing French and Belgian law as examples). A parallel provision within international contract law can be found, e.g., in CISG, Article 35(2)a) and b). 218 Action directe in the French context; Schwenzer and Schmidt, supra note 151, p. 112. 219 See supra subsection 7.2.3. 220 In rem rights/claims are those closely linked to their object; they are transferred with the object. Anybody who possesses the object can execute the rights or anybody can make the claims against the thing regardless of who possesses it. See Stevenson and Lindberg, note 99 (chapter 1).

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ity of a product or the fitness for a particular purpose if a CSR label is to be attached to them by the final seller, and due to the breach of the CSR standards by a supplier, the product does not qualify for the label. However, as clarified earlier, those requirements are not considered as SCCs but rather as products’ specifications.221 Moreover, even if we accepted that SCCs are determinants of products’ merchantability and fitness for a particular purpose, we would once again face the difficulty of assessing the substantive delimitation of suppliers’ CSR standards if they are not expressed in a clear and unambiguous way or are merely implied.222 While we might claim that a reasonable expectation exists that a supplier does not use child labor, we could probably not conclude the same about measuring CO2 emission during the production process. Secondly, although the extension of implied warranties to subsequent buyers is well established in some jurisdictions, it is still largely unknown in others; therefore, “… it is rare that all laws governing the respective (sequential) contracts will allow a direct contractual claim.”223 Then a question arises as to which law is applicable to decide the admissibility of such a claim.224 If we take international contract law as the applicable legal framework, we could run into an impasse. The CISG does not provide for third parties’ claims at all.225 The admissibility of claims for breaches of implied and express warranties by a sub-buyer against the original seller under the CISG was tested in the Caterpillar case.226 In this case, Caterpillar’s Mexican subsidiary (CMSA) sourced steel from Usinor Industeel (hereinafter “Usinor”) to manufacture truck bodies for its mother company Caterpillar. Caterpillar had chosen to buy the steel from Usinor after being presented with product characteristics by Usinor. After delivery of the trucks, some of the steel truck bodies cracked. Caterpillar sued Usinor for breaches of implied and express warranties under the CISG and sought damages for repairs, increased production costs, and loss of goodwill and alleged “promissory estoppels” under the Illinois common law. The court held that Caterpillar did not have the right to claim breach of contract and thus remedies, since it was not in a contractual relationship with the defendant. The court based its decision on a restrictive interpretation of Article 4 of the CISG, which states that the Convention governs rights and obligations of the seller and the buyer.227 The decision left the plaintiff with the state 221 222 223 224

See supra 7.2.3. See supra subsection 7.1.2. Carette, supra note 217, p. 589 (brackets added). Ibid. (discussing the admissibility of third parties’ claims under implied warranties in the international context); Smythe, supra note 154 (analyzing the admissibility of direct actions under the CISG). 225 Schwenzer and Schmidt, supra note 151, p. 114; Smythe, supra note 154, suggests that third parties’ claim could be established based on Article 16(2)(b) of the CISG, however, only in cases where an express promise is given in advertisements or promotional materials and a sub-buyer relies on the promise when purchasing the specific goods. 226 Supra note 154. 227 However, Schwenzer and Schmidt (supra note 151, p. 114) suggest that this interpretation of Article 4 CISG may not be correct.

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law actions only. Although the decision has been criticized,228 it shows that the admission of claims under the CISG by remote buyers against original sellers would probably be difficult to establish even in jurisdictions where express and implied warranties are generally recognized.229 The result would probably not be different under the other international contract law instruments, although they all allow contractual parties to create rights for third parties both expressly and impliedly.230 Such claim would have to be based on third-party beneficiary rules rather than as a direct action based on a warranty. An important element of a contract for the benefit of a third-party beneficiary is that the parties confer a right on the third party. If the right is not expressly defined, its existence may still be deduced from the terms and circumstances of the contract.231 It is, however, hard to imagine that a judge would accept that a contract between a sub-supplier and supplier created a right on the part of the buyer to claim remedies against the sub-supplier based on behavior by the subsupplier’s behavior that does not affect the product in question.232 In the light of the above, it seems rather improbable that SCCs could currently create an express or implied warranty for any subsequent buyer of the product. However, there is the potential for future case law to develop in this direction. 7.3.2.2 Best practice Since the legal enforcement of contracts between other two upstream subjects in a supply chain is not realistic, the regulators expect that companies will couple the contractual chain of CSR requirements with due diligence processes. For example, the SRSG expressed this approach as follows: “Beyond the first tier, it can become more difficult for an enterprise to know all the entities in its supply chain and whether any are abusing human rights. With regard to those additional tiers, not knowing about abuses is not a sufficient response by itself to allegations of either legal or non-legal complicity if the enterprise should reasonably have known about them through due diligence. Therefore, enterprises should: … (b) take action to mitigate any such risks, including by seeking to ensure that intermediary entities in the supply chain

228 Smythe, supra note 154; editorial remarks to the Caterpillar case at the Pace Law database www.cisg.law.pace.edu/cases/050330u1.html#pv (last accessed 13/7/2014). 229 For acceptance of implied warranties, see supra note 217; expressed warranties are, inter alia, accepted in the Germanic and US legal systems, where they are deemed to create a true contract between the seller and the remote buyer (Schwenzer and Schmidt, supra note 151, p. 110–111). 230 See supra subsection 7.3.1.3. 231 Supra subsection 7.3.1.3; UNIDROIT Principles 2010 Official Commentary, p. 161. 232 See also Cafaggi, note 48 (chapter 2), p. 7.

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are themselves practicing due diligence and maintaining appropriate standards.”233 It seems logical to pass not only substantive CSR requirements upstream but also the CSR processes, such as due diligence. However, the buyers will find themselves in exactly the same difficult situation: able to control that direct suppliers require their sub-suppliers to adhere to the CSR standards but unable to control the actual execution of due diligence by sub-suppliers. So even though such process-related or improved implementation requirements strengthen the pressure on direct suppliers, they may not secure greater confidence on the part of buyers in relation to further tiers of their supply chains. Yet extending the applicability of sustainability clauses up the supply chain remains one of the few available tools to cope with the imposed duty to manage sustainability throughout the whole supply chain.234 Therefore, it is widely used by companies, which is reflected also in the examples provided in chapter 3. From those five examples, we can see that such an extension is present to a certain level in four of them. TGB and GE Energy oblige the sellers to ensure compliance of their business partners and representatives in the broadest sense, covering various subjects, for instance, employees, representatives, agents, or subcontractors.235 Pressalit approaches this issue more carefully. It makes compliance with the environmental policy one of the decisive factors when choosing subcontractors; however, it does not extend this requirement beyond the second tier of the supply chain.236 HP’s CSR Agreement appears to be a bilateral arrangement only. But if we look closer at the internal documents of the company, we find that they understand them as “total supply chain initiatives.” For example, under the General Specification for the Environment, suppliers have the ultimate obligation to ensure that the materials, components, and products used comply with the set standards and for 10 years after production must be able to demonstrate which specific actions they took to verify such compliance.237 In practical terms, this means that they must be aware of the environmental performance of their own suppliers. Verizon is the only company that does not extend the anti-bribery requirement beyond the first tier of the supply chain. As this could be ascribed to the

233 SRSG, note 46 (chapter 6), pp. 5–6. 234 One of the participants in the exploratory study explains the effort involved in extending SCCs beyond firsttier suppliers as follows: “We would of course love to be able to go to every supplier in our value chain but it is simply impossible. So what we do is to go to our first level of suppliers and we also ask them that they go further into the value chain … But of course the longer back in the value chain the more gaps, the more complicated, the more difficult is to be able to enforce our code because again we do not have a legal contract with a sub-supplier, that is the supplier who has that contract, has that relationship, so it is actually very difficult for us to do anything unless we have our suppliers involved in it.” 235 TGB Sourcing agreement, Article 17.1, in conjunction with Article 1.6; GE Terms of Purchase, Article 15.5. 236 Pressalit’s General Terms, section on Pressalit policies. 237 HP’s General Specification for the Environment, Article 3 Supplier Verification.

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wording of the FCPA, combating corruption is still a part of CSR and as such companies are expected to strive to align the whole supply chain with the standards. The frequency of efforts to reach beyond first-tier suppliers can also be observed from the empirical study. The results show that close to 60% of the sample companies mention second- and further tier suppliers in their contracts, supply chain CSR policies, or CSR reports. They will usually require their direct suppliers to pass the CSR requirements to upper-tier suppliers. Such a requirement is in more than 40% cases formulated as a hard business demand. This does not mean that it will be legally enforceable, but it is formulated as having a major influence on the existence of the business relationship. In less than 10% of cases, the requirement to pass CSR standards on further subjects is merely a recommendation. An interesting point is that about 16% of the sample companies reserve the right to audit sub-suppliers’ performance. This may suggest that the contract between the buyer and the supplier binds sub-suppliers to allow the buyer to conduct audits of their premises or documents. However, this is not acceptable under contract law. An entity cannot legally bind another entity if it is not in an agency (or similar) position.238 Therefore, this presupposes that suppliers will make arrangements to this effect in their contracts with sub-suppliers. If a sub-supplier then refuses the buyer’s access to its premises, the buyer can only claim remedies for breach from its direct supplier, for failing to ensure the sub-supplier’s cooperation. The results also show a major difference in the use of CSR standards as a total supply chain initiative between European and American companies and among various industries. The CSR standards are passed on to sub-suppliers and controlled twice as often in Europe than in the USA. Regarding the industries, the airline industry deviates from the rest. As the other industries generally fluctuate (with between 50 and 85% of companies passing CSR standards beyond their first-tier suppliers), only one of the seven reviewed airline companies reported the same. On the other hand, a positive deviation can be observed in the sub-suppliers’ assessment within the telecommunications industry. Here the reason is rather obvious, as most of the European companies participate in a joint initiative in suppliers’ and sub-suppliers’ auditing, namely, the Joint Audit Cooperation (JAC).

238 Supra note 148.

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Graph 7.6 Reaching beyond first tier (USA x Europe)

Graph 7.7 Reaching beyond first tier (industries)

To summarize, under international contract law, it is rather impossible for companies to enforce CSR standards based on contracts concluded between two subjects upstream in a supply chain. Nevertheless, companies are expected under CSR regulations to pass their sustainability requirements upstream through contractual provisions and due diligence processes. The empirical results show that companies in Europe are more prone to involve

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second- and further tier suppliers in their sustainability efforts. However, we must keep in mind that there is a gap between stating and enforcing those requirements. Generally, the proliferation of standards beyond first-tier suppliers is, together with the ability to measure performance and enforcement of those standards, the biggest challenge companies face in the CSR area while being a crucial component of SCCs’ effectiveness. Some companies choose to limit their supply chain responsibly by simply claiming that their supply chains are too complex to be controlled and that trying to assume responsibility for them all is like as “signing an open cheque.”239 In such situations, those companies will basically pass the responsibility onto the first-tier supplier, expecting him to do the same. Even though this a pragmatic way of dealing with this complicated issue, it may not bring the companies any advantage regarding their reputational risks. As a final remark in this section, it should be noted that the intention to cause effects outside of the contractual relationship move SCCs towards being a governance tool rather than being still a part of the framework for a private transaction.

7.4

Performance management/enforcement

Implementation of CSR issues into international supply contracts is certainly a positive step towards global sustainability; however, it is a step that may lead nowhere if the provisions are not enforced and, moreover, if they are not enforced throughout the whole of supply chains.240 Thus, the enforcement of SCCs remains a major question mark and a controversial issue in CSR, since buyers may employ diverse methods to enforce compliance on their direct suppliers but, as described above, face difficulties in enforcing compliance on further supply chain tiers with whom they have no direct relationship.241 Legal tools and practical solutions for an extension of sustainability requirements on suppliers of second and further tiers were addressed in the previous subsection; the present one focuses on the enforcement mechanisms in relation to the original contracts between buyers and their first-tier suppliers. Not even a direct legal relationship ensures that sustainability requirements will be or even can be effectively monitored and enforced. On the one hand, companies may not 239 McBarnet and Kurkchiyan, note 17 (chapter 1), p. 85; see also supra note 61 (IBM limits the greenhouse gas inventory to their first-tier suppliers only and in the IBM Supplier Conduct Principles states: “Our goal is to work with our suppliers to ensure full compliance with these principles, as they in turn apply them to their own suppliers they work with in the delivery of goods and services for IBM”). 240 Blair, M. M., Williams, C. A., Lin, L.-W., 2008, “The new role for assurance services in global commerce”, Journal of Corporation Law, 33(2), 325–360, p. 337 et seq. (discussing reasons why companies need to engage in global monitoring and enforcement of the CSR standards: the risks to global brands, the increasing sophistication of activists, and the growing demand for transparency). 241 Cafaggi, F. (ed.), note 11 (chapter 5), p. 6 (noting that enforcement gaps undermine the credibility and legitimacy of SCCs and other transnational private regulatory schemes).

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Sustainability Clauses in International Business Contracts even intend to do that, if they merely use SCCs as a part of their “greenwashing” strategy.242 On the other hand, companies that sincerely pursue sustainability goals may encounter a lack of enforcement tools or suppliers’ resistance to cooperate. Before entering into an analysis of the various enforcement tools, the meaning of “enforcement” should be discussed briefly. To “enforce” means to put something into effect or to compel obedience.243 However, enforcement is not always of a formal legal character (i.e., carried out by institutionalized systems of authorities – courts or arbitration tribunals – according to remedies provided by the law). Even better results with regard to enforcement can be, and often are, achieved through informal processes as well, such as reputation effects.244 The latter tends to be the predominant route in relation to sustainability clauses. Companies do not tend to start formal enforcement procedures, but rather choose relational, informal ways to secure suppliers’ compliance for several reasons.245 One of the reasons may be companies’ fear of attracting media attention. Negative advertisement and effects on companies’ business relationships due to such proceedings may be more detrimental to companies than the risk of reputational damage if a supplier’s non-compliance is discovered by an activist.246 However, companies could equally approach the matter differently and make a positive advertisement from such a proceeding, proving to the public how much they care about the actual compliance. Yet the risk of possible loss of suppliers’ and other business partners’ trust could outweigh any positive impacts. Another reason discouraging companies from starting formal proceedings include the uncertainty as to the binding nature of CSR requirements,247 the unavailability and unreliability of the court systems in developing countries,248 or industry-specific rules with a need for a spe-

242 However, this may not be often, as SCCs are usually part of internal documents and thus not in public view. 243 Merriam-Webster, online dictionary, www.merriam-webster.com/dictionary/enforcement?show=0& t=1371203767 (last accessed 14/6/2013). 244 Lin, note 17 (chapter 1), p. 724 et seq. (discussing the pros and cons of formal enforcement through the courts, informal enforcement, and international arbitration in relation to SCCs); for further context, see Cafaggi, supra note 96 (chapter 1), pp. 12–17 (“Transnational regulatory contracting is characterized by the presence of informal mechanisms and strong non-legal enforcement systems whose effectiveness is largely associated with the institutional and social framework, more than the legal systems, in which they operate”). 245 See note 17 (chapter 1); Lin, note 17 (chapter 1), p. 724 (“… state courts as a legal institution for dispute resolution are avoided and a new extra-legal enforcement institution is favored”). 246 Lin, note 17 (chapter 1), p. 725. 247 The interpretation of often vaguely formulated suppliers’ CSR requirements may lead to different results in various jurisdictions, which means a high level of uncertainty in terms of the results for buyers; moreover, the chosen private monitoring and enforcement processes could be seen as exclusive and thus formal enforcement could be rejected (see Kocher, note 16 (chapter 1), pp. 267–268). 248 Some developing countries’ court systems are highly influenced by local economic and political powers; they are weak, corrupt or unsophisticated, or simply are not easily accessible or do not follow democratic procedural rules. See also Blair, Williams, & Lin, supra note 240, p. 356; and Trebilcock, M., Leng, J., 2006, “The Role of Formal Contract Law and Enforcement in Economic Development”, Virginia Law Review, 92(7), 1517–1580 (analyzing the role of contract enforcement in developed and developing states).

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cialized judge.249 These uncertainties and negative effects could be avoided by using an arbitration procedure, since the procedure is confidential and therefore not disclosed to the media, allows for tailored substantive and procedural rules, and involves expert arbitrators. However, both court and arbitration procedures have a major drawback: they have a remedial character. A remedial function is necessary when enforcing the main subject matter of a contract between the contractual parties, in which both parties have invested some resources and have reasonable expectations regarding the outcome.250 The main objective of enforcement in this respect is then to protect parties’ economic interests. However, as has repeatedly been noted, SCCs are targeted to protect public rather than private interests.251 Their character is thus preventive, aiming at avoiding negative impacts of corporate behavior on third, non-contractual parties.252 Consequently, in cases of noncompliance, the directly harmed subject is such a third party and the damage caused to the aggrieved contractual party is collateral to this. It does not mean that this collateral damage is less detrimental to the contractual party than any other damage suffered within international contracts’ performance. However, it is damage that is more difficult to control and difficult to remedy. Thus, companies strive to manage the associated risks by adopting preventive SCCs and relevant enforcement processes.253 In other words, companies’ activities concerning suppliers’ compliance with SCCs do not only aim to solely enforce desired behavior but also and primarily to manage connected opportunities and risks. To reflect this, this subsection bears the title “Performance management/enforcement.” Based on the studied examples as well as the literature review, we may divide enforcement means into two broad groups: monitoring mechanisms and remedies.254 Monitoring mechanisms are employed to identify any risks and cases of non-compliance in order to prevent their escalation and, thus, the necessity to adopt more severe and costly enforcement mechanisms and sanctions.255 Remedies include not only contractual and statutory sanctions but also non-legal, relational means of resolving any non-compliance. A comprehensive monitoring and enforcement strategy will typically involve suppliers’ self-assessment,

249 250 251 252 253

Lin, note 17 (chapter 1), p. 725. Cooter, R., Ulen, T., 2008, Law & Economics, 5th edition, USA: Pearson International Edition, p. 200. Supra section 3.2 and 7.2.3. Lin, note 17 (chapter 1), p. 726. McBarnet and Kurkchiyan, note 17 (chapter 1), p. 75 (noting that the “compliance model” of SCCs’ enforcement is preferred over punitive sanctions due to the partnership model of cooperation within the CSR area); Cafaggi, note 48 (chapter 2), p. 29 (noting that in the case of regulatory contracts, “… (t)he main objective of remedies is to restore compliance”). 254 Cafaggi, note 48 (chapter 2), p. 24. 255 Cummins, David, & Kawamoto, note 34 (chapter 3), p. 542; Cafaggi, note 11 (chapter 5), p. 5 (“… when a regime opts for strong ex ante requirements associated, for example, with certification or licensing, the role of ex post legal enforcement decreases”).

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regular audits (both internal and external), corrective action plans, and contract termination as the last resort.256

7.4.1

Monitoring

Adopting monitoring mechanisms in international business is not new.257 Monitoring of suppliers’ performance is considered to be a part of best practice of contract management.258 It is, for example, regularly used in the area of product quality. Quality control mechanisms often consist of several steps, including implementation of internal quality assurance processes, risk management plans, and internal and external auditing systems.259 All these means are similarly used in the CSR area, with suppliers’ self-assessment and internal and external audits being the most frequently formulated monitoring processes in relation to SCCs.260 Preventive monitoring of compliance with sustainability criteria is essential, because any non-compliance is not detectable after the goods are delivered, as sustainability processes do not affect goods’ physical quality and utility.261 As the empirical results revealed, more than half of the investigated companies use suppliers’ self-assessment and/or internal auditing in the compliance monitoring phase. External auditing is then used by about 40% of the companies. Graph 7.8 shows that the usage of monitoring tools varies extensively between different industries. We can observe a rather clear divide between the close-to-consumer industries (telecommunications, pharmaceuticals, food and beverages, and chemicals)262 and business-to-business industries (metals and aerospace and defense), with the former using monitoring tools much more often. This can be explained by a higher risk of reputational damage of these companies as they are more visible to consumers.263 The airline companies then once again deviate from the expected scenario;264 the reason may be that although they can be viewed as close to consumers, consumers are more concentrated on the price of the service than on corporate sustainability. Transportation is generally not associated with environmental protection and social issues and thus the public expectations are lower. 256 257 258 259 260 261 262 263 264

The use of the complete CSR enforcement strategy is discussed in the conclusion to this section. McBarnet and Kurkchiyan, note 17 (chapter 1), p. 75. Cummins, David, & Kawamoto, note 34 (chapter 3), p. 539 et seq. See, e.g., the Supplier Quality requirement of Medtronic, Inc. available at: www.medtronic.com/aboutmedtronic/our-suppliers/quality/supplier-quality/index.htm (last accessed 13/7/2014). This was revealed during the review of documents which formed part of the empirical study and is also evident from the literature review. Schwenzer and Leisinger, note 6 (chapter 1), p. 265. The chemicals industry manufactures both consumer and industry products. The consumer products seem to influence the overall CSR strategy of the firms. This is consistent with the finding of Haddock-Fraser and Fraser, note 125 (chapter 2). See also supra subsection 7.3.2.2 (noting a similar deviation in relation to the extension of SCCs beyond first-tier suppliers).

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Graph 7.8 Monitoring (industries)

Moreover, Graph 7.9 demonstrates that not only industry affiliation but also companies’ location influences the use of monitoring tools. European companies appear to be more involved than American ones. An especially large difference is observable in the use of external auditing: while this tool is applied by 57% of the sample European companies, the American peers adopt it in only 24% of the cases. Graph 7.9 Monitoring (USA x Europe)

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7.4.1.1 Suppliers’ self-assessment As evidenced by the empirical findings, suppliers’ self-assessment is a commonly used monitoring mechanism. For instance, HP requires that suppliers themselves identify the areas where an improvement is needed and design improvement action plans.265 Further, HP’s suppliers must be prepared to submit a self-assessment report upon the buyer’s request.266 This attitude is an example of a highly relational approach towards sustainability contractual obligations, relying on the parties’ shared values and their mutual wish to achieve common goals.267 Because the answers to any self-assessment questionnaires can obviously be skewed by suppliers in order to show their successes and hide any weakness, self-assessments cannot be relied upon as the only enforcement mechanism or the only source of information on suppliers’ performance. Still, some companies apply it as the main tool in securing suppliers’ ethical behavior.268 Nevertheless, suppliers’ self-assessment of CSR performance is often required during the suppliers’ selection process as well as regularly or upon request during the contractual term.269 It is considered to be a part of best CSR practice and as the important first step initiating dialogue between companies and their suppliers.270 It is also a part of buyers’ risk assessment and due diligence, required by global CSR regulations.271 As a cheaper alternative to on-site audits, self-assessments can be conducted more often and commonly serve as detecting “red flag” issues, which are then further followed up during suppliers’ inspections.272

265 HP CSR Agreement, Article 1.3. 266 Ibid., 1.4. 267 The relational basis is evident, for example, from the tone of Coca-Cola’s Supplier Guiding Principles, Global Workplace Rights: Workplace Rights Implementation Guide, p. 54 (“Once the standards are set, the policies and procedures are in place and you have assigned responsibility (and resources accordingly) it is now time to measure implementation and progress…There are many self-assessment tools that can help you evaluate your performance or you those responsible can set up routine reporting to measure progress”). 268 For example, AT&T widely uses supplier survey; see AT&T 2011 Sustainability Report, “Engaging our Supply Chain.” 269 For example, Heraeus Holding screens its suppliers in the selection process by means of a self-assessment form in relation to the quality as well as the sustainability performance; the form is available at: http://heraeusprecious-metals.com/media/webmedia_local/media/einkauf_1/Supplier-self-assessment.pdf (last accessed 13/7/2014). 270 See, e.g., the CSR Compass tool developed by the Danish Ministry of Business and Growth and the Confederation of Danish Industry for the use by small and medium enterprises, http://csrcompass.com/suppliers’self-assessment (last accessed 13/7/2014). 271 Supra subsection 6.2.1.2. 272 For example, Johnson & Johnson requests that its suppliers conduct annual self-assessments, which are then supplemented by an audit every three years: Johnson & Johnson, Responsibility Report 2011, p. 27.

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7.4.1.2 Auditing As noted above, suppliers’ self-assessment provides only the first, indicative information about suppliers’ performance and, therefore, is usually complemented by on-site inspections of suppliers’ premises and documents.273 A buyer’s right to audit is considered to be a part of CSR best practice.274 It is also an enforcement tool within the CSR area, which is probably the most often discussed in academic literature, due to its variability, widespread use, and problematic value and effectiveness.275 A variety of types of audit exists, including internal (in-house) and external (third-party) audits, announced and unannounced audits, audits coordinated among groups of firms, and according to different audit standards. All these categories are mentioned below. Overall, an on-site inspection is a rather invasive controlling mechanism; it involves an assumption that suppliers are non-compliant and interferes with suppliers’ daily operations and may threaten the confidentiality of manufacturing processes. The starting point is therefore a lack of trust towards suppliers’ compliance with contractual requirements. Any lack of trust can be detrimental to the quality of a contractual relationship. In order to mitigate the possible negative effects, companies are most likely expressly to reserve the right to audit in contractual texts and, most importantly, to formulate the provisions on auditing in a highly relational tone (in terms of being of assistance in achieving compliance) rather than as an action leading to punitive consequences.276 For example, ArcelorMittal in its Code for Responsible Sourcing commits to suppliers that it will: – “Collaborate: Work with suppliers to improve social (including health and safety and human rights), environmental and ethical standards. This may include joint assessments, such as site visits, to evaluate performance against the Code. – Support: Assist suppliers to identify activities that fall below the requirements of the Code and work towards achieving improved conditions in a timely manner.”277 The company thus promises to “work” with suppliers and “assist” them, stating that it will not implement hard enforcement tools, such as contract termination, without prior efforts from the company to help the suppliers to achieve compliance. Such language and such

273 Bayer, supra note 4, p. 32 (“In 2011 we conducted random audits to check the information provided by the suppliers in the supplier self-assessments”). 274 Pace University School of Law and IACCM, note 46 (chapter 1), pp. 23 and 28. 275 Lin, note 17 (chapter 1), p. 724; McBarnet, Voiculescu and Campbell, note 17 (chapter 1), p. 74 et seq., Cafaggi, note 48 (chapter 2), p. 24 et seq. 276 McBarnet and Kurkchiyan, note 17 (chapter 1), p. 75. 277 Supra note 115.

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an attitude seem important to maximize suppliers’ cooperation and transparency about the social and environmental impacts of their activities. Nevertheless, doubts about and criticism of information presented by suppliers during audits remain. Suppliers have been caught covering up facts, producing two sets of documents (one realistic, one for auditors), and in extreme situations even setting up a compliant factory subcontracting work to hidden, non-compliant facilities.278 Furthermore, the quality of audits has also been questioned in the context of possible corruption. This is especially relevant when it is the supplier who arranges and pays for a third-party audit. It may be cheaper for suppliers to pay a bribe than to actually comply with the sustainability requirements.279 However, it may equally happen that individual auditors will demand bribes in exchange for “clean” reports, regardless of the actual level of the supplier’s performance.280 In order to minimalize the possibility of evasive information manipulation, buyers can assume the right to audit suppliers without prior notice.281 An unexpected inspection does not leave a supplier time to hide or alter audited premises or documents. However, unannounced audits are not favored by suppliers, because they may interrupt daily operations and may result in disclosure of confidential matters. Therefore, conducting unannounced audits may also lower the trust between the parties and, thus, contradict the relational management style that is generally recommended.282 Buyers must further decide if they wish to conduct on-site audits internally, using their own employees, or to employ an external third party. Each choice has both positive and negative aspects. Internal audits allow for more sensitive monitoring regarding the specifics of each supplier and suppliers may feel that they are less intrusive.283 However, it may be expensive to train employees in CSR auditing, as it requires a high level of technical knowledge as well as knowledge of the local conditions of suppliers’ locations.284 This may

278 Clean Clothes Campaign, 2005, Looking for a Quick Fix: How Weak Social Auditing is Keeping Workers in Sweatshops, The Netherlands: Clean Clothes Campaign, pp. 17–31; McBarnet and Kurkchiyan, note 17 (chapter 1), pp. 77–78. 279 Blair, Williams, & Lin, supra note 240, p. 334. 280 CSR Compass, supra note 270, http://csrcompass.com/preparing-visit-your-suppliers (last accessed 13/7/2014). 281 Leire, C., Mont, O., 2010, “The implementation of socially responsible purchasing”, Corporate Social Responsibility and Environmental Management, 17(1), 27–39, p. 33; for sustainability reports, see, e.g., Bayer Sustainable Development Report 2011, p. 33 (child labor context: “… auditing firm Ernst & Young, India, once a year conducts an unannounced on-site inspection of farms selected on a random basis”). 282 CSR Compass, supra 270 (“As a rule, assessments should be performed in close cooperation with the supplier in order to achieve tangible results. It is important to give the supplier advance warning about your assessment/visit so the supplier can make sure you have access to the relevant personnel and documentation. You should always give advance warning, regardless of whether your assessment of social and environmental conditions forms part of a routine visit or is the sole purpose of the visit.”). 283 Darnall, N., Seol, I., Sarkis, J., 2009, “Perceived stakeholder influences and organizations’ use of environmental audits”, Accounting, Organizations and Society, 34(2), 170–187, p. 173. 284 Ibid.; McBarnet and Kurkchiyan, note 17 (chapter 1), p. 75.

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not prove to be feasible in cases where a company does business in diverse locations around the globe.285 In-house audits have also been questioned due to a possible conflict of interest between the economic and sustainability interests of company’s auditing employees, leading to questionable external transparency and credibility.286 External audits, whether conducted by auditing companies287 or business or non-profit organizations,288 are preferred for their more objective results and highly specialized personnel.289 However, a negative side of using an external auditor is a higher possibility of corruption or rigid processes favoring objectivity over a case-based approach, which may lead to superficial control and an adverse reaction on the part suppliers.290 Weighing up the pros and cons of internal and external audits, it is impossible to say which is likely to lead to the better result in terms of global sustainability. Confronted by this dilemma, an increasing number of companies use both types of audit, especially for suppliers from high-risk countries. In the empirical study, 30% of companies expressly mentioned using both in-house and third-party audits.291 It has been observed that as the use of external CSR auditors increases, a whole new thirdparty assurance industry emerges.292 More and more companies are also joining forces to respond to the criticism of subjectivity and lack of transparency in their auditing processes and to share knowledge about (and the costs of) CSR audits.293 Such collaboration may happen within an individual industry or across different industries.294 Companies may participate in such collaboration voluntarily or they may be obliged to do so due to their participation in a certification or labeling scheme.295 In either case, the companies delegate monitoring (and sometimes also remedial) functions to an external subject. In order for an external auditor to enter a sup-

285 Blair, Williams, & Lin, supra note 240, p. 335. 286 McBarnet and Kurkchiyan, note 17 (chapter 1), p. 75; Darnall, Seol, and Sarkis, supra note 283, p. 171. 287 For example, Pricewaterhouse Coopers, www.pwc.co.uk/sustainability-climate-change/index.jhtml (last accessed 13/7/2014). 288 Generally four types of external auditors exist: global financial auditing firms, quality control firms (specializing in testing, inspecting, and certification), specialized for-profit social audit firms or consultancies, and not-for-profit social audit organizations (Clean Clothes Campaign, supra note 279, p. 54). 289 Darnall, Seol, and Sarkis, supra note 283, p. 173. 290 McBarnet and Kurkchiyan, note 17 (chapter 1), p. 77. 291 For example, Bayer, supra note 4, p. 32 (“Sustainability audits of 15 suppliers in four countries … were conducted in cooperation with independent external auditors … Furthermore, internal Bayer auditors conducted 205 audits of suppliers in the reporting period that were focused on hse (Health, Safety, Environmental Protection)”). 292 Blair, Williams, & Lin, supra note 240, pp. 329 et seq. (noting the emergence of the third-party assurance industry and discussing evidence and reasons for its growth). 293 “An audit itself is likely to cost anything between 350–3500 euros”, Clean Clothes Campaign, supra note 278, p. 70. 294 For example, Pharmaceutical Supply Chain Initiative, www.pharmaceuticalsupplychain.org/principles/introduction (last accessed 13/7/2014); BSCI, supra section 6.2.8; or The International Council of Toy Industries CARE Process, www.icti-care.org/index.html (last accessed 13/7/2014). 295 Cafaggi, note 11 (chapter 5), p. 24.

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plier’s facility, the buyer must reserve the right to appoint an external party to conduct an audit in the contract.296 Companies claim that auditing cooperation brings advantages to both buyers and suppliers.297 However, some of these initiatives have also been harshly criticized for diverting attention from actual positive changes in developing countries to process-based social auditing.298 Despite all the questions regarding the efficiency and quality, CSR audits are still critical in detecting any socially and environmentally unacceptable behavior in international supply chains. In response to the criticism, companies are becoming progressively more transparent about the results of audits and a number of cases of non-compliance that have been discovered.299 This information, despite the fact that it may not be complete, is absolutely essential for implementing any practical change in suppliers’ behavior through various soft and hard remedial strategies.

7.4.2

Remedies

In the event that a breach of an international contract is discovered during an inspection or otherwise, the aggrieved party will normally have several remedies available.300 The remedies include any kind of contractual sanctions the parties agree on, and if the parties do not either fully or partially cover the issue of remedies in the contract, then available statutory remedies may be sought.301 Contract remedies generally serve two purposes: remedial and preventive. Firstly, they are designed to “… cure or repair a wrong, loss, or 296 France Telecom, supra note 141, p. 7 (“France Telecom Orange Group will be entitled, by itself or through a nominated auditor, to audit suppliers and through them supplier’s sub-contractors in order to assess their conformity to this Code of Conduct Sourcing and Supply Chain”). 297 During the exploratory study, a participant stated the following regarding an industry audit cooperation: “…there are definitely some benefits both for the manufacturer and for us as a buyer. We are actually paying only voluntarily donations and contributions, because we want to support the initiative, but it is actually the factories who contact (the auditing initiative) and say we are supplying to the industry and now we want to be certified according to (the auditing initiative) standard. So, it is basically good for them because they become available to the whole industry … Factories do not need to follow different standards … they do not have to spent resources being audited or servicing different auditors being sent from different buyer companies … which is a big advantage for them as well, so they do not have to spent two days every month or how often it would be”) (in order to keep the company confidential, the name of the initiative has been erased). 298 Clean Clothes Campaign, supra note 278, p. 60 (“By contrast, the trend, particularly among retailers, towards participation in weaker less-demanding initiatives like the BSCI, which overemphasises the role of audits and weakens standards in the process … , may mislead buyers into a false sense of security and undermine the progress being made in the context of other initiatives”). 299 For example, Nestlé Creating Shared Value Report 2011, p. 145 (“In 2011, 136 audits revealed supplier critical ethical practices, and we are working with particular suppliers to resolve these critical issues. 750 audits revealed major breaches to the Nestlé Supplier Code and as a result 300 projects to upgrade supplier practices have been initiated”). 300 A party is in breach of contract if it fails to perform any of its obligations under the contract: CISG, Articles 45 and 61; UNIDROIT Principles, Article 7.1.1; PECL. Article 8:101 (1); CESL, Article 87. 301 Bernstein and Lookofsky, note 6 (chapter 6), p. 115.

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other problem”;302 in other words, their objective is to put the aggrieved party in the position it would have been in had the breach not occurred.303 Secondly, their aim is to deter contractual parties from committing a breach.304 The purpose of remedies, however, shifts as a consequence of the blend of private and public interests they safeguard in the arena of sustainability contractual clauses.305 The two-sided nature of sustainability clauses, fusing contractual and regulatory functions, is also manifested in the range of remedies and the way they are used. In order to fulfill the public regulatory aims embedded in SCCs, the applicable remedies aim to “correct regulatory failures”306 and restore compliance, whereas in order to fulfill the private aims of SCCs, the remedies aim to protect the aggrieved party against economic loss. The position of the contractual parties is thus rather complicated when enforcing SCCs as they must balance the protected interests as well as coordinating a possible clash of remedial systems.307 Already the introduction to this book noted that disputes over SCCs are highly unlikely to reach the stage of court proceedings.308 This fact indicates that the regulatory (protecting public concerns) and preventive functions of remedies (deterring non-compliance) prevail over their remedial function (to compensate an aggrieved party). It does not mean, however, that the public concerns would be favored over the private ones. Rather, the contractual parties react to the realities of chain-based production. Consequences of a breach extend up and down supply chains;309 therefore, supply chain members must cooperate to eliminate a breach and its consequences in all stages of a production and product cycle, i.e., to regulate behavior across a supply chain, rather than to sanction or compensate each other in the event of non-compliance. Only by such an attitude can they prevent economic losses and costs associated with reputational damage, the need to seek a new business partner, and litigation commenced by third parties. In this way, the public and private interests that 302 303 304 305

306 307

308 309

Smith, note 2 (chapter 4), p. 397. Cafaggi, note 48 (chapter 2), p. 30. Smith, note 2 (chapter 4), pp. 396–398 (he speaks of remedies as incentives). The mixture of private and public interests that is characteristic of sustainability clauses has already been discussed above in subsections 2.1.3 (private/public law divide) and 7.2.3 (disconnectedness of SCCs from the subject matter of a contract). Cafaggi, note 48 (chapter 2), p. 29. An additional complication may appear when a buyer requires that a supplier acquires a certification, e.g., SA8000 (note 169 (chapter 6)), before entering into a supply agreement. Regardless of who arranges for such an external auditor, two types of contracts are concluded: a supply agreement between a buyer and a supplier and a certification contract between a certifier and a buyer/supplier. A breach of CSR standards by the supplier may then constitute a breach of both contracts and trigger two simultaneous remedial processes (Cafaggi, note 48 (chapter 2), p. 30). These two remedial processes may differ, as the objectives of the two contracts (commercial and regulatory) also vary. See note 17 (chapter 1). For example, if a company becomes aware that a sub-supplier breaches the prohibition on child labor, it may terminate its relationship with the breaching sub-supplier (although this may be impossible as there is no direct legal relationship between the two entities) and with the direct supplier who subcontracted to the party in breach. For other examples, see Cafaggi, note 48 (chapter 2), p. 29.

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may at first sight seem to clash pursue the same primary goal: achieving compliance of the whole supply chain with the environmental and social requirements. 7.4.2.1 Relational enforcement tools As described above, the objective of remedies for breaches of SCCs is neither to compensate the aggrieved party nor to punish the party in breach, but rather to influence and motivate suppliers to comply with CSR requirements. Only by aligning the whole of supply chains with the imposed CSR standards can both the public and private aims be reached. Sustainability requirements are included in contracts, among other purposes, to express the seriousness of the issue.310 However, many other non-contractual activities are implemented in order to achieve the targets, including training programs, reward schemes, or action plans. It feels inappropriate to call these activities “enforcement tools.” Many of them do not force anything upon suppliers: they are more of a nature of assistance. Taking into account the regulatory character of SCCs, they could be better subsumed under the category of “implementation tools.” Their aim is to secure compliance with sustainability requirements in a preventive and collaborative manner and to avoid any disputes. Such an approach is in line with the relational contract theory;311 in fact, Macaulay “introduces the idea of relational contracting as a method of contractual enforcement.”312 Relational contracts are based on mutual trust between the parties and their common values; the aim of the contractual relationship is to sustain those values and the relationship. Therefore, non-compliance is not sanctioned, but rather solved in order to avoid its recurrence and maintain the relationship.313 Moreover, non-compliance is not perceived as a single action, but rather as suppliers’ state of mind, meaning their non-cooperative attitude.314 It is quite common that buyers expect a certain level of non-compliance among their suppliers; they are aware that a change does not occur in one day, but that it is a long process. Therefore, buyers will usually not break off cooperation if a supplier is willing to improve.315 Some companies see SCCs as a demonstration of a partnership between the contractual parties more than as a contract.316 This is reflected in the relation management of preventive actions as well as eventual non-compliance as it was also shown during the empirical 310 311 312 313 314

See further elaboration infra subsection 8.1.1.1. Supra subsection 4.2.1. Trebilcock and Leng, supra note 248, p. 1537. Cafaggi, note 48 (chapter 2), p. 30. See, e.g., AstraZeneca Annual Report and Form 20-F Information 2011, p. 53, www.astrazeneca-annualreports.com/2011/ (last accessed 23/6/2013), p. 53: “We will not use suppliers who are unable or unwilling to meet our expectations in a timely way” (emphasis added); or ArcelorMittal, Code for Responsible Sourcing, supra note 115, Article 6 (the company does not request that suppliers demonstrate compliance with the code of conduct, but that they demonstrate efforts to comply). 315 In the exploratory study, one of the participants stated that his company is “focusing on those who are actually not doing anything at all.” 316 McBarnet and Kurkchiyan, note 17 (chapter 1), p. 79.

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investigation, where: (i) 78% of the sample companies claimed in their CSR reports and policies to cooperate with suppliers to achieve the requested sustainability goals; (ii) 51% of them provided education and training to suppliers in relation to sustainability requirements; (iii) 47% reported collaborating with suppliers on the development of new sustainable technologies, products, and/or processes; and (iv) 9% provided a reward to compliant suppliers. Although this may appear as altruistic behavior on the part of the companies, it should be assessed in the context of various social and economic drivers of CSR.317 Companies try in this way to minimize the risks associated with complicity in unethical behavior. Therefore, although educating suppliers and sharing knowledge and resources is certainly an important part of the relationship, companies sometimes involve themselves in it out of pure self-interest. The activities listed above are all proactive in nature.318 The question is how companies react in the event of any actual non-compliance. Corrective action plans seem to be the most widespread reactive enforcement tools. Nearly 60% of companies examined within the empirical study use them as one of the two primary enforcement mechanisms.319 Corrective action plans are typically developed by a supplier alone and approved by the sourcing company or in cooperation with the buyer, and consist of activities that suppliers must undertake within a given timeframe to remedy an instance of non-compliance that has been discovered. Adhering to the plan is usually a precondition for continuing the business relationship. The plan’s implementation is often subject to follow-up on-site audits.320 Corrective action plans are also a strategy recommended by regulatory institutions and instruments.321 In addition to various relational enforcement tools, companies may rely on reputationbased name-and-shame enforcement. Even though the threat of being shamed is well 317 Crane, A., McWilliams, A., et al., 2008, The Oxford Handbook of Corporate Social Responsibility, Oxford University Press, Section 4: Actors and Drivers. 318 See note 13 (chapter 2). 319 See graph no. 7.10 below (70% of European companies and 44% American companies reported using corrective action plans); the other tool is contract termination (see subsection 7.4.2.2). 320 For example, AstraZeneca Annual Report and Form 20-F Information supra note 315, p. 53 (“Forty five percent of supplier sites audited demonstrated standards that met our expectations with a further 51% implementing improvements to address non-compliances. We monitor progress across all corrective actions and 4% of suppliers audited this year will require significant follow up to confirm they will make the improvements we require”). 321 For example, CSR Compass, supra note 168, http://csrcompass.com/phase-5-ongoing-improvements-andpartnerships (last accessed 13/7/2014): “If a supplier’s self-assessment or a supplier visit reveals violations of your Code of Conduct, you should discuss with the supplier how you can achieve a constructive, effective programme of improvement. It is important that the improvement process is rooted in an equal partnership between you and the supplier. In practice this means that you share a mutual understanding of each other’s roles, that you are open and honest with each other and that you undertake to invest time and resources in the improvement process. The nine recommendations in this phase are: – Ask the supplier to draw up an action plan – Continually follow up on the action plan ….”

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Sustainability Clauses in International Business Contracts recognized as an enforcement mechanism in relation to multinational buyers,322 its use at the level of suppliers is still evolving. An increasing number of collaborative suppliers’ monitoring initiatives are an important development in this respect.323 These monitoring collaborations usually establish a database of suppliers or factories, where compliant entities may be found.324 Being erased from such a database or, worse still, listed as a non-compliant subject means, the supplier or factory can no longer be used by members of the specific initiative. Relational enforcement tools are essential for the effectiveness of SCCs as they aim to actually change behavioral patterns in supply chains. Support provided by buyers in the form of education, guidance, and knowledge sharing can be necessary for many suppliers, as they may not have sufficient experience and resources to assess the importance of CSR issues and to implement them.325 However, although neither companies nor regulators often stress it, the effectiveness of all the relational, informal tools is grounded in the threat of formal legal sanctions.326 As Kagan et al. put it, “… legal rules and a significant prospect of enforcement and punishment provide the essential standards and expectations around which social and normative pressures for compliance revolve.”327 It is evident that companies rely on this indirect enforcement power of formal legal sanctions, as they frequently reserve the right to terminate a contract if the supplier’s non-compliance is not remedied as agreed under an action plan or if it is repeated.328 This reliance on the fear motivation of being caught and punished may be especially important in regions where the business environment has not yet totally embraced CSR as a normative and social license duty.329 For this 322 Vogel, note 30 (chapter 2) , p. 268. 323 Supra note 293 to 298. 324 For example, in the toy industry, the ICTI Care program works with a publicly accessible factories’ database, www.icti-care.org/e/content/cat_page.asp?cat_id=175 (last accessed 23/6/2013). 325 See also infra section 9.2. 326 Adar and Gelbard, note 40 (chapter 4), pp. 405–406. 327 Kagan, R. A., Gunningham, N., Thortnton, D., “Fear, duty and regulatory compliance: lessons from three research projects”, in Parker, C., Nielsen, V. L. (eds), 2011, Explaining Compliance: Business Responses to Regulation, Edward Elgar Publishing, p. 41. 328 There is a vast amount of literature in the micro-economic scholarship on the question of whether formal contract and relational governance serve as substitutes or complements. While Poppo and Zenger (Poppo, L., Zenger, T., 2002, “Do Formal Contract and Relational Governance Function as Substitutes or Complements?”, Strategic Management Journal, 23(8), 707–725) argued for the latter, they doubt the generalization for the findings to countries with weak enforcement regimes. Later research from China (Zheng Zhou, K., Xu, D., 2012, “How foreign firms curtail local supplier opportunism in China: Detailed contracts, centralized control, and relational governance”, Journal of International Business Studies, 43(7), 677–692, p. 678) has shown that the generalization can be made, because precisely if “… the enforceability of contracts is not guaranteed in emerging markets, the use of relational governance will constitute a useful complement to contracts.” 329 Social license pressure has been extensively described as a motivation for the CSR conduct of multinational firms, especially those operating in close-to-consumer markets. However, social license pressure may be much less effective in the case of suppliers further up the supply chains, particularly if they are seated in

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reason, the sanctions of contract termination and damages are analyzed below even though they are rarely activated in the sustainability area.330,331 7.4.2.2 Contract termination Contract termination is frequently chosen by companies to exercise the deterrence function of formal contract law tools in relation to SCCs. According to the responses in the case study, refusal to source from a supplier is considered as the most severe punishment.332 The widespread use of a threat of contract termination was also shown during the empirical study, with 55% of the sample companies reserving the right to terminate their supply agreements where a supplier does not comply or refuses to make efforts to comply with sustainability requirements. It is interesting to see that while contract termination seems to be the principal enforcement tool for the American companies, the European companies rely primarily on corrective action plans. Overall, the sample European companies seem to work more with relational contracting.

developing countries, where the consumers, the economics, and the regulatory pressures in the CSR are not comparably strong. 330 McBarnet and Kurkchiyan, M., note 17 (chapter 1), p. 79. 331 The specific performance remedy is not discussed herein since it is the belief of the author that it cannot be applicable to breaches of SCCs, as they do not stipulate the physical qualities of the delivered products (Schwenzer and Leisinger, note 6 (chapter 1), p. 265). Moreover, logically speaking, specific performance, delivery of substitute goods, or repair are of no interest to the buyer, if, e.g., child labor was used or waste was not managed properly during the production phase. 332 One of the participants in the exploratory study put it as follows: “I think the punishment you can do to a supplier, the biggest punishment is actually saying ok, I do not want to buy from you anymore.” See also, e.g., Collins, note 91 (chapter 2), p. 101.

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Graph 7.10 Enforcement tools (USA x Europe)

As in the case of monitoring mechanisms (Graph 7.8), a similar variation in the use of corrective action plans is observable among various industries based on their closeness to consumers. However, that is not the case for contract termination, where the telecommunications industry has comparable results to the metals industry and the aerospace and defense industry has comparable results with foods and beverages and pharmaceutical industry. The low variance in the use of contract termination can possibly be explained by the low cost of its inclusion in contracts. If a buyer is in a strong economic position towards its suppliers (which most of the multinational companies are), then it can unilaterally include the sanction of contract termination for specific non-compliance into supply contracts. This sanction then deters suppliers from a breach without imposing any additional costs on the buyer, as is the case with corrective action plans (where the buyer has to invest time in agreeing on the plan and invest resources in conducting follow-up audits).

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Graph 7.11 Enforcement tools (industries)

Nevertheless, contract termination plays an important role in all jurisdictions, industries, and relationships; it has a reminder function. This operates under the same logic as the reminder function of formal legal sanctions in other areas (i.e., companies are more prone to comply if they are aware that some of their peers have been caught and sanctioned).333 Suppliers will most probably be more prone to comply if they see that the buyer has terminated its relationship with other non-compliant suppliers. The fact that a buyer includes the possibility of termination in the contract reminds its suppliers that even though the contract in may be highly relational in regard to the sustainability requirements, those requirements are nevertheless also highly important. As the possibility of contract termination signals the importance of sustainability issues to suppliers, it is also a signal to the public that the company takes a strong stand in relation to the CSR topics. A high level of transparency on sustainability in supply chains appears to be accepted better by the public (although the disclosed information may not be only positive) than a low level of transparency. For example, BASF group reported terminating eight supply contracts in 2011 due to suppliers’ non-compliance with SCCs.334 This proves

333 Kagan, Gunningham, Thortnton, supra note 327, p. 47. 334 BASF Report 2011: Economic, environmental and social performance, http://report.basf.com/2011/en/servicepages/welcome.html (last accessed 13/7/2014) p. 92: “We conduct risk-based assessments of our suppliers through on-site visits. … If our audits find need for improvement, we take corrective measures. We perform a follow-up audit a few months later. If we do not see any improvement, we terminate the business relationship. This occurred in eight cases in 2011.”

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to BASF’s stakeholders that the company takes the issue seriously and strives for improvements. Although contract termination is a remedy provided to a buyer under all international contract law instruments,335 it is most often executed outside of any formal enforcement proceedings. A company may simply stop placing orders to a supplier (unless minimum quantities for orders are prescribed in the contract).336 However, theoretically we can imagine a situation in which formal proceedings would be initiated if a supplier disagreed with a buyer’s termination. This could in particular happen in a case in which the buyer had not expressly reserved the right to terminate a contract when an SCC was breached. If that were to happen, the court would have to establish whether the breach in question amounted to a fundamental breach (fundamental non-performance), as only a fundamental breach may lead to contract termination.337 This can be easy if the contract expressly states that non-compliance with SCCs constitutes a fundamental breach,338 but much more difficult if it does not.339 According to international contract law, a fundamental breach is such non-performance that substantially deprives the aggrieved party of what that party was entitled to expect under the contract, unless the breaching party did not or could not reasonably have foreseen such result.340 Each of the international contract law instruments then stipulates further details as to how a fundamental breach should be assessed, with the UNIDROIT Principles providing the most guidance.341 The two major concepts used to determine whether a breach is fundamental or not is a deprivation of reasonable expectations and foreseeability of such deprivation. Usually a fundamental breach is found when the main obligation under a contract is not fulfilled, i.e., in the case of a supply agreement when the goods are not delivered or the delivered goods are non-conforming; thus, it most often relates to the physical quality of

335 CISG, Article 49 et seq.; UNIDROIT Principles, Article 7.3.1 et seq.; CESL, Article 114 et seq.; PECL, Article 9:301 et seq. 336 Kocher, note 16 (chapter 1), p. 268. 337 Schwenzer and Leisinger, note 6 (chapter 1), p. 268. 338 For example, Boeing Research and Technology (BR&T) Non-Government General Terms & Conditions (10/12/2010), www.boeingsuppliers.com/terms_conditions/RD_GP_10-12-10.pdf (last accessed 24/6/2013), pp. 11–12 (“Further, any material violation of law by Seller relating to basic working conditions and human rights in the performance of work under this contract may be considered a material breach of this contract for which Buyer may elect to cancel any open orders between Buyer and the Seller, for cause, in accordance with the provision of this order entitled ‘Cancellation for Default’ or exercise any other right of Buyer for an Event of Default under this contract”). 339 Koch, R., “Art. 25 CISG-UP” in Felemegas, supra note 75, p. 126 (noting that the expectation of the parties under a contract should be primarily derived from the express and implied conditions of the contract); see also Vogenauer and Kleinheisterkamp, supra note 16, Article 7.3.1, para. 25. 340 CISG, Article 25; UNIDROIT Principles, Article 7.3.1(2)(a); CESL, Article 87(2)(a); PECL, Article 8:103(b). 341 The UNIDROIT Principles list aspects that should be considered in determining whether a breach is fundamental. The list is, however, non-exhaustive. Vogenauer and Kleinheisterkamp, supra note 16, Article 7.3.1, para. 12–14.

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goods.342 However, a breach of ancillary obligations can also result in a fundamental breach, but if those obligations were not connected to non-conformity, they would most probably not be accepted as the basis of a fundamental breach.343 Yet one anecdotal note acknowledges that a failure to comply with a contractual obligation to comply with the ILO’s international labor standards can constitute a fundamental breach.344 Moreover, it has also been argued that the same applies in relation to extra-contractual protective duties, if they are implemented in the contract.345 Furthermore, in relation to a breach of an SCC, there would most likely be questions as to the usability of the delivered goods, since not all types of non-conformity would result in a fundamental breach. If the delivered goods can be reasonably used in another way than purported under the contract, the breach is not fundamental.346 In the case of SCCs that do not stipulate the physical qualities of the delivered products, the relevant breach does not at first sight affect the usability of the goods. However, the question of the buyer’s reputation and brand should be taken into consideration here, since it has been claimed that “(t)he reasonable use test should not lead to the result that the aggrieved party is left with goods that it cannot sell on without risking damage to its reputation.”347 Basically any goods manufactured in an unethical way substantially threaten the buyer’s reputation, and thus, it seems that the reasonable use test could lead to a conclusion that the breach is fundamental. Concerning the condition of foreseeability of a substantial deprivation, Schwenzer and Leisinger claim that the foreseeability condition is fulfilled if the parties include an obligation to adhere to certain ethical standards in the contractual text or even if they do not, but the supplier breaches “a basic ethical standard.”348 However, they do not elaborate on what should be considered a basic ethical standard or how the contractual obligation should be formulated. Therefore, I believe that when determining substantial deprivation foreseeability, the general rules on contract interpretation have to be applied.349 The main aspect to examine will probably be the language of the SCCs and/or the manner in which the supplier was informed of the buyer’s CSR standards.350 It is more probable that a fundamental breach would be found when a buyer has a detailed CSR strategy, which the suppliers are

342 343 344 345 346

347 348 349 350

Schlechtriem & Schwenzer, supra note 16, Article 25, paras 57–58. Vogenauer and Kleinheisterkamp, supra note 16, Article 7.3.1, para. 87. Schlechtriem & Schwenzer, supra note 16, Article 25, para. 24. For the term “duty to care,” see supra note 827; Schlechtriem & Schwenzer, supra note 16, Article 25, paras 16–17. Another use could, for example, mean the possibility of reselling the goods and claiming any financial loss. Vogenauer and Kleinheisterkamp, supra note 16, Article 7.3.1, para. 75; Schlechtriem & Schwenzer, supra note 16, Article 25, paras 57–58. Vogenauer and Kleinheisterkamp, supra note 16, Article 7.3.1, para. 81. Schwenzer and Leisinger, note 6 (chapter 1), p. 268 For a discussion of contract interpretation rules in the context of SCCs, see subsection 7.2.4.3 above. On foreseeability, see Schlechtriem & Schwenzer, supra note 16, Article 25, paras 26–33 (noting that the importance of the issue can be made clear to a supplier, e.g., during negotiations).

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informed about and which is consistently monitored and enforced, than when it does not have a well-established sustainability strategy for its supply chain. As a final note to contract termination, it should be stressed that termination of a relationship with a non-compliant supplier is not the most effective way of using SCCs for sustainable development goals. On the contrary, terminating a business relationship means that the supplier most probably does not change its behavior or, perhaps more relevantly, it means that the buyer does not help the supplier to change its behavior and supervise and lead the supplier through the process of embracing sustainability standards. Moreover, it has been repeatedly underlined that, for example, in the context of child labor, contract termination may have a more detrimental effect on the life conditions of children than being employed by the supplier.351 That is why regulators encourage companies not to terminate relationships, but to work with suppliers on the implementation of changes in suppliers’ CSR performance and attitude first and only to use termination as a last resort.352 For example, the Danish CSR Compass incites companies to “not break off cooperation” if they reveal a supplier’s non-compliance, but to use an action plan and follow up on it, involve the supplier’s workers, explain the financial benefits of compliance to the supplier, reward compliance, share knowledge, and consider providing financial support.353 Obviously, the intention of the regulator is to assure that suppliers change their behavior rather than that buyers protect their reputation and manage business risks. Therefore, it can be concluded that the possibility of contract termination plays an important role in the use of SCCs for sustainable development aims, but the role relates more to the deterrence function of such a contractual provision than its actual use. In this sense, underlying contract law is crucial in allowing multinational buyers to exert legal pressure over their suppliers. 7.4.2.3 Damages Damages for breach of contract is another typical contract law remedy; it may even be said that it is the central remedy for contract law, because aggrieved parties often prefer to recover their loss in money, particularly if it is impractical to insist on specific performance by a party in whom they may have lost trust and/or in the event that late performance is of no interest.354 Contract termination does not remedy all the suffered loss in such cases.

351 For instance, the Guiding Principles (para. 19) and the OECD Guidelines (Commentary on Human Rights, para. 43, p. 33) urge companies to consider whether terminating a relationship with a non-compliant supplier would in itself have adverse human rights consequences. The Clean Clothes Campaign even pointed out that companies may use termination as a way of avoiding their own commitments under their CSR policies and codes of conduct: see the Clean Clothes Campaign, supra note 278, p. 79. 352 SRSG, supra note 46 (chapter 6), pp. 5–6. 353 Supra note 321. 354 Moreover, as already stated (note 179 (chapter 6)), some jurisdictions are not supporting specific performance claims.

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Therefore, one might expect that damages would also be used in relation to breaches of SCCs. But the practice shows otherwise. As mentioned several times above, disputes over SCCs do not generally reach court proceedings.355 Thus, a discussion of the use of damages in the context of SCCs is somewhat theoretical. Nevertheless, it is certainly noteworthy, as was also shown in the assignment solved by students in the Twentieth Annual Willem C. Vis International Commercial Arbitration Moot.356 The right to claim damages arises for the aggrieved party in the event of any non-performance by the obliged party;357 generally, it is not important whether the breached obligation is fundamental or ancillary.358 Even though the international contract law instruments differ to a certain extent in the rules on damages, the main principles are the same: damages equal a loss suffered as a consequence of non-performance, which has been foreseen or could be expected to have been foreseen by the breaching party.359 The loss includes not only direct loss but also loss of profit and may also cover future loss, if it can be proved with reasonable certainty.360 The aim of the remedy is to ensure that the aggrieved party is in the position it would have been in if the breach had not occurred.361 Although the rules seem relatively clear and there is a vast amount of case law that interprets some of the issues, many questions emerge when speaking of damages for a breach of SCCs. Firstly, can a non-pecuniary loss, in the case of SCCs reputational damage, be recovered? Secondly, how can parties prove future loss caused by a damaged reputation? Thirdly, how does the condition of foreseeability apply in this context? The following discussion addresses these and other possible issues arising in connection with the recovery of loss caused by breaches of SCCs by means of claiming damages under international contract law. It is commonly understood that in order to claim damages, the buyer has to prove a breach, damage that was foreseeable, and a causal relationship between the breach and the damage.362 All three may pose problems in relation to SCCs. 355 See note 17 (chapter 1). 356 Twentieth Annual Willem C. Vis International Commercial Arbitration Moot, Vienna, Austria, 22–28 March 2013, Organized by: the Association for the Organisation and Promotion of the Willem C. Vis International Commercial Arbitration Moot www.cisgmoot.org/docs/10thVisDocs/Problem-20-corrected-with-clarifications.pdf (last accessed 26/6/2013). 357 CISG, Article 74 et seq.; UNIDROIT Principles, Article 7.4.2 et seq.; PECL, Article 9:501 and 9:503; CESL, Article 159 et seq. 358 UNIDROIT Principles 2010 Official Commentary, supra note 14, p. 265. 359 CISG, Article 74; UNIDROIT Principles, Article 7.4.2 and 7.4.4; PECL, Article 9:501 et seq.; CESL, Articles 159 and 161. 360 The CISG does not expressly provide for the possibility of recovering future loss; however, the same result was deduced from the principle of full compensation (see CISG-AC Opinion No. 6, Calculation of Damages under CISG Article 74, Rapporteur: Professor John Y. Gotanda, Villanova University School of Law, Villanova, Pennsylvania, USA, para. 3.19); UNIDROIT Principles, Article 7.4.3(1); PECL, Article 9:501(2)b); CESL, Article 159(2). 361 This aim is referred to as the “full compensation principle.” It is expressly stated in: UNIDROIT Principles, Article 7.4.2; PECL, Article 9:502; and it is the main rule in calculating the amount of awarded damages. 362 Schlechtriem & Schwenzer, supra note 16, Article 74, para. 64.

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Firstly, a breach can occur only where there is a binding obligation. As was discussed earlier, the binding nature of SCCs may be questionable and is particularly dependent on the relevant provision’s form and specificity.363 Secondly, sustainability requirements are included in supply contracts with the primary aim of enhancing and/or protecting reputation and managing connected risks.364 If an SCC is breached, for example, child labor is used despite an express prohibition or hazardous waste produced during manufacturing processes is dumped into rivers, the physical quality of delivered products is not affected, and in many cases, they may be resold without any loss.365 Therefore, the most likely damage to occur is reputational damage to the buyer in the event that such non-compliance of its suppliers with ethical standards is discovered and possibly publicized in the media. Reputational damage may lead to economic loss due to decreased sales, but it can also be seen as damage to a business asset.366 The question is whether non-pecuniary damage is recoverable under international contract law at all. Whereas the UNIDROIT principles and the PECL expressly provide for the possibility of recovering non-pecuniary loss,367 the same possibility is the subject of an academic discussion as well as contradicting court decisions under the CISG, and it is expressly excluded in relation to reputational loss by the CESL.368 Since the CISG is the only hard law instrument, it is of primary interest to see how it can be applied in the above-described situation. While some authors authoritatively state that reputational damage can be recovered under the CISG,369 others are reluctant to accept such a general conclusion.370 The second group of academics is in agreement with the opinion of the CISG Advisory Council that reputational damage is recoverable only if it results in financial loss, which has also been confirmed

363 Supra subsections 7 and 7.2.4. 364 Supra note 86. 365 Schlechtriem, note 13 (chapter 5), p. 99; for problematization of this issue, see also Collins, note 91 (chapter 2), p. 75 (“What private law cannot achieve within its discourse is the protection of abstract or collective interests unless those public goods coincide with private harms”). 366 Saidov, D., 2005, “Damages: the need for uniformity”, Journal of Law and Commerce, 25(1–2), 393–403, FN 2 and p. 397 (distinguishing the two types of reputational damage: economic loss caused by the damage and damage to reputation, which can be seen as a value in itself); Vogenauer and Kleinheisterkamp, supra note 16, Article 7.4.2, para. 19. 367 UNIDROIT Principles, Article 7.4.2(2); PECL, Article 9:501(2)(a). 368 CESL, Article 2(c): “‘loss’ means economic loss and non-economic loss in the form of pain and suffering, excluding other forms of non-economic loss such as impairment of the quality of life and loss of enjoyment.” 369 Schwenzer and Leisinger, note 6 (chapter 1), p. 269 (“As Article 74 recognizes the principle of full compensation, there is no question that loss of goodwill can be recovered under this article”; however, the authors distinguish between situations when the goods have not been or have been resold before a breach is discovered and further between the situations when the breach became public or remained unknown to public; however, overall they advocate a broad possibility of reputational damage recovery under the CISG). 370 Schlechtriem, note 13 (chapter 5) (providing a list of authors with similar view in FN 3).

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by some court decisions371 and is also a probable interpretation of Article 7.4.2(2) of the UNIDROIT Principles.372 This interpretation corresponds to the unclear definition of the term “reputation.”373 Unless there is a clear understanding of what reputation is and how it can be quantified, damage caused to this immaterial asset can logically only be assessed against its material consequences.374 If we accept the necessary adverse financial consequences as a condition for reputational damage, the principle of foreseeability required under international contract law will pose another problem. Financial losses caused by reputational damage will most often consist of decreased sales. However, according to empirical studies, consumers and investors do not react consistently to corporate non-ethical behavior and companies do not experience an outflow of consumers after negative publicity or negative CSR results.375 Therefore, it could be hard to generalize that a supplier could foresee any financial losses caused by reputational damage in the CSR context.376 Nevertheless, it may be easier to establish damage where the breach becomes public and leads to open reactions of the company’s stakeholders, such as boycotts, than in cases where it remains known only to the parties.377 Moreover, the issue of any previous ethical scandals should be examined. For example, Walmart has been repeatedly accused of unethical behavior in its supply chain; its reputation has thus been harmed several times already. Should Walmart’s suppliers still foresee that any further reputational damage can occur? This would be very hard to prove. Furthermore, this could be extended to whole industries, such as the apparel industry. The reputation of virtually the whole industry was harmed by the recent problems in Bangladesh.378 371 CISG-AC, supra note 360, para. 7.1; Schlechtriem, note 13 (chapter 5), p. 89; Court d’Appel de Grenoble, 96J/00101, 21.10.1999 (loss of commercial reputation can only be recovered under Article 74 of the CISG if it resulted in monetary damage). 372 Vogenauer and Kleinheisterkamp, supra note 16, Article 7.4.2, para. 19 (noting that tribunals may be reluctant to award damages for reputational loss where the latter does not have any adverse financial consequences). 373 Saidov, supra note 366, pp. 395–399 (noting that the lack of a uniform definition hinders the uniform application of Article 74 CISG). 374 LG Darmstadt , 9 May 2000, 10 O 72/00 (“[Buyer] does not prove that its allegedly damaged reputation harmed its sales quotas. For this reason, it ‘is unable to calculate the exact losses resulting from the damaged reputation’”) (translation by Janal, R. M., edited by Andersen, C. B., available at http://cisgw3.law.pace.edu/cases/000509g1.html, last accessed 26/6/2013). 375 van Erp, J., “Naming and shaming in regulatory enforcement”, in Parker and Nielsen, supra note 327, p. 327. This has been confirmed in various research projects and surveys, e.g., the WPP Group study into consumer trust and corporate reputation available at: www.marketingweek.co.uk/csr-is-not-consumerspriority/2056060.article (13/7/2014) (stating that “…people do not always behave as they would like to think they do. While the majority of respondents felt companies should behave in a responsible manner (87% in the UK and 89% in the US), only a third of respondents (32% in the UK and 39% in the US) think about responsibility when shopping and less than 4% would actually not buy a product because of the corporation’s ethical policy…”). 376 For a different opinion, see Schwenzer and Leisinger, note 6 (chapter 1), pp. 268–270. 377 Schwenzer and Leisinger, ibid. 378 Supra subsections 6.2.9 and 7.3.2.

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Finally, the causal relationship between breach of an SCC and relevant damage is also difficult to prove. As Schlechtriem writes, it will often be “a matter of speculation and guesswork.”379 And it will be even harder if a buyer claims a future loss, which must be proved with reasonable certainty.380 It may be impossible to reach reasonable certainty, unless the buyer, for example, faces litigation by third parties (e.g., an unfair advertisement claim) due to the breach in question and expects to lose it. As a peripheral but important comment, attention should be brought to the discussion on normative considerations put forward by Schlechtriem in relation to the moral justification of damages for “ethically tainted” goods.381 He suggests that the CISG should not serve as a means for imposing the ethical convictions of one contractual party over the other, since both parties’ ethics and beliefs may be equally substantiated considering their cultural background, and that such an interpretation would go against the international character of the Convention and could cause a divergent decision practice.382 This opinion differs substantially from the one proposed by Schwenzer and Leisinger, who advocate the inclusion of basic ethical standards in all contracts via Article 9(2) of the CISG.383 Therefore, more research in this area is needed to elucidate the situation. In the light of the foregoing, I would tend to conclude that under international contract law, it is not practically feasible to be awarded damages in cases of breaches of SCCs. Although theoretically it is not impossible, the practical limitations appear to be simply too complex. Facing uncertainties in connection with damages available under international contract law instruments, it could be expected that buyers will insist on inserting a provision on liquidated damages into the supply contracts, especially if they assign high importance to SCCs.384 However, we do not see liquidated damages agreed upon for cases of breaches of SCCs. One reason could be that both sides of business contracts are often aware that a certain level of non-compliance will be present and the overall aim is gradually to eliminate such non-compliance. In such cases, the suppliers cannot possibly sign a contract providing for liquidated damages, as their liability would be instant.

379 380 381 382 383 384

Schlechtriem, note 13 (chapter 5), p. 94. UNIDROIT Principles, Article 7.4.3; CISG-AC, supra note 360, para. 3.19. Schlechtriem, note 13 (chapter 5), p. 96 et seq. He speaks of “an inappropriate, missionary bending of the function of the CISG’s interpretation.” See discussion in subsection 7.1.2. It is a common practice in international business to include a provision on liquidated damages in business contracts. According to the survey regularly conducted by the International Association for Contract and Commercial Management, liquidated damages were in 2011 the sixth most frequently negotiated contractual provision. The full research report is available at: www.iaccm.com/members/library/?id=3958#top (last accessed 24/04/2012).

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Conclusion on performance management/enforcement

This section has discussed two interconnected and equally important parts of the enforcement of SCCs. The monitoring phase of suppliers’ performance is crucial in uncovering any instances of non-compliance, as the latter cannot be detected from the goods itself. The blend of formal and informal remedies is then key in deterring noncompliance and driving a factual change in the suppliers’ CSR attitude. The combination and usage of all available monitoring and enforcement means is absolutely essential to the effectiveness of SCCs in relation to sustainable development goals. It is difficult, if not impossible, to identify which of the means have a greater influence over their effectiveness than others. The causal relationship is obscured by an overwhelming mixture of various incentives of CSR behavior and the complexity of international business relationships. Nevertheless, a best practice strategy of a four-step enforcement process emerges. Such a process includes suppliers’ self-assessment, audits (either internal or external, or preferably both), corrective action plans, and potential contract termination. The findings of the empirical study in Graph 7.12 show that while the majority of companies employ at least one of the monitoring tools (76%) and the same applies to enforcement means (71%), a much lower proportion of sample companies report practicing the full four-step enforcement process (33%). Moreover, a considerable gap can be observed between the European and American companies, as only a fragment (12%) of the investigated American companies claimed to follow the four-step best practice, in comparison to 50% in the case of the European companies. Graph 7.12 Best practice in enforcement (USA x Europe)

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Finally, once again, a gap between B2B (from 0 to 20%) and close-to-consumer (from 38 to 43%) industries can be seen in Graph 7.13 concerning the use of the best practice strategy. Graph 7.13 Best practice in enforcement (industries)

7.5

Conclusion on sustainability clauses’ anatomy

This chapter has analyzed the characteristic features of SCCs (identified in section 3.2) under the prism of international contract law. It was shown that each of the features may influence the legal enforceability of SCCs. Moreover, it seems that SCCs would not in most cases be held by courts enforceable since their inclusion into a contract is not always done in appropriate manner; they are often vague to an extent that no clear obligation can be deduced from them; third parties have hard time proving that they were intended beneficiaries; and remedies stipulated by international contract law are not particularly suitable to formally enforce SCCs. This leads us to the quick conclusion that international contract law rather hinders than supports the use and effects of SCCs. However, this conclusion could be impetuous. International contract law may not provide us with special rules on SCCs; however, there is no reason why most of the general rules would not apply to SCCs. The applicability will depend on the manner in which SCCs are drafted and used by the parties. Furthermore, as it stems from the discussion on the monitoring and enforcement, legal enforceability is not the main purpose of these clauses. It is their factual effects that are important, whether

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this means effects on suppliers’ behavior or on other CSR regulation. These effects may be supported by the theoretical subjection of SCCs to international contract law, without the need to actually enforce them or to analyze the applicability of the rules to SCCs. This conclusion therefore brings us to the next part of this book, Part IV discussing the effects and effectiveness of SCCs.

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Part IV Regulation through Sustainability Contractual Clauses Part IV moves away from the regulation of SCCs to regulation through SCCs. The main hypothesis of the book assumes that SCCs can serve as a transnational regulatory tool of sustainability, meaning that they can induce (and control) the required behavior in international supply chains. In this part of this book, the author examines where the regulatory effects of SCCs occur. A very important step in achieving the overall aim of this book, i.e. assessing the effectiveness of SCCs against the goal of global sustainable development, is to identify what effects these provisions have at the regulatory as well as the behavioral level and then to assess whether these effects are consistent with the goal of sustainable development. This is not an easy task: sustainable development is influenced by a number of interacting variables, where sustainability in international supply chains is only one of those, and furthermore SCCs are only one of the tools to influence this fairly intractable problem. Nevertheless, the complexity of the problem should not discourage legal scholars from tackling it. Therefore, as described in the methodology subsection 2.3.1, this book intends to infer changes at the regulatory level (legalization of soft CSR regulation) and corporate level (changing suppliers’ behavioral patterns through legalization), which may be ascribed either fully or partially to the use of SCCs and assess their contribution to the global sustainable development goals. In the first chapter of this part (chapter 8), the effect of legalization of CSR within international supply chains is examined by discussing how SCCs may harden soft CSR regulations or create new legal obligations. The major focus is on the manner in which the contractual form strengthens the perception of sustainability requirements as binding. In this chapter, possible links between the legalization effects and change in suppliers’ behavior are sketched. The second chapter in this part (chapter 9) considers whether the effects of SCCs bring positive results to the global regulation of sustainable development, i.e. it assesses whether regulation through contracts appears to be an effective means of transnational regulation of sustainable development. This chapter ties together the previous findings to decide whether the main hypothesis should be retained or rejected.

8

Legalization of CSR/hardening soft CSR regulation

A major contribution of SCCs at the regulatory level can be seen in the legalization of corporate social responsibility, which was traditionally perceived as an area of voluntary action. Legalization can be understood as a “move to law.”1 Most frequently, this effect of SCCs at the global regulatory level is described as already several times mentioned hardening of soft CSR regulation.2 In a simple sense, legalization means to give legal validity to, or legally sanction, certain behavior.3 On this basis, “law” is defined as hard law enforceable through state judicial institutions. In essence, this assumes that a new legal right or obligation is created, regardless of whether it is made via state legislation or through informal ways such as creating a trade usage through corporate practice. However, legalization may also be understood in a more complex way as a move to law in a multifaceted sense: “… moving away from a narrow view of law as requiring enforcement by a coercive sovereign.”4 In this context, the concept of legalization has primarily been discussed in relation to international institutions, bridging the spheres of politics and law.5 However, some authors also refer to legalization in relation to specific areas, such as corruption or environmental regulation.6 It may at first sight seem odd to transplant the discussion on the legalization of international regulatory regimes to the context of business contracts, but it is justified when approaching business contracts as a global regulatory means or when speaking about the hardening of soft international regimes through business contracts.7 Hitherto, the most influential conceptualization of legalization has been developed by Abbott et al., who define legalization as a multidimensional contin1 2 3 4 5

6 7

Bélanger, L., Fontaine-Skronski, K., 2012, “‘Legalization’ in international relations: A conceptual analysis,” Social Science Information, 51(2), 238–262, p. 239. See notes 16 and 117 (chapter 1) and note 11 (chapter 5). Merriam-Webster, online dictionary, www.merriam-webster.com/dictionary/legalization (last accessed 8/7/2013). Abbott et al., notes 59 (chapter 2), p. 402. Kahler, note 38 (chapter 2). See special issue of International Organization, 2000, 54(3), devoted to this topic. The special issue set the stage for some very influential theoretical scholarship. See also Bélanger and FontaineSkronski, supra note 1 (providing a review of the literature using the concept of legalization introduced in the special issue of International Organization). For example, corruption; see Abbott, K. W., Snidal, D., 2002, “Values and Interests: International Legalization in the Fight against Corruption,” Journal of Legal Studies, 31(S1), S141–S177. This approach is taken in the main hypothesis. The approach to contracts as a regulatory means also justifies the use of literature not only regarding the legalization of regulatory regimes but also regarding compliance with regulation rather than contract compliance.

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Sustainability Clauses in International Business Contracts uum oscillating around three dimensions: “obligation,” “precision,” and “delegation.”8 They briefly describe the three dimensions as follows: “Obligation means that states or other actors are bound by a rule or commitment or by a set of rules or commitments. Specifically, it means that they are legally bound by a rule or commitment in the sense that their behavior thereunder is subject to scrutiny under the general rules, procedures, and discourse of international law, and often of domestic law as well. Precision means that rules unambiguously define the conduct they require, authorize, or proscribe. Delegation means that third parties have been granted authority to implement, interpret, and apply the rules; to resolve disputes; and (possibly) to make further rules.”9 Legalization can occur asymmetrically around the three dimensions.10 At one end of the spectrum lies typical hard regulation with all three dimensions maximally legalized; at the other end is a complete absence of legalization, meaning no law in any sense.11 In essence, any regulation that is weakened around one or more of the dimensions constitutes soft law.12 None of the dimensions is so important that it can fully compensate for an absence of one or both of the other two.13 This means that even though we may have precise wording in a code of conduct, its legalization will be low if there is no clear intention of the company/suppliers to be bound by the code and if there is not a clear enforcement procedure at place. It has been argued that greater legalization leads to greater cooperation and compliance of actors at international level.14 However, this assertion has also been contested by a range of authors who have argued that there is no clear proof that hard law is more efficient than soft law and, moreover, that all three dimensions are not equally important (and even that legalization in relation to one dimension may lead to de-legalization in another).15 8

9 10 11 12 13 14 15

Abbott et al., note 59 (chapter 2), p. 401; the three-dimension concept has been criticized by some authors for being too restrictive, for failing to consider other important aspects of law (such as legitimacy), and for being insufficiently precise to distinguish legal from other normative systems: see, e.g., Finnemore, M., Toope, S. J., 2001, “Alternatives to Legalization: Richer Views of Law and Politics,” International Organization, 55(3), 743–758. However, in my opinion, the three-dimension framework still represents an important conceptualization of this complex topic that can be built upon and developed if needed. Ibid.; the dimensions are individually analyzed and detailed within the article. Abbott and Snidal, note 52 (chapter 2), p. 422. Abbott et al., note 59 (chapter 2), p. 402. Abbott and Snidal, note 52 (chapter 2), p. 422; see also note 59 (chapter 2) et seq. Bélanger and Fontaine-Skronski, supra note 1, p. 242. Kahler, note 38 (chapter 2), p. 673 et seq. (summarizing the arguments of the authors from the special issue on this point). For a literature review on the application of the Abbott et al. legalization concept, see Bélanger and FontaineSkronski, supra note 1, pp. 247–251 (pointing towards major discrepancies in assessing the same regimes

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Global regulation of sustainability is dominated by soft regulatory instruments of an international or national and public or private nature, as well as some of a hybrid nature.16 As soft instruments, they are weak in relation to one or more of the legalization dimensions, and therefore their quality, efficiency, and enforcement have been frequently questioned.17 With regard to transnational private and hybrid regulation, the issue of legitimacy can lead to further criticism.18 This section provides an overview of how the contractual form may have the effect of legalizing soft CSR regulation in relation to each of the three dimensions.

8.1

Obligation

The major problem concerning the “obligation” dimension of CSR regulation relates to its unclear legitimacy.19 At national level, the legitimacy of the law is derived from state governance. But there is no substitute of such an authority at transnational level since there is no decision-making center there.20 As there is no authority to dictate binding rules for transnational business activity, soft modes of regulation are employed by various of the affected subjects. Taking the form of guidelines, recommendations, or voluntary participation initiatives, CSR regulation most often does not express a clear intention to bind companies, and non-compliance does not generally create legal liability, meaning that subjects of the regulation and those whose interests are protected cannot start legal procedures based on non-compliance or invoke legal remedies.21 The level of “obligation” is to be primarily derived from the language used in a specific instrument. One of the most legalized forms of language in the spectrum of CSR regulation

16 17 18 19 20

21

by several authors and claiming that the obligation dimension is the only independent variable of legalization, while precision and delegation are highly dependent on it); for a different view, see, e.g., Böhmelt, T., Pilster, U. H., 2010, “International Environmental Regimes: Legalisation, Flexibility and Effectiveness,” Australian Journal of Political Science, 45(2), pp. 245–260 (through a quantified model finding that the obligation and delegation dimensions are irrelevant for international environmental regimes’ effectiveness, while precision is an important determinant in this respect). Supra subsection 6.2 and Table no. 6.1 therein. See supra section 1.2(b); see also Cafaggi, note 96 (chapter 1), p. 2. Lambooy, note 33 (chapter 1). Legitimacy can be understood as a source of obligation and compliance pull in law; see Finnemore and Toope, supra note 8, p. 749. For a discussion on the accountability of transnational private regulation, see, e.g., Curtin and Senden, note 34 (chapter 1), and Mückenberger, U., Jastram, S., 2010, “Transnational Norm-Building Networks and the Legitimacy of Corporate Social Responsibility Standards,” Journal of Business Ethics, 97(2), 223–239. Abbott et al., note 59 (chapter 2), p. 409 and 411 (noting that they can instead make normative claims and resort to relational remedies); however, indirect liability may arise under, e.g., consumer, contract, or labor law. Furthermore, Finnemore and Toope, supra note 8, p. 748, criticize the definition of obligation for only focusing on consequences, without having regard to how a feeling of obligation is created. Subsection 8.1.2.3 addresses this criticism in relation to the expressive function of the law.

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was used in the original draft of the UN Norms, which stated in its Article 1 that “(w)ithin their respective spheres of activity and influence, transnational corporations and other business enterprises have the obligation to promote, secure the fulfillment of, respect, ensure respect of and protect human rights….”22 However, the legalized language was also one of the reasons why the UN Norms failed to be adopted in the end.23 ISO 26000 lies at the opposite end of the spectrum, expressly denying its own regulatory nature and stating that it contains voluntary guidance rather than obligatory requirements.24 Overall, considering that even the strongest CSR regulation does not amount to legally binding rules, the “obligation” is generally rather weak, and, therefore, affected subjects seek ways to harden the CSR regulation indirectly.25 With international governmental negotiation being slow, failing, or non-existent, some national legislators (who have no jurisdiction over transnational corporate activities) indirectly try to create a hardened level of “obligation” for CSR behavior among international supply chains through the so-called meta-regulation.26 By regulation focused on managerial processes, they invoke improvement of control and enforcement of sustainability requirements across supply chains. A typical example of these regulatory efforts is reporting legislation that empowers the social pressure of civil society and other stakeholders by providing them with information about companies’ activities.27 This creates a perception of CSR behavior among multinational buyers as mandatory, although it is not an obligation in a hard law sense and it does not directly influence behavior of international suppliers. Multinational companies sourcing from foreign (usually developing) countries and operating under mixed economic, legal, and social pressures increasingly endeavor to harden the “obligation” dimension for their suppliers by means of contracts in order to live up to the expectations of their own stakeholders.28 The question is whether the contractual form really legalizes CSR requirements, specifically: i. Is the issue of unclear legitimacy (an urgent issue in the case of transnational private regulation) overcome by means of contracts? ii. Do soft requirements become legalized after their inclusion in a contract, or, eventually, can a new obligation be created through contracting practice? 22 Supra subsection 6.2.1.1. 23 See note 42 (chapter 6). 24 ISO 26000 para. 1 (“It is not intended or appropriate for certification purposes or regulatory or contractual use”). 25 McBarnet, note 74 (chapter 1), p. 42. 26 See e.g. note 151 (chapter 6). 27 Reporting legislation typically does not prescribe what CSR actions companies have to undertake within their supply chains, but merely requires companies to describe what they are doing/not doing and why (note 23 (chapter 2)). See also Gunningham, note 118 (chapter 2), pp. 483–485 (speaking of the “legal expansion of the social license”). 28 From the vast literature on CSR drivers, see, e.g., Gunningham, note 118 (chapter 2) (describing the interaction and proliferation of economic, social, and legal incentives for CSR behavior).

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Regarding the first issue, the question of legitimacy generally does not emerge in a contractual relationship where the contract is the product of negotiation and agreement between the parties in which they set the rules for their mutual relationship. However, a contract within an international supply chain may not be the product of negotiation but rather consist of unilaterally imposed rules by an economically stronger party.29 While this may raise some concerns regarding general justice, it should be remembered that the current international contract law is based on the leading principle of freedom of contract and that “(s)ociety, by proclaiming freedom of contract, guarantees that it will not interfere with the exercise of power by contract.”30 Probably more alarming is the issue of legitimacy viewed from the perspective of third parties whose interests are regulated or influenced by a specific contract.31 Third parties do not have any input in the contract negotiation and drafting processes; therefore, in theory they could contest the legitimacy of SCCs.32 However, as their interests are primarily affected in a positive way, they will probably not contest the content of SCCs as such, but may raise questions as to the adequacy of their protection through business contracts. Such questions (or rather criticisms) aim to reconsider the position of public regulation rather than weaken the legitimacy of SCCs that could have an effect on the perception of “obligation” under such provisions. Regarding the second issue, one is tempted quickly to conclude that by being included in a contract, soft CSR instruments automatically gain a hard law character and thus create a binding obligation. However, more analysis is needed in this respect. As discussed in chapter 7, the binding level of commitment towards CSR requirements in companies’ supply chains depends on its form and the language used, as well as on the buyer’s conduct, especially in relation to consistent monitoring and enforcement practice. Therefore, probably a more appropriate statement would be that by being included in a contract, the “obligation” dimension of soft CSR regulation hardens, meaning that it does not always transfer from being of a soft to being of a hard nature, but more often moves from being of a soft to being of a less soft nature. The distinction between various levels of softness can be difficult to judge. Moreover, there is no objective measurement of the “obligation” level. Therefore, it is not a question of legal enforceability, but rather one of perception, and it is influenced by many factors,

29 McBarnet and Kurkchiyan, note 17 (chapter 1), p. 86 (“…in the MNC-supplier relationship the symmetry of power is massively distorted. Decision-making is monopolized by the MNC, and the supplier has little bargaining power”). 30 Kessler, note 50 (chapter 4), p. 640 (“the law, by protecting the unequal distribution of property, does nothing to prevent freedom of contract from becoming a one-sided privilege”); this conclusion becomes inapplicable in the case of consumer contracts. 31 Collins, note 91 (chapter 2), p. 70 (“Unlike a regulatory regime imposed by an agency that is required to consider the interests of all affected parties and other externalities, under the rules of private law the self-regulation represented by the contractual agreement denies the need to consider any spill-over effects”). 32 Lin, note 17 (chapter 1), p. 742.

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including the language of the particular regulation and whether or not there is an expectation of legal and/or non-legal sanctions. The fact that individuals’ perception is used to evaluate the level of “obligation” inherently weakens any conclusions, as the result may be skewed by individuals’ attitudes and cognitive biases.33 However, as there is no objectively reliable model of quantification for assessing the legalization dimensions, the scholarship must rely on individuals’ perceptions and seek their objective substantiation, which is also the method used here.34 In the search for such substantiation, recourse to other disciplines (including psychology, sociology, and behavioral economics) seems to be necessary. As described in the relevant subsection on methodology (2.3.2), the use of other than legal disciplines is done only in a limited manner due the author’s educational background and the feasibility of this project. Therefore, the relevant arguments are merely outlined here, and their more profound analysis is left to future multidisciplinary research. This methodological problem is relevant in the whole context of the legalization evaluation; however, as will be seen from the following discussion, it becomes the most urgent in relation to the “obligation” dimension. From the analysis presented in this book so far, three instances of “obligation” legalization of sustainability requirements and CSR regulation via contracts emerge: a hardening of the weak “obligation” in soft regulations through their formalization, the creation of a new “obligation” through standardization, and a hardening (or creation) of a new “obligation” through the transplanting of norms.

8.1.1

Hardening obligation through formalization

The most frequently articulated, and probably the most significant, effect of SCCs at the global regulatory level is the aforementioned hardening of soft CSR commitments and initiatives by giving them a contractual form.35 Let us consider again the example of the Verizon Australia Supply Agreement.36 As concluded in subsection 7.2.4.3, compliance with the Verizon Supplier Code of Conduct (implemented in the agreement by means of a reference in Article 14.2) would most probably not be enforced under international contract law. At best it seems that a court would decide that suppliers had an obligation to invest efforts to support Verizon’s values expressed in the policy. The task here is not to repeat the analysis undertaken earlier, but to see whether the inclusion of the Supplier Code of Conduct into the Supply Agreement 33 Böhmelt and Pilster, supra note 15, p. 251. 34 See, e.g., research design, Ibid., p. 250 et seq. (using the International Regimes Database of regimes that were each coded by 1–4 coders selected from renowned experts, covering among other things their legalization dimension). 35 See notes 16 (chapter 1) and 11 (chapter 5). 36 See note 46 (chapter 3) and Annex no. 3.

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changed the “obligation” in the sense of making it harder or not or even if it on the contrary made the “obligation” weaker. The Verizon Supplier Code of Conduct mixes language of a hard and soft nature. On the one hand, it firmly states that “(a)ll suppliers must operate in full compliance with the laws, rules and regulations of the jurisdictions in which they operate, and they must act ethically at all times” and Verizon “reserves the right to review or audit” compliance.37 On the other hand, it states, in much softer mode, that suppliers “shall support” the values by “striving for performance excellence” and by “accepting accountability.”38 It does not seem coincidental that the hard language is used in relation to general requirements of legal compliance and ethical attitudes, which any company should comply with, regardless of any sustainability requirements. Soft language is then used in relation to compliance with the specific Verizon CSR values and standards. The soft nature is, moreover, amplified by a lack of sanctions envisioned for cases of non-compliance and the fact that the requested actions to be taken by suppliers concern managerial processes within the suppliers’ companies rather than empowering Verizon to enforce or manage non-compliance.39 Considering the above, the prevailing perception of the “obligation” level of the Code standing alone is rather low. Does that change with its insertion into the Supply Agreement? And how does that affect suppliers’ behavior? On first sight, it does not seem to change the “obligation” level, as the wording used in the contractual reference is soft as well.40 The formulation that the “(b)uyer expects its suppliers to share this commitment” and that the supplier “agrees to adhere” to the Supplier Code of Conduct does not itself strengthen the “obligation,” but could on the contrary be deemed to soften even the scarce hard expressions in the Supplier Code of Conduct. A stronger perception of “obligation” would be reached if the word “expects” was replaced with “requests” or “obliges” and the word “agrees” with “commits” or “undertakes.”41 Nevertheless, already the fact that the Code is implemented into the contract alone seems to change the perception of the “obligation” level in several ways. 8.1.1.1 Signaling commitment Firstly, the contractual form signals the importance of the issue for Verizon. Using the form of a binding commitment, even though the undertaking may not be legally enforceable,

37 38 39 40 41

Verizon Supplier Code of Conduct, Preamble. Ibid. Ibid., Section F & Management System. See discussion supra in subsection 7.2.4.3. Cf. Guzman, A. T., 2005, “The Design of International Agreements,” The European Journal of International Law, 16(4), 579–612 (concluding that at international level the form of commitment influences its effects on the addressees’ behavior: harder language leads to more effects).

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Sustainability Clauses in International Business Contracts is a signal of the seriousness of the commitment towards suppliers.42 If they do not comply, suppliers may therefore fear adverse consequences, although these may not amount to any formal dispute resolution.43 It has been suggested that the increased credibility of commitment through the use of binding language might compensate for the low possibility of non-compliance detection, as it raises the potential cost of violations.44 As the effectiveness of monitoring mechanisms of CSR requirements is questionable,45 the language used may become an important incentive for suppliers’ compliance. The same logic can be translated to the use of the form of a binding commitment. For example, if we imagine Verizon not including its Code of Conduct in the contract while also not providing for any monitoring mechanisms, the supplier would most probably breach the Code, since the probability of detection is low (if existent at all, provided that it is not recognizable from the goods itself) and the language does not suggest that Verizon intends to impose any sanctions for breaches. When Verizon inserts the Code by reference into the contract, the supplier can still rely on the low probability of breach detection, but the expected sanctions tighten, as they comprise all remedies under international contract law.46 Moreover, the signaling function of the contractual form also works in relation to the public and other companies’ stakeholders. Although contracts are not usually publicly available, the results of the empirical study show that companies report on whether they do or do not have SCCs in their contracts.47 By means of such disclosure, companies communicate to all their stakeholders the importance they assign to the issue. As it has been argued, “… turning a promise into a contract means that the promise is to be believed, accepted and relied upon.”48 The reliance is created not only between the buyer and the supplier but also to third parties. Thus, even if formal commitments do not lead to legal consequences, they may entail greater reputational costs,49 both on the side of the companies making these undertakings and their suppliers joining them through contracts. In this way, the signaling function raises the fear of adverse consequences if the formal commitment 42 Compare to Woolthuis, K., Hillebrand, B., Nooteboom, B., 2002, “Trust and Formal Control in interorganizational Relationships,” Erasmus Research Institute of Management (ERIM), ERIM Report Series Research in Management (concluding that “(c)ontracts may serve as a sign of commitment rather than as a safeguard against opportunisms”; although the authors speak of commitment to the business relationship established by a contract, a parallel could be drawn with the commitment to CSR); see also Abbott and Snidal, note 52 (chapter 2), p. 422 (listing the strengthening of commitments’ credibility as one of the reasons to use hard law). 43 See supra subsection 7.4.2. 44 Abbott and Snidal, note 52 (chapter 2), pp. 428–429. 45 See supra subsection 7.4.1 46 For the purposes of this book, the author presumes that the parties did not make a choice of applicable law, although in actual fact they have excluded the applicability of the CISG. 47 See supra subsection 7. 48 Rousseau, D., 1995, Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements, SAGE Publications, Inc, p. 18. 49 Cf. to Shaffer and Pollack, note 50 (chapter 2), p. 3.

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is not adhered to and, therefore, may lead to suppliers’ higher compliance costs, as well as to greater cooperation on the part of both parties in reaction to being exposed to the threat of an adverse public reaction. 8.1.1.2 Internalization of agreed values50 Secondly, by the mere act of signing the Supply Agreement, a supplier’s commitment to the Verizon Supplier Code of Conduct is stronger than if the supplier only received a copy of the Code without being obliged to sign it. By means of the contractual form, the requirements gain the character of agreed terms.51 Although, as already stated, in practice SCCs are rarely negotiated, formal acceptance of the terms as part of a business deal is likely to increase the internalization of the values and goals agreed upon by the supplier.52 This may also explain why companies insist on the act of signing their Codes of Conduct by suppliers even without the intention to create a contract; the act of signing may itself enhance conscious acceptance of the content and thus also compliance. 8.1.1.3 Moral obligation Moreover, by means of the contractual form, the Supplier Code of Conduct comes under the moral imperative of pacta sunt servanda.53 As empirical research shows, a consensus exists “that a legally valid contract also imposes certain moral obligations on a promisor”;54 therefore, a supplier will probably feel obliged to comply with the Code, irrespective of its actual legal force. Under the moral approach to contracts, a contractual commitment gives 50 Kelman, H. C., 1958, “Compliance, Identification, and Internalization: Three Processes of Attitude Change,” Journal of Conflict Resolution, 2(1), 51–60, p. 4, described internalization process as follows: “Internalization can be said to occur when an individual accepts influence because the content of the induced behavior – the ideas and actions of which it is composed – is intrinsically rewarding. He adopts the induced behavior because it is congruent with his value system. He may consider it useful for the solution of a problem or find it congenial to his needs. Behavior adopted in this fashion tends to be integrated with the individual’s existing values. Thus the satisfaction derived from internalization is due to the content of the new behavior.” 51 Cf. Rousseau, supra note 48, pp. 9–10 (noting the importance of the act of agreement in the event of psychological contracts in labor relations and aligning one’s actions to what one believes one has agreed to). 52 Similar reasoning can also be found behind introducing environmental contracts concluded between governmental institutions and companies in some jurisdictions as a part in the implementation process of environmental laws, e.g., Section 10 of the Danish Environmental Protection Act. See Basse, E. M., “Environmental Contracts: a New Instrument to be Used in the Danish Regulation of Environmental Law,” in van Dunné, J. M. (ed.), 1993, Environmental Contracts and Covenants: New Instrument for a Realistic Environmental Policy?, Rotterdam, The Netherlands: Koninklijke Vermande, 197–224 (noting that in realization of the Danish Environmental Protection Act “contractual actions have tremendous significance for the cooperative climate”). 53 Hyland, note 7 (chapter 2), p. 427 (speaking about the civil law understanding of the maxim: “… the keeping of promises is considered to be a moral obligation, and the law of contract is viewed as the legal means to enforce that obligation”; this approach has, however, been continuously contested by the moral right to breach a contract in certain instances). 54 For a literature review on the empirical evidence, see Depoorter and Tontrup, note 126 (chapter 7), p. 706, footnote 141.

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rise to self-generated pressure on the promisor, who strives for consistency of his/her behavior with the contract and, thus, builds his reputation.55 In practice, this is directly linked to reputational pressure, which may once again be intensified by the CSR disclosure regimes. Cohen compares the function of formalism in modern contracting to ceremonies: “Psychologically, they are habits; socially, they are customary ways of doing things; and ethically, they have…normative power of the actual, that is, they control what we do by creating a standard of respectability or a pattern to which we feel bound to conform.”56 Signature may seem unimportant if the SCCs are in any event drafted in vague terms or their enforceability is otherwise doubtful, but it makes a clear, almost symbolic demarcation of what is considered a part of the deal and, therefore, ethically requested of the supplier to conform with.57 8.1.1.4 Navigation through regulatory system categories Finally, one can also speak in this context about the formalization of CSR requirements and regulation.58 Codes of conduct, like most other types of private regulation and selfregulation, occupy an unclear position within the hard legal framework. Bestowing a contractual form on these regulatory forms allows us to place them within established conceptual frameworks of binding and non-binding rules. Thus, suppliers are likely to consider sustainability requirements as being binding without resorting to an actual legal analysis of the binding nature under the applicable law (as undertaken in subsection 7.2.4.3). The same line of thought may be applied in relation to the legalization of global CSR initiatives through contracts. For example, Pressalit’s General Terms prescribe that “compliance with UN’s Global Compact should be observed.”59 The General Terms use vague formulations, do not contain a link to the UNGC text, and above all do not provide for any enforcement mechanisms. Overall, this provision would in all probability be found to have no binding effect if contested in litigation. Nevertheless, through the contractual form, the UNGC does seem to become vested with stronger, semi-binding powers than if it were to stand alone, since the contractual form again overcomes (at least in formal terms) the ambiguous regulatory character of the UNGC.

55 56 57 58

Rousseau, supra note 48, p. 24. Cohen, note 17 (chapter 4), p. 582. Ibid. McBarnet, note 74 (chapter 1), p. 42; for a discussion on formalism and efficiency, see Collins, note 91 (chapter 2), p. 174 et seq. 59 See note 2 (chapter 3).

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The effect of contractual form on the placement of sustainability requirements and regulation is illustrated in Figure 8.1. Figure 8.1 Effect of contractual form on Codes of Conduct and other soft law instruments (figure made by the author)

8.1.1.5 Summary Given the outlined consequences of the formalization of sustainability requirements through contracts (the signaling function, the internalization of accepted rules, the moral imperative of pacta sunt servanda, and the conceptual classification of soft regulation), we may presume that SCCs harden the “obligation” dimension of CSR soft regulation, although they may not convert such regulations into legally binding commitments. The four outlined consequences are closely intertwined; for example, the fact that the contractual form helps us to place the ambiguous CSR regulation into conceptual categories that we already know (binding/non-binding, public/private) may also reinforce the internalization of the rules, as they become perceived not only as something that has been undertaken but also some-

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Sustainability Clauses in International Business Contracts thing that has been undertaken as being binding.60 This subsection does not claim that the form of the contract is the only incentive for suppliers’ compliance, but it argues that the form is one of many ways to affect suppliers’ perception of the sustainability requirements and their CSR behavior. Furthermore, it seems to be a way that is easily executed by buyers without increasing their costs (provided that they are in the stronger position in the business relationship).

8.1.2

Hardening obligation through standardization

Using SCCs cannot only harden the perception of “obligation” on the part of individual suppliers in connection with a specific business relationship, but it can also harden a general perception of sustainable practices. As described by Abbott and Snidal: “(o)ver time, even non-binding declarations can shape the practices of states and other actors and their expectations of appropriate conduct, leading to the emergence of customary law or the adoption of harder agreements.”61 In a simplified way, we could say that if numerous companies include sustainability requirements in their contracts for a certain length of time, the public and the business community will start to expect that all companies should follow such practices and that it is the right and prudent thing to do so. Under the most legalized hypothesis, it may evolve into a trade usage or practice between specific parties and, thus, become an implied term of relevant business contracts.62 This subsection outlines three possible ways in which SCCs affect the general perception of the “obligation” level of sustainability requirements in international supply chains: the establishment of best practice, the development of trade usage, and the expressive function of SCCs. 8.1.2.1 Global best practice Consistent and widespread use of SCCs contributes to a development of best practice for CSR in international supply chains.63 Best practice refers to “commercial or professional procedures that are accepted or prescribed as being correct or most effective.”64 Commercial 60 61 62 63

See the further discussion on the expressive function of contracts supra subsection 8.1.2.3. Abbott and Snidal, note 52 (chapter 2), p. 412. See supra subsection 7.1.2. For best practice in sustainable supply chain management, see, e.g., Pace University School of Law and IACCM, note 46 (chapter 1), pp. 23–24. 64 Stevenson and Lindberg, note 99 (chapter 1). For other definitions, see www.investopedia.com/terms/b/best_practices.asp (last accessed 14/7/2014) (“A set of guidelines, ethics or ideas that represent

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best practice often develops in areas where legal regulation is missing or needs to be made more concrete.65 Best practice serves as a quality standard and a tool for companies’ benchmarking.66 As the area of environmental and social sustainability in international supply chains is essentially unregulated by hard law67 and since the issue is very complex, companies and other subjects that are interested in sustainability endeavor to describe best practice in order to set a bar for companies’ behavior as well as provide them with implementation tools and procedures.68 We could ask what “best” means in this respect. Should it be understood as best for companies or best for the goals of sustainable development? As there are no specific rules (any rules would actually go against the core of the concept) as to how best practice should be developed and whose interests should it consider, “best” would most probably mean uniting the most efficient risk management with the largest possible contribution to sustainable development goals. The result should serve the twofold purpose of protection against reputational risks and the building of a positive reputation. Established best practice may have multiple roles. Firstly, it provides practical guidance for companies as to what is expected of them by their stakeholders and how can they fulfill those expectations. Secondly, it provides companies with a benchmark against which they can assess how they perform in comparison to their peers.69 Thirdly, by formulating best practice, pressure is created on those companies who lag behind. Moreover, by establishing best practice, companies may level competition between them in areas where regulation is non-existent or ambiguous and concentrate on competition in more transparent areas, such as price or quality of material. Furthermore, best practice may eventually evolve into acceptance of more stringent regulation. However, it may on the other hand also lull public regulators into a (false) sense of security that companies behave well and take on the responsibility and that there is thus no need to adopt new laws.70 Finally, best practice may create a “safe harbor,” meaning that in the event that a dispute arises, a company who acted in compliance with best practice can claim that it invested all the efforts one could

65 66 67 68 69 70

the most efficient or prudent course of action. Best practices are often set forth by an authority, such as a governing body or management, depending on the circumstances. While best practices generally dictate the recommended course of action, some situations require that such practices be followed”); McGrath, note 101 (chapter 1), p. 139 (“Best practice generally refers to the use of the best available technology or management practice irrespective of ‘normal’ or industry practice”); or www.businessdictionary.com/definition/best-practice.html (last accessed 13/7/2014) (“A method or technique that has consistently shown results superior to those achieved with other means, and that is used as a benchmark”). Glinski, note 110 (chapter 1), p. 129; Bogan, C. E., English, M. J., 1994, Benchmarking for Best Practices: Winning Through Innovative Adaptation, New York: McGraw-Hill. Bogan, Ibid. See supra chapter 6. See, e.g., Brammer, S., Hoejmose, S., Millington, A., 2011, Managing sustainable global supply chains: Framework and Best Practices, Network for Business Sustainability, report. For example, see Vytopil, note 119 (chapter 1), p. 169. See note 62 (chapter 4).

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reasonably expect and acted with due diligence and in accordance with the standards of the relevant industry.71 In relation to the use of contracts for sustainability goals in international supply chains, a body of general best practice applicable across industries is detectable, especially in relation to the monitoring and enforcement phases.72 In addition to general best practice, specialized industry-specific best practices emerge. Companies associate with one another according to their industry affiliation to share knowledge and jointly fight against the risks connected with allegations of complicity in unethical conduct. An example of such an association is the Responsible Care program of the chemical industry, which was established to “share best practices and support their adoption worldwide.”73 The effect of best practice on the perception of the “obligation” dimension is straightforward: best practice provides for behavior and procedures that are widely accepted and, thus, creates a demand as to companies’ conduct. With more subjects acting in accordance with best practice, it gains more support, which then strengthens the perception of participation as an “obligation,” since any conduct not aligned with best practice may be punished by the social means of condemnation by the general public or company’s peers, possibly leading to reputational damage.74 8.1.2.2 Trade usage Trade usage is an important concept of international contract law as it may precede default contract law rules. Trade usage has already been analyzed in detail in relation to the form of implementation of sustainability requirements into contracts.75 Therefore, the basis of the concept will not be discussed again. However, in this subsection, the question is not whether sustainability requirements are implied terms of international supply contracts, but how development of a trade usage relates to the legalization of CSR. Specific business conduct evolves into a trade usage if it is widely known and regularly observed by contractual parties in a particular trade.76 This basic definition does not seem to differ much from the concept of best practice as introduced above. However, the difference between these two concepts is major in terms of their content, use, and consequences. While best practice relates to the conduct of leading companies in a specific area that is 71 For an analysis of best efforts, reasonable care, due diligence, and reference to industrial standards in international commercial contracts, see Fontaine and De Ly, note 39 (chapter 3), pp. 187–230. However, some authors point out that the “safe harbor” may just be elusive and in fact does not protect companies against potential legal liability; see, e.g., Glinski, note 110 (chapter 1), p. 139 et seq. 72 Pace University School of Law and IACCM, note 46 (chapter 1), p. 28. 73 Responsible Care leaflet, www.icca-chem.org/ICCADocs/ICCA%20-%20Responsible%20Care%20_English.pdf (last accessed 15/7/2013). 74 Kahler, note 38 (chapter 2), p. 680 (“… the value and strength of norms may grow with the numbers endorsing them”). 75 See supra subsection 7.1.2. 76 See note 37 (chapter 7).

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superior (i.e., better than average) performance,77 trade usage refers to conduct that is known and observed by the majority of subjects involved in a specific trade and not just by the leaders.78 Best practice expresses some aspirational goals towards which companies should strive to approach; it is a management term. Trade usage is a description of existing business practices that most companies follow; it is a legal term. If certain best practice becomes generally accepted and fulfilled by the majority of companies, it may evolve into trade usage. However, development of best practice is a continuous process; therefore, when a part of it may be deemed to establish trade usage, usually even better practice exists that assumes the position of the prior best practice. Given the foregoing, in the context of CSR legalization, we may say that the development of best practice may be a step that precedes the establishment of trade usage. This level of legalization is of great importance, because it strengthens the “obligation” considerably, transforming soft best practice into hard trade usage. As a part of the hard law of contracts, trade usage can then be interpreted and applied by courts or arbitral tribunals. 8.1.2.3 Expressive function of contracts It is well recognized that “(l)aw can work by what it says in addition to what it does.”79 This means that it is not always necessary to enforce the law in order to give it effect and that already by making a statement through law, both our judgments and our behavior may change.80 As Sun writes “… law has an internalization and coordination power to attract beliefs toward the legally commended behavior, and then sharp the social norms through an opinion formation process.”81 The expressive function of law thus means that morals as well as behavior align to the prescribed legal norms, i.e., that law shapes the social norms of a given society.82 The expressive function of law is usually discussed in relation to hard governmental regulation. However, expressive effects can also be found in private regulation and private

77 This point is criticized in the literature, noting that best practice may not be best for all companies (despite being from the same sector); see, e.g., Lapide, L., 2005, “Benchmarking Best Practices,” Journal of Business Forecasting, 24(4), 29–32, p. 30. 78 Schlechtriem & Schwenzer, supra note 16 (chapter 7), Article 9, para. 16. 79 Sun, H., 2012, “Expressive Law: A Social Identity Approach,” conference talk, 10th Annual Conference, October 19 and 20, 2012, 7th French-German Talks in Law and Economics, available at www.law.uchicago.edu/files/file/Sun%20Houjun%20paper.pdf (last accessed 16/7/2013), p. 1. 80 Sunstein, C. R., 1996, “On the Expressive Function of Law,” University of Pennsylvania Law Review, 144(5), 2021–2053, p. 2025; Abbott and Snidal, supra note 6, p. S151 (“Normative content of law is central to changing values and hence behavior”); Abbott and Snidal, supra note 52 (chapter 2), p. 425 (“Legal rules and institutions change material incentives as well as modify normative understandings, standards of behavior and identities”). 81 Sun, supra note 79, p. 2. 82 Social norms are understood here as the consensus of a society on how people ought to behave. See Cooter, R., 1998, “Expressive Law And Economics,” Journal of Legal Studies, 27(S2), 585–607, p. 587.

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Sustainability Clauses in International Business Contracts contracts.83 In fact, they may actually have stronger effects than public command-andcontrol regulation, especially in the area of CSR, where social norms regarding protection of the environment and social and human rights clash with social norms regarding fairness and private autonomy.84 Private regulation, including regulation through contracts, is not as aggressive towards the norms of autonomy and fairness and as such will most probably be viewed as more legitimate and experience less resistance from the business community; consequently, it will also induce more internalization of the prescribed rules.85 International supply contracts will lead to different expressive effects in different jurisdictions. Each society’s social norms vary, and thus the effect law has on them also varies. Where the content conforms to the local social norms, the content of the contract will be easily internalized by suppliers and vice versa. For example, child labor under 14 years of age is considered unethical not only in the developed world but also in most developing countries.86 However, some countries’ social norms may not condemn child labor. For example, India has not ratified the ILO conventions regarding child labor, citing the socio-legal situation in the country.87 The reasons why certain societies accept child labor are multiple, and many of them have to do with customs, culture, and social norms; for instance, in some societies, work in childhood is considered good for character-building and skill development, or a strong belief exists that girls do not need the same education as boys and, therefore, they are employed at home or sold into work.88 These strong cultural and social norms are hard to change through international law, as the governments of these countries often share the same beliefs and, thus, do not accede to international conventions or, even if they do so for international political reasons, they do not enforce the law properly. In these situations, private contracts may be more successful in changing the social norms although their content differs from the local social norms. Internalization of the content can be enhanced by educational activities, sharing of suppliers’ results and experience across jurisdictions, and consistent monitoring and enforcement. Multinational buyers also create new grounds for pride (compliance rewards) and shame (de-listing suppliers from compliance lists) in order to drive suppliers’ behavior in the required direction.89 Contracts involving multinational companies from developed countries may thus induce internalization of the values (expressed in those contracts) of Western society

83 Vandenbergh, note 97 (chapter 1), p. 2075 et seq. 84 Ibid., pp. 2076–2077. 85 Grabosky, P. N., 1994, “Green Markets: Environmental Regulation by the Private Sector,” Law & Policy, 16(4), 419–448, p. 437; Vandenbergh, note 97 (chapter 1), pp. 2076–2077. 86 ILO Minimum Age Convention, 1973 (No. 138), ratification by country at www.ilo.org/dyn/normlex/en/f?p=1000:11300:0::NO:11300:P11300_INSTRUMENT_ID:312283 (last accessed 13/7/2014). 87 See note 20 (chapter 3). 88 ILO, child labor causes, www.ilo.org/public/english/region/eurpro/moscow/areas/ipec/causes.htm (last accessed 13/7/2014). 89 Cf. Sunstein, supra note 80, p. 2031.

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by suppliers from developing countries and, therefore, contribute towards a general change of local social norms and a perception of the new requirements as “obligations.”90 Another important expressive effect of SCCs in relation to the changing of social norms is connected with their informative role. It is a known phenomenon that new information about risks connected with a specific behavior may shift relevant social norms.91 The information can be spread via international private contracts to locations where no such information is available or does not produce the same effects. For example, if buyers request in their contracts that suppliers reduce CO2 emissions as this is bad for the environment and future generations, they may shape the judgments of suppliers regarding the acceptability of emissions as such, not only in relation to the specific contract but generally. It is, therefore, desirable that buyers ensure that their contracts and code of conducts are accompanied by explanations of the reasons behind the requirements, as provision of information may have even greater effect on compliance than enforcement. In the regulatory environment, information is the least intrusive option, which should therefore be preferred if the same level of effectiveness can be achieved by both.92 The above discussion on expressive function has so far assumed that buyers’ values and interests are aligned with the requirements in their contracts and codes of conduct, i.e., that they are active proponents of sustainability in their supply chain. However, even buyers who use SCCs purely for marketing purposes or for the avoidance of future litigation risks and do not truly strive to bring about change in their supply chains may still induce behavioral change through the expressive effects of contractual content. The intention of the person making a statement (in the present case the company drafting the SCCs) may not be relevant to the expression effects.93 To summarize, similarly to any other kind of regulation, SCCs also have expressive effects. By making statements in their contracts and codes of conduct, multinational companies enhance the internalization of this contractual content by their suppliers, as well as the public at large. Using a contractual form expresses the moral judgment of the sustainability concerns and provides new information to the addressees, potentially leading to a change in their perception of the specific problem (e.g., CO2 emissions) that moves from a neutral stance towards being reprehensible, which is then reflected in social norms. When a specific behavior becomes socially reprehensible, the “obligation” dimension to avoid such behavior strengthens.

90 In this context, the question of whether it is ethical to force the morality of certain countries over others arises. For some reflections on the use of contracts to impose the values of one society over another, see Schlechtriem, note 13 (chapter 5), pp. 101–102. 91 Abbott and Snidal, supra note 6, p. S151 (“Law also affects interest actors indirectly, by changing their information…”); Sunstein, supra note 80, p. 2035 (speaking about information-induced norm cascades). 92 Sunstein, supra note 80, p. 2036. 93 Cf. Sunstain, supra note 80, p. 2022.

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8.1.2.4 Summary This subsection has shown how SCCs change the perception of “obligation” legalization not only on the part of the contractual parties but also on the part of a broader audience. The extra-contractual effects may lead to a hardening of obligations all the way from the soft to the hard end of the spectrum, potentially leading to a change in social norms or the creation of a trade usage that becomes impliedly included in all business contracts for the sale of goods.

8.1.3

Hardening obligation through legal transplants

It has already been noted that the use of contracts for sustainability goals is initiated due to a lack of international agreement on substantive rules stemming, inter alia, from differences in the legal systems, social norms, and economic development of various countries. By means of contracts, companies try to bridge these differences and fill in the empty space created by the fact that there is no relevant public authority. However, they do not aim for a compromise between the rules of their own countries and those of their suppliers, but rather being (rightly)94 persuaded of the ethical supremacy of the Western values, morals, and practice in the social and environmental areas they impose them on their suppliers. In fact, by means of contracts, companies bring various types of regulation that are not directly applicable to their suppliers over to the suppliers’ locations and integrate them into the legal framework that suppliers operate in.95 This phenomenon has been described as “legal transplants through private contracting.”96 The transplanted regulation includes not only national and international hard laws but also a range of soft regulatory means, such as suppliers’ codes of conduct and global CSR initiatives.97 By making those a part of an existing or a new frame of reference for suppliers’ behavior, they strengthen existent

94 See supra note 90. It is important to note here again that this book does not set out to judge the validity and legitimacy of sustainable development goals. See supra subsection 1.3.5. 95 Lin, note 17 (chapter 1), p. 714 (“Through the channel of contracting, private transactors have been ‘smuggling’ tons of regulatory law across borders for over a decade”); in the typology of transplant presented by Miller, the transplants through contracts are closest to the category of “Externally-dictated transplants”; see Miller, J. M., 2003, “A Typology of Legal Transplants: Using Sociology, Legal History and Argentine Examples to Explain the Transplant Process,” American Journal of Comparative Law, 51(4), 839–885, p. 847 et seq. 96 Lin, note 17 (chapter 1); Ferrando, T., 2012, “Private Legal Transplants: Bright and dark nature of an unnoticed phenomenon,” Juris Diversitas Blog, 15 June 2012, available at http://jurisdiversitas.blogspot.dk/2012/06/opinion-private-legal-transplants.html (last accessed 13/7/2014); Tomaso Ferrando, 2013, “Codes of Conduct as Private Legal Transplant: The Case of European Extractive MNEs,” European Law Journal, ELJ WISH Special Issue, 19(6), forthcoming, accessible at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2145879 (last accessed 13/7/2014). 97 Traditionally, the scholarship on legal transplants speaks about transporting national laws or their parts from one country to another through copying laws, imposing laws during colonial times, or otherwise. See Watson, A., 1974, Legal Transplants: An Approach to Comparative Law, University of Georgia Press.

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or create new “obligations.”98 Two main groups of legal transplants in this area can be observed: firstly, legal transplants of soft national, international, or transnational CSR regulation and, secondly, legal transplants of national laws, in essence extending their geographical applicability, making it possible for states indirectly to influence subjects in another jurisdiction without the necessity to negotiate with the other government.99 Some authors have argued that CSR transplants in international supply chains create special transnational “zones,” having a distinct legal order and control system and having a territorial scope matching the specific supply chain.100 However, this view does not acknowledge the growing number of instances of cooperation not only between multinational companies or within specific industries but also across industries and between public and private actors,101 nor does it acknowledge the transnational standardization effects of the transplanting process discussed in subsection 8.1.2. The effects cannot simply be considered as being limited to the companies participating in one supply chain. Naming the phenomenon “legal transplants” has been criticized by Legrand, who claims that no proper transplant of the law is possible, since each legal system is closely connected to the specific society, its social norms, understandings, and values, and therefore “… a crucial element of the ruleness of the rule – its meaning – does not survive the journey from one legal system to another.”102 Moreover, he states that “… the ‘legal transplants’ thesis discards the existence of qualitatively differentiated phenomena and the concrete contents of experiences and values.”103 Although this position is difficult to argue within the context of national legal systems, the situation may be more blurred at the transnational level. Many types of CSR regulation have been prepared by subjects from multiple countries and legal cultures. Thus, it could be argued that such regulation is built on an international consensus on meanings of different concepts (if such consensus may even exist).104 Nevertheless, even if we accept the concept of international meanings (or norms or values), we will still encounter the problem that most of the CSR regulation was drafted by developed countries or actors from developed countries.105 Thus, Legrand’s critique of the legal 98 Ferrando (2013), supra note 96, p. 10. 99 See, e.g., the example of the REACH regulation, notes 54, 55 (chapter 7). 100 Ferrando (2013), supra note 96, p. 10 and 13; see also Sassen, S., 2009, “Bordering capabilities versus borders: implications for national borders,” Michigan Journal of International Law, 30(3), 567–597 (developing further her previous idea that “the increased deregulation of particular components of traditional borders … has induced the development of … new types of borderings”). 101 See, e.g., discussion on cooperation in the monitoring phase, notes 293 et seq (chapter 7). 102 Legrand, P., 1997, “The Impossibility of ‘Legal Transplants,’” Maastricht Journal of European and Comparative Law, 4, 111–124, p. 117. 103 Ibid., p. 122. 104 The CISG and connected case law could be given as an example of where the international meaning of concepts and terms has been developed. However, the endeavor to reach such unified interpretation repeatedly encountered the problem of nationally embedded adjudicators; see note 60 (chapter 1). 105 Lin, note 17 (chapter 1), p. 713 (noting that developing countries have a weak voice in the international lawmaking process).

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transplants concept may still be valid in relation to the distinction between values and understandings in Western and developing countries. The differences between meanings and understandings may be partly solved through the expressive effects of SCCs, as described in the previous subsection.106 8.1.3.1 Summary Overall, we can see that the concept of legal transplants touches upon many topics that have been discussed in relation to the hardening of soft regulation and hardening through standardization. It is an important part of the legalization puzzle that explains the process of transmitting “obligations” between different jurisdictions and regulatory levels. However, it does not seem to provide more guidance as to how the perception of the “obligation” level is strengthened.

8.2

Precision

The precision of SCCs’ language (i.e., the extent to which it is clear and unambiguous) has already been discussed in relation to the link between the language specificity and the enforceability of the provisions under international contract law.107 The discussion in this section moves to the question of whether SCCs make soft CSR regulations more precise – in other words, whether the “precision” dimension is legalized by the inclusion of soft CSR regulations or individual rules and principles from them into international supply contracts. Precision is defined by Abbott et al. as follows: “Precision means that rules unambiguously define the conduct they require, authorize, or proscribe.”108 In contrast to this definition, CSR regulations are mostly drafted in general to vague language that has to be clarified through implementation and enforcement.109 This vagueness of transnational private regulations has been the subject of strong criticism for years now.110 For example, Deva writes about the UN Global Compact that “(t) he generality-cum-vagueness of the Compact principles is counter-productive from the perspective of both sincere and insincere corporate citizens.”111 On the one hand, vague language does not provide sufficient guidance for 106 Although they may be partly solved by approximation, it does not justify the Western model as a “hegemonic term of reference” for the rest of the world; see Ferrando (2013), supra note 6, p. 16. 107 Supra subsection 7.2.4. 108 Abbott et al., note 59 (chapter 2), p. 401. 109 See, e.g., discussion on the term “sphere of influence” used in various CSR regulatory instruments in section 6.2. 110 Rasche, A., 2009, “‘A necessary supplement’: what the United Nations global compact is and is not,” Business & Society, 48(4), 511–537, pp. 16–18. 111 Deva, S., 2006, “Global Compact: A Critique of the U.N.’s ‘Public-Private’ Partnership for Promoting Corporate Citizenship,” Syracuse Journal of International Law and Commerce, 34(1), 107–151, p. 129.

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implementation of the regulations by sincere companies; on the other hand, it allows insincere companies easily to circumvent the spirit of the regulation while complying with a minimal understanding of the letter of the regulation but in fact doing nothing.112 What Deva points out in relation to the UNGC could equally be said of most transnational private law instruments. However, the inherent vagueness of transnational CSR regulation may not be entirely useless or without reason. The “precision” of language can be among other things influenced by the purpose for which a specific regulation is adopted.113 Certification schemes, adopted for the purpose of providing standards against which companies may be assessed and benchmarked, will be more precise (e.g., SA8000), containing measurable or assessable requirements.114 By contrast, regulation introducing policies (e.g., the EU Renewed Strategy) or principles establishing the regulations (e.g., the UNGC), which have the purpose of stimulating discussion of, learning about, and the adoption of more stringent corporate and legislative rules, will be vaguer, drafted in more general words to reach a broad audience and achieve an initial agreement. Furthermore, regulators may decide to use low specificity in order to secure wide acceptance of the regulations across multiple jurisdictions, facilitating the flexibility of the regulation to adapt to various cultural, social, and legal environments and swift development of the CSR regulatory framework.115 Nevertheless, precision in language seems to be considered an aspect of CSR regulation that is closely linked to the compliance level of the regulated subjects. Logic tells us that more specific language in SCCs may yield higher compliance, just because it makes it easier to evaluate compliance.116 In other words, if a regulation is not specific, it may be impossible to say when subjects comply with it and when they do not. In this way, we may say that “precision” enhances compliance. Moreover, “precision” is closely connected with the “delegation” dimension of legalization. If a regulation is imprecise but subject to judicial or other authoritative and binding oversight, it may be made precise in adjudication.117 Since we have no such decision-making authority at transnational level, it seems that precision in the language of CSR regulation is, therefore, even more important in order to limit inappropriate and self-serving interpretations.118 112 Ibid. 113 Rasche, supra note 110. 114 Not all the requirements will be quantifiable. In the CSR area, many certification schemes work with qualitative requirements. 115 Abbott and Snidal, note 52 (chapter 2), p. 434 et seq. 116 Getz, note 120 (chapter 2), p. 261; similarly Abbott et al., note 59 (chapter 2), p. 414 (in relation to international law saying “… many provisions are so general that one cannot meaningfully assess compliance…”). 117 See note 59 (chapter 2). 118 Similarly in relation to international law, Alexander, K., 2000, “The Role of Soft Law in the Legalization of International Banking Supervision: A Conceptual Approach,” ESRC Centre for Business Research, University of Cambridge, Working Paper No. 168, p. 6 (“Precision is especially important in international law because

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At first sight, it appears that a change in form cannot change the “precision.” However, we should appreciate that there are two levels of “precision” to consider in relation to SCCs. The first level is the precision of a specific contractual provision, i.e., the SCC. In the event that sustainability requirements are incorporated into a contract as an express provision,119 that provision will be the only place where language “precision” is assessed. In such a case, regardless of whether the provision is drafted by the relevant company or if the provision copy-pastes the text of a particular CSR regulation, the contractual form does not change the level of language specificity and, thus, does not add to (or reduce) the level of legalization. A second level is added if sustainability requirements are incorporated into contracts by reference to another document. In such case, we have to look at the “precision” of both the provision containing the reference and the referred document itself, their combination, and the final outcome. Let us outline the possible situations using the dichotomy of precise/vague language.120 Firstly, we may have situations where both an SCC and an incorporated document are precise. This seems to be the least frequent situation. BT Group Plc. General Conditions incorporating BT’s anti-corruption and bribery policies are one of the examples.121 Both are drafted in rather specific language, and the specificity does not change through implementation of the policies into the contract. The legalization thus occurs through the “obligation” dimension, as the “precision” seems already to be at the hard law end of the spectrum. The second possibility is that an SCC is precise, but the incorporated document is vague. The General conditions of purchase of Danone S.A. are a perfect example here.122 In Article 18 (“Sustainability Principles”), suppliers are strictly requested to comply with three documents on sustainability principles that form attachments to the conditions under the sanction of immediate termination. In order to ensure continuous implementation, suppliers must register on the SEDEX platform123 and agree to permanent monitoring and, thus, the unlimited access of Danone to their premises. The article uses clear and unambiguous language. However, the three documents on sustainability principles are only vague. For example, they state that suppliers must ensure that their “employees receive a decent wage, as compared to standard pay practices in their country.”124 There is no

119 120 121 122 123 124

of the relative absence of courts or similar devices for applying and clarifying broad legal principles”); or Abbott et al., note 59 (chapter 2), p. 414. Supra subsection 7.1.1. The dichotomy is considered here for explanatory reasons only. Otherwise, this book and especially this section work with the idea of a continuum, in which “precise” and “vague” are the two opposite ends. BT group Plc., GENERAL CONDITIONS (Version 10 – July 2012), www.selling2bt.bt.com/Downloads/gc_v10.pdf (last accessed 13/7/2014). www.danoneproveedores.com/des_pdp_por/exportToPdf.do (last accessed 21/7/2013). www.danoneproveedores.com/des_pdp_por/sedex.do (last accessed 21/7/2013). Danone General conditions of purchase, Annex 1, Article 7 – PAY.

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explanation provided as to what is considered “decent” or how “standard pay practices” should be determined. The strict and clear contractual provision does not make the language of the incorporated substantive rules less vague (although it does strengthen the level of legalization through a clear “obligation”). The broadly formulated principles leave too much space for interpretation to assess whether they are complied with or not. Overall, the conclusion has to be that the specific contractual term does not remedy the vagueness of the substantive rules. The third scenario is that an SCC is vague, while the incorporated document is precise. We can look at the documents of HP for an example.125 The HP CSR Agreement only states in vague terms that HP and a supplier will cooperate in order to achieve goals stipulated in the General Specification for the Environment (and Suppliers Code of Conduct). The General Specification for the Environment stipulates requirements regarding the environmental performance of HP’s suppliers in terms of highly precise language. The combination of the precise rules and vague incorporation into a contract may be a little confusing and pose questions regarding the enforceability of both documents. With the “obligation” in the contract appearing to be rather low, the “precision” of the incorporated document does not have the expected effect of increasing legalization. Therefore, we could argue that vague language in a contract can disarm precise rules of incorporated regulatory tools and, thus, hinder the legalization effects of those tools. Finally, there are cases where both an SCC and the incorporated documents are vague. An example is the Verizon Australia Supply Agreement and the therein incorporated Suppliers Code of Conduct.126 As concluded in subsection 8.1.1, the “obligation” dimension of the Code is strengthened through its inclusion in the Supply Agreement by signaling the seriousness of the issue and other consequences of the formalization. However, this does not seem to be the case with regard to “precision.” The Suppliers Code of Conduct mainly consists of general provisions that are similar to standards. For example, in the health and safety area, it states that “…(e) very supplier shall be committed to the safety and health of its employees…,” “… supplier should have or subscribe to a written safety and health program…,” and “(s) uppliers are responsible for addressing and controlling worker exposure to potential safety hazards in conformance with all applicable standards and/or regulations and by utilizing suitable means.” The Code does not elaborate on the terms used, such as “committed” or “suitable means,” and the contractual form does not rectify this vagueness. On the contrary, by using imprecise and general language itself, the contractual provision could even undermine what would be considered the more precise parts of the Code (similarly to the previous example).

125 See example 2 in supra section 3. 126 See note 31 (chapter 7).

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Overall, it seems that the “precision” and “obligation” dimensions of SCCs are highly interconnected. For this reason, some authors argue that “precision” should be abandoned as a separate dimension of legalization. It has been shown that in scholarship that “precision” is considered the least important dimension of legalization as it is already captured by “obligation” and some authors are even of the opinion that precision may impede legalization.127 To answer the question of whether the contractual form legalizes through “precision” soft CSR regulation, we may basically say that the contractual form does not enhance “precision” in the same way as in relation to “obligation.” This conclusion does not, however, downplay the importance of specific wording in SCC and the CSR regulation. What this section shows is that the vagueness of regulation cannot be remedied through a mere change of legal form and on the contrary that a vague contractual provision may impede the effects of high “precision” of incorporated regulation.

8.3

Delegation

The third dimension of legalization described by Abbott et al. is “delegation,”128 which means that “third parties have been granted authority to implement, interpret, and apply the rules; to resolve disputes; and (possibly) to make further rules.”129 It is this dimension that raises the most concerns in relation to transnational CSR regulation, as national and international courts generally do not have the jurisdiction to decide disputes in this area and there is no executive power to overview compliance. This lack of verifiable reporting, monitoring, and enforcement systems, together with the unclear legitimacy, undermines the effectiveness of CSR regulation.130 Regarding the monitoring phase,131 emerging mandatory CSR reporting schemes do not prescribe what CSR activities companies should perform, but only require companies to inform the authorities of the measures they adopt or, in the event that they do not take

127 Bélanger and Fontaine-Skronski, supra note 1, pp. 251–252 (discussing the opinions that precision does not change the legal quality of a commitment and the situation when higher precision may lead to actually creating loopholes for law-avoiding strategies). 128 Delegation has been found to be the least contested dimension of legalization in the existing scholarship; see Bélanger and Fontaine-Skronski, supra note 1, p. 253. 129 Supra note 9. 130 Lambooy, note 33 (chapter 1), p. 256; De Jonge, note 5 (chapter 1), p. 72. 131 Abbott et al., note 59 (chapter 2), p. 416, distinguish between two parts of delegation: a) dispute resolution and b) rule making and implementation. In relation to CSR regulation, I similarly speak about a) the enforcement phase and b) the implementation and monitoring phase. However, as some authors point out, delegation remains much more closely related to adjudication; see Bélanger and Fontaine-Skronski, supra note 5, p. 253.

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CSR into consideration within their operations and internal policies, to explain why.132 Moreover, as CSR performance is not easily quantifiable,133 verification of the reported results and benchmarking thereof is rather complex (if possible at all), and, therefore, the procedures are not well established.134 Many of the public and hybrid forms of soft CSR regulation then do not provide for any monitoring and enforcement systems at all.135 Finally, soft transnational private regulations provide for compliance monitoring in the form of CSR audits performed by the companies themselves or by third-party auditors, similarly to the situation described in subsection 7.4.1 in relation to SCCs. The fact that there is neither a connection to the public authorities nor a formal enforcement power in relation to the auditors results in doubtful quality and effectiveness of such audits.136 Moreover, CSR soft regulations are not subject to review by the courts, which could lead to the critique of window dressing.137 Overall, the legalization dimension of “delegation” is significantly weakened in the case of transnational CSR regulations. The question is whether this deficiency can be cured by using contracts. In the implementation and monitoring phases, the contractual form does not greatly assist the “delegation” dimension. As parts of private contracts, SCCs are (or should be) implemented and monitored by the contractual parties. Although the contractual parties may assign this task to a third party (e.g., an external auditor or an industrial association),138 this does not mean that the “delegation” is strengthened, because the third party acts as the representative of one or the other party and, therefore, is not an independent entity.139 Moreover, third-party implementation and monitoring subjects are most often chosen by the buyer, to whom they also answer. This deficit is to a certain extent remedied in the event that implementation and monitoring authority is delegated to an industrial or similar association or a certification body,140 as they generally act independently from the contractual parties. However, even if an implementation and monitoring subject is selected in 132 An example is the Danish legislation on CSR reporting, note 54 (chapter 2), or the Californian Supply Chain Transparency Act, note 148 (chapter 6). 133 There are some aspects of CSR that may be measured and where a common methodology is established or is emerging, such as CO2 emissions or the number of fatal accidents at workplace. 134 Szabo, D. G., Mandatory Corporate Social Responsibility reporting in the EU, PhD thesis, Aarhus University, forthcoming. 135 For example, the UNGC; UN Norms and Guiding Principles; ISO 26000; EU Renewed CSR Strategy. The OECD Guidelines are an exception, establishing NCPs, which nevertheless have no formal powers, meaning that their decisions are not formally enforceable. 136 For a critical view on social audits, see Owen, D. L., Swift, T. A., Humphrey, C., and Bowerman, M., 2000, “The new social audits: Accountability, managerial capture or the agenda of social champions?,” European Accounting Review, 9(1), 81–98. 137 Compare to Abbott and Snidal, note 52 (chapter 2), p. 422 (noting that legal realists focusing on the absence of independent judiciary consider all soft international regulation as window dressing). 138 See supra subsection 7.4.1 on monitoring. 139 See, e.g., BT Group Plc., Generic Standard 18 Sourcing with Human Dignity, p. 3 (“BT’s suppliers should: ò provide BT or its representatives with reasonable access to all relevant information and premises…”). 140 Note that certification systems are outside of the scope of this book.

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agreement of both contractual parties or is an independent entity, it usually does not have the authority to carry through enforcement of its findings in a binding manner.141 With regard to the enforcement phase, by taking the form of a contract, the “delegation” is hardened as SCCs become subjected to the underlying law of contract. Thus, at least theoretically, their enforcement can be carried out through courts or arbitral tribunals that have the jurisdiction to decide over international contractual disputes while applying the established international contract law.142 However, enforcement of the clauses depends on the contractual parties, meaning that only contractual parties can seek enforcement.143 If they do not, then third parties, who are often directly adversely affected, are left with no means to protect their rights and secure positive results for SCCs. Moreover, as described in subsection 7.4.2, international contract law may not be suitable to enforce social and environmental requirements, as the available remedies may not correspond to the underlying purpose of the CSR policies and there are unlikely to be remedies for all affected subjects. Nevertheless, the fact that there is rarely enforcement through formal proceedings does not erase the existing possibility. Furthermore, the fact that contract law remedies may not be ideal does not change the fact that a court could sanction non-compliance. Given the foregoing, the conclusion must be that even the theoretical possibility of seeking formal enforcement strengthens the “delegation” dimension of soft CSR regulation considerably, since it formally transfers the right to interpret SCCs and resolve any disputes to independent parties (courts) that interpret and apply international contract law. Thus, in theory, it is the enforcement part of the “delegation” dimension where the contractual form legalizes transnational CSR regulation the most as it moves the regulation from the soft to the hard end of the legalization spectrum. However, the practice significantly differs from the theory.144

8.4

Conclusion on legalization of CSR/hardening soft CSR regulation

The low legalization of transnational CSR regulations may improve in the future, but it currently leads to their perception as merely voluntary regimes with questionable democratic foundation and control and without standardized effective enforcement. This chapter has shown that contracts can be one of the ways to overcome to a certain extent

141 Compare to Abbott et al., note 59 (chapter 2), p. 415 (“Dispute settlement mechanisms are most highly legalized when the parties agree to binding third-party decisions on the basis of clear and applicable rules”). 142 For an overview of contract enforcement mechanisms, see Trebilcock and Leng, supra note 248 (chapter 7). For an overview of SCCs’ enforcement mechanisms, see Lin, note 17 (chapter 1), p. 723 et seq. The applicability of the CISG on SCCs is analyzed in Schwenzer and Leisinger, note 6 (chapter 1), pp. 249–275, and Schlechtriem, note 13 (chapter 5). 143 External parties may use indirect methods of enforcement. See supra subsection 7.3.1. 144 See supra subsection 7.4.2.1.

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the deficiencies of CSR regulations, meaning their unclear level of obligation, vague language, and missing reliable monitoring and enforcement rules. However, not all three dimensions are legalized equally. While there is almost certainly a legalizing effect in the “obligation” dimension and a clear legalizing effect in the “delegation” dimension, the “precision” dimension does not change much. I am of the opinion that the most significant is the legalization of “obligation” through outlined social and psychological processes, as it represents a non-intrusive way of changing suppliers’ behavior. Regarding the legalization of “delegation,” it must be concluded that it is used to support the obligation dimension rather than practically assigning courts the authority to decide over non-compliance. Generally, contracts may in practice only harden one dimension (e.g., delegation) but may leave an unclear level of precision or even obligation. Thus, the actual hardening effect may sometimes be overestimated. This conclusion moves the discussion to the question of how the legalization effects of SCCs relate to their potential in achieving sustainable development goals and, thus, to the next chapter. That chapter puts together the findings of the previous chapters to evaluate the effectiveness of SCCs.

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The previous chapter identified what effects SCCs have at regulatory level in terms of hardening soft CSR regulations as well as their effects on suppliers’ CSR behavior. The legalization process was chosen as the most comprehensive theoretical approach to describe the effects. This chapter ties together findings from the previous chapters to assess the effectiveness of SCCs as a transnational form of regulation and illustrate how the effectiveness can be enhanced.1 All of the foregoing analysis (covering the regulation of and regulation through SCCs, as well as the discussion on the theoretical foundations of SCCs) points towards four important aspects of SCCs that should be present in order for the clauses to have the possibility of inducing positive effects on sustainable development goals and, thus, to be an effective form of transnational regulation of sustainability. The four aspects are a form of contractual commitment, precise language, a relational basis, and a complete monitoring and enforcement (implementation) system. These four aspects correspond to the regime attributes in the Getz international regime effectiveness model, which is (as suggested in the methodological section 2.3) therefore chosen as a framework for evaluating the SCCs’ effectiveness.2 The model describes the effectiveness of international regulation systems by building a causal relationship between the tractability of the regulated issue and the effectiveness, which can be influenced through the way the specific regulation is drafted. In the model, the tractability of the problem is a stable (working as an independent) variable that is determined by four aspects: causal explanation, behavioral diversity, behavioral

1 2

Effectiveness is for the purpose of this book defined as the ability to induce suppliers’ performance in accordance with the sustainable development goal; see supra subsection 1.3.5. Getz, note 120 (chapter 2), p. 258. It should also be said here that the application of the Getz model on SCCs has some severe limitations as it ignores other regulations in the social and environmental area and the effects SCCs may have on them. In the situation where governmental transnational regulation is inadequate or basically absent, SCCs seem to induce positive changes in suppliers’ behavior that resonate with the sustainable development goals. However, this does not mean that they are the optimal solution to the problem or that they may even not hinder other better regulatory solution (see Vandenbergh, note 36 (chapter 2), p. 50, stating that private governance “… may succeed without solving the problem or being the optimal solution”). As noted earlier, contract strategies may provide a false perception that the social and environmental problems have been taken care of, which may deter the adoption of public regulation (note 62 (chapter 4)). Public regulation could theoretically be more effective, i.e., cause bigger change in suppliers’ behavior, as it could be authoritatively enforced. However, such a discussion falls outside the scope of this book since the effectiveness measure used here is confined to the occurrence of any positive change in suppliers’ behavior and does not consider a comparative analysis with other regulatory means.

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* Getz, note 120 (chapter 2), p. 258

For the purpose of assessing SCCs’ effectiveness, the model has been adjusted by the author to reflect the characteristic features of SCCs and the analysis conducted in previous chapters. Generally, the independent variables remain the same, but the dependent variables are slightly amended or, better said, fleshed out. The clarity of objective category is divided into two more specific attributes: clarity of commitment and clarity of requirements. Allocation of resources is narrowed down to relational assistance to suppliers. And finally, the balanced implementation system is limited to a complete monitoring and enforcement 3 4

All the aspects of the model are further described below. Although the terms “independent variable,” “dependent variable,” and “moderating variables” are primarily used within experimental designs, the Getz model uses them to suggest the causal relationship between effectiveness and a regime’s attributes. For definitions of the terms, see, e.g., www.indiana.edu/∼educy520/sec5982/week_2/variable_types.pdf (last accessed 26/8/2013): Independent variable: The presumed cause in an experimental study. Dependent variable: The presumed effect in an experimental study. The values of the dependent variable depend upon another variable, the independent variable. Moderating variable: A variable that influences, or moderates, the relation between two other variables and thus produces an interaction effect.

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system. The amended model is illustrated below and discussed immediately after (Figure 9.2). Figure 9.2 Amended Getz model (amended by the author)

9.1

Tractability of suppliers’ sustainable performance

The first issue to examine when assessing the effectiveness of SCCs is the tractability of the regulated problem(s). The question is whether the problem is manageable and whether the characteristics of the problem make it possible to influence it through regulation in an intended direction. As Getz writes “(a) regime is more likely to be effective if there is a clear causal explanation of the problem it seeks to address.”5 This is based on the simple logic that if we know what causes an effect, we can regulate the cause to influence the outcome. Equally, if we do not know the cause of an effect, we do not know which behavior should be regulated. It has already been discussed above that such a causal explanation is difficult (if at all possible) to draw, as the problems governed by SCCs are complex.6 The complexity is generated not

5 6

Getz, note 120 (chapter 2), p. 270. See above between notes 115 and 118 (chapter 2).

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Sustainability Clauses in International Business Contracts only by the variety of topics covered by SCCs7 and the variability of the concurrent incentives8 and regulations that companies operate under9 but also by the variability in companies’ intentions behind their SCCs and their CSR strategies. Nevertheless, whether the motivation of a company is to achieve legal compliance, to mitigate risks connected to reputational damage or possible costly litigation, or to gain a competitive advantage, the one main underlying purpose is common, i.e., to eliminate suppliers’ unethical behavior, as this would help to achieve all the other goals. The reasons for suppliers to behave in ways that are not aligned with global CSR standards can be rooted in many different factors, including the particular topic, the suppliers’ location (i.e., the local legal, social, and economic stage of development), the power relationship with the buyer, or the legal regulation of the issue. The causes of suppliers’ unethical conduct are thus many. The complexity can be mitigated by concentrating on single topics or single locations, where we can more precisely define what causes certain behavior. However, even single topics, such as for example corruption or CO2 emission reduction, are still highly complex, and we may expect that they will not become simpler in the future, as global society is increasingly interconnected at all possible levels.10 Moreover, separating one topic from the others is likely to cause the central goal of sustainable development (against which the effectiveness is assessed here) to fragment,11 as sustainable development is by definition based on the balance between heterogeneous social, environmental, and economic aspects.12 The complexity of the causal explanation of suppliers’ unethical behavior is also reflected in the high level of behavioral diversity that SCCs try to tackle. As companies try to regulate all sorts of behavior, the effectiveness of SCCs may be lowered. Under the adjusted model of effectiveness outlined above, better results could be expected if companies were to choose only certain specific areas to regulate through SCCs. However, focusing on selected issues only may lead to unwanted spillover effects. For example, as a result of strict elimination of child labor from international supply chains, suppliers may lower the already minimal wages of their adult employees to sustain the same production costs. Thus, even though the behavioral diversity may have a negative impact on the overall effectiveness of SCCs,13 it is justified in reaching the complex sustainable development goals. The desired behavioral change, meaning the difference between suppliers’ behavior if it is not subjected to SCCs and if it is, is another aspect influencing the tractability of the problem. Therefore, SCCs are likely to be more effective with suppliers who are already on the path of CSR, as the required change in behavior is less onerous than it is for those 7 8 9 10 11 12 13

Supra subsection 7.2.1. See note 118 (chapter 2) Supra chapter 6. Getz, note 120 (chapter 2), p. 276. Supra subsection 1.3.5. Supra subsection 1.3.1. The more types of behavior that are regulated, the more non-compliance is possible.

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who have not yet embraced the CSR idea and strategy.14 Since this book primarily discusses contracts concluded between Western-based companies with suppliers from developing countries, the behavioral change is expected to be large, especially in the case of suppliers coming from risk countries. Companies are aware of these differences and often address them in their CSR strategies and supply chain management by conducting more monitoring and enforcement activities in the risk areas.15 Finally, under the Getz model, tractability is determined by the target group’s size and power. As compared to other regulatory tools, SCCs have the advantage that they are aimed at one specific addressee through one contract. Although the contract may actually communicate a general policy, such as a suppliers’ code of conduct, it is each specific contract that constitutes the actual regulatory tool. Therefore, the group size theoretically includes just one single subject. However, where the effects of SCCs are intended to exceed the bilateral agreement and affect the behavior of more distant supply chain members,16 the group size grows to include the whole supply chain. In these (common) situations, the less complex a supply chain is, the more likely it is that SCCs will be effective. Complex supply chains cannot be effectively monitored and thus raise the probability of unethical behavior occurring.17 Regarding the target group power aspect, this book deals only with the scenario of a strong buyer and a weaker supplier. Nevertheless, it is acknowledged that in practice there may be situations when an economically strong company will contract with a supplier that is theoretically economically weaker, but the latter is in some way crucial for the manufacturing of a particular product or its components. In such a case, the power balance may change the effectiveness radically. In the light of the above, it has to be concluded that suppliers’ CSR behavior is a fairly intractable problem. The most problematic aspect is the complexity of a causal explanation, which obscures the possible causes of unethical behavior to be influenced. As the independent variables of SCCs are not optimal for enhancing the clauses’ effectiveness, greater focus should instead be devoted to the moderator variables, as they are more manageable.18

14 Getz, note 120 (chapter 2), p. 260. 15 See, e.g., Telefónica S. A., 2011 Corporate Sustainability Report, Together transformingàdevelopment, www.telefonica.com/en/about_telefonica/pdf/informes/2011/informe_rc2011_eng.pdf (last accessed 13/7/2014), pp. 63 et seq. 16 Supra subsection 7.3.2. 17 Cf. to note 58 (chapter 7). 18 Getz, note 120 (chapter 2), p. 276.

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9.2

SCCs’ attributes moderating effectiveness

Under the Getz model, the first attribute of a regulation that can be influenced to enhance effectiveness is the clarity of its objectives. In relation to SCCs, two different types of objectives are relevant in this context: the clarity of contractual commitment, meaning clarity with regard to the binding nature of sustainable requirements, and the clarity of requirements, meaning whether the substantive rules are expressed in unambiguous terms. As the discussions on the form of SCCs and the obligation dimension of legalization showed, a contractual form for a CSR commitment triggers legal and behavioral processes that enhance suppliers’ compliance and, thus, the effectiveness of SCCs.19 From a legal point of view, the contractual form is a precondition for the application of default contract law rules, such as provisions on remedies in the event of suppliers’ non-compliance. Although buyers do not often resort to actually applying contract law to SCCs, the possibility of doing so strengthens their legal certainty and helps to manage their legal liability risks, and it concurrently serves a deterrence function against suppliers and thus limits their opportunism. However, in order to rely on the default contract law, buyers have to be sure that SCCs validly become a part of the contract according to international contract law.20 With regard to suppliers’ behavior, the clearer and stronger the contractual commitment is, the more positive effects we can expect in terms of the suppliers’ internalization of the requirements as well as in relation to a general change in CSR perceptions through standardization.21 Thus, clear contractual commitments enhance SCCs’ effectiveness in a number of ways. Clarity of language in relation to the actual requirements is also essential for both legal and behavioral reasons. Vague wording may prevent SCCs from having legal effects, as inherently vague provisions would not be found enforceable under international contract law.22 This can in turn prevent their perception as binding by suppliers, which can undermine the obligation dimension of legalization.23 From a practical point of view, clearly defined objectives make it possible for the addressees to evaluate what behavior constitutes compliance and what does not. Moreover, as has been argued in other fields, clearly defined goals increase the cooperation of the involved subjects.24 Therefore, unambiguous CSR requirements may support the involvement of contractual parties and their cooperation, including information and resource sharing, in the effort to achieve suppliers’ sustainable performance. 19 20 21 22 23 24

Supra sections 7.1 and 8. If the parties do not select other governing law. Supra subsections 8.1.1 and 8.1.2. Supra subsection 7.2.4. Supra section 8.2. Mitkidis, P., Sörensen, J., Nielbo, K. L., Andersen, M., Lienard, P., 2013, “Collective-Goal Ascription Increases Cooperation in Humans,” PLoS ONE, 8(5).

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The second attribute that is likely to influence the effectiveness of a regulation is the allocation of resources for its implementation. Supply chain sustainability efforts are costly.25 Furthermore, resources are necessary on both sides – the buyer’s and the supplier’s – to reach the goals of SCCs.26 Buyers have to adjust internal processes, allocate workforce to implement and supervise the CSR supply chain strategy, and train their employees and internal auditors as well as their suppliers, and most of them also conduct expensive monitoring activities.27 Obviously, as more funds are allocated to the monitoring and enforcement phases, the higher the possibility that SCCs will be effective. Suppliers potentially have to change their manufacturing processes as well as their HR policies, adopt new CSR policies, and allocate responsible employees to review their implementation, train and educate their employees, and prepare for (and sometimes also fund) the compliance monitoring conducted by the buyer or third parties. A shortage of funding on either side may hinder SCCs’ effects. As this book deals with contracts between multinational Western-based firms and suppliers from developing countries, the financial shortage is more urgent on the suppliers’ side.28 Therefore, if buyers are serious about their sustainable supply chain strategies, they should be prepared to render their suppliers assistance in implementing the requirements. The assistance has taken the form of educational and training activities29 but may also include financial support. By transparent investment in the CSR activities throughout their supply chains, companies not only facilitate implementation but also strengthen the credibility of the commitment. This consequently strengthens the commitment towards the public and suppliers, leading to a higher level of legalization around the obligation dimension.30 The fourth regime attribute identified in the Getz model that affects effectiveness is a balanced implementation system. Getz speaks of the necessity of finding a balance between hierarchy and discretion in the monitoring and sanctioning phase.31 In relation to SCCs,

25 Kolk and Tulder Van, note 103 (chapter 7), p. 268. 26 Similarly with regard to codes of conduct Mamic, I., 2005, “Managing Global Supply Chain: The Sports Footwear, Apparel and Retail Sectors,” Journal of Business Ethics, 59(1), 81–100, p. 89 (“All of the MNEs and supplier factory representatives interviewed reported that who will bear the costs of training and who will bear the costs of the changes that are being required as a result of implementing the CoC (Code of Conduct), are important questions that needed to be addressed at the very start of the CoC implementation process”). 27 See note 293 (chapter 7) 28 See, e.g., Jamali, D., 2008, “A Stakeholder Approach to Corporate Social Responsibility: A Fresh Perspective into Theory and Practice,” Journal of Business Ethics, 82(1), 213–231, p. 227 (citing an interview with a manager of a Lebanese firm “… we do not have the resources to ensure that appropriate controls are in place to monitor our entire supply chain. Attention to a few key stakeholders is thus dictated by practical considerations and priorities”). However, even large companies admit that the costs of supply chain monitoring may be high and even impossible for them to afford. 29 In the empirical study, over half of the sample companies reported providing suppliers with education and training assistance; supra subsection 7.4.2.1. 30 Supra subsection 8.1.1.1. 31 Getz, note 120 (chapter 2), p. 262.

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the important balance to strike is between formal and informal monitoring and enforcement tools and strategies. It is this attribute of SCCs as regulation where governance of and governance through are intertwined to the greatest extent. Although it is the monitoring tools and informal, relational enforcement strategies that are used the most often and are considered to produce the highest level of compliance,32 it is the background possibility of formal enforcement through contract termination and a potential claim for damages that amplify or even facilitate the effectiveness of the informal means.33 The theoretical possibility of formal enforcement legalizes sustainable clauses among the delegation dimension,34 moving them from business to legal requirements and thus possibly raising their effectiveness. Thus, a balanced or full monitoring and compliance system will include a mixture of informal and formal tools, optimally mirroring the established best practice of suppliers’ self-assessment, internal and/or external auditing, corrective action plans, and potential contract termination.

9.3

SCCs’ effectiveness

In order to assess whether SCCs constitute an effective form of transnational regulation, we must observe whether suppliers’ unethical behavior has declined. It is obviously impossible to cover all existing SCCs and all buyers and suppliers using them. The variability of SCCs inevitably means that virtually every contract must be considered as a separate instance of regulation whose effectiveness can be assessed. However, the author does not intend to say that SCCs are effective or not but rather to investigate whether they have the potential to be effective and, if so, identify when and how. As was concluded above, suppliers’ ethical behavior is not a very tractable issue, which effectively means that positive results must be reached via modification of SCCs’ form, language, and monitoring and enforcement systems, including both relational implementation and formal sanctions as well as through rendering suppliers necessary assistance in the implementation phase. Throughout the discussions in this book, it has been seen that the stronger the contractual commitment, the clearer the language, the greater the relational assistance, and the more complete the monitoring and enforcement system that SCCs entail, the greater the possibility of their effectiveness is. Graph 9.1 illustrates data from the empirical study against this finding to assess the share of SCCs fulfilling the outlined attributes. However, only three of the four attributes

32 Supra subsection 7.4.2.1. 33 Supra subsections 7.4.2.2 and 7.4.2.3. 34 Supra section 8.3.

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are included in the graph: contractual commitment,35 relational assistance,36 and complete monitoring and enforcement system.37 Precision of language is omitted due to the fact that most of the investigated SCC and CSR strategies were vague or included mixed language (precise in some aspects, vague in others). If a hypothesis is formed that any document where there is at least one vague requirement is considered as vague, in most instances SCCs are not precise. The assessment would then be needed to be conducted in relation to each single provision separately. Therefore, the graph here is not complete but only suggests possible conclusions in relation to the investigated SCCs’ and CSR policies’ effectiveness. Graph 9.1 Effectiveness attributes (USA x Europe)

The graph reveals that while according to their CSR reports the sample companies’ SCCs score high in the relational assistance attribute and relatively high in terms of contractual commitment, they lag behind in monitoring and compliance system development. According to the author’s subjective conclusion, they would score even lower in terms of language precision. The difference between the relational assistance and the monitoring and enforcement systems cannot be blamed on costs, since they can both be equally 35 Companies report that SCCs are a part of a contract or signed by the supplier before entering into contract. 36 Companies report that they “cooperate” with a supplier in achieving sustainability goals, provide suppliers with education and/or training in the CSR area, and/or cooperate with them on new sustainable technology development. 37 Companies report having at least two forms of monitoring (suppliers’ self-assessment, internal auditing, external auditing) and both of the two enforcement tools (corrective action plans and contract termination) from the established best practice. Supra subsection 7.4.3.

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expensive. However, the reason may lie in the scope of the attributes. Relational assistance was found positive if a company reported cooperating with suppliers in achieving sustainability goals, provided suppliers with education and training, or cooperated with suppliers on new sustainable technology development. However, these three categories are rather heterogeneous. While cooperation in the broadest sense does not really say much about companies’ actual activities and, therefore, we cannot precisely assess whether knowledge, resource sharing, or assistance is provided, the development of new technologies is a specific activity, but this benefits both sides and cannot therefore be seen as relational assistance rendered by a buyer to a supplier. If we limit the results to the provision of education and training, the percentage drops to 51% among all the companies. Nevertheless, the results suggest interesting conclusions. Firstly, SCCs can potentially be effective transnational forms of regulation as there are some cases where all three investigated attributes are present (12 out of 55 sample companies).38 However, the fourth attribute – language precision – seems to negatively influence the SCCs’ potential, since a certain level of vagueness is present in most of the investigated documents. A significant gap can be seen between the sample European and American companies: while 33% of the European companies report including all three attributes in their SCCs (10 out of 30 sample companies), the American companies do so only in 8% (2 out of 25 sample companies). In the light of the above, it can be concluded that although suppliers’ ethical behavior is not very tractable, SCCs can be seen as effective under the amended Getz model. However, the empirical data reveal that most current SCCs are likely only to be partially effective (i.e., do not utilize their full potential), since only a fraction of them have the four attributes enhancing their effects. Nevertheless, we can conclude that SCCs may, if drafted in a specific manner, enhance suppliers’ sustainable performance and induce change where other regulations fail to do so (either because there is no public regulation thereof or because of the inherent softness of any relevant instance of private regulation). Therefore, the principal hypothesis of the presented research is supported. However, such effectiveness is not automatic, meaning that inclusion of environmental and social issues in contracts will not alone secure the results. The actual impact depends on SCCs’ attributes that can be influenced by the contractual parties, as well as the underlying public and private regulations. Therefore, companies with a strong commitment to CSR can take inspiration from these findings to focus the improvement of their supply chain strategies. For public regulators, it would be advisable to evaluate how they could support the various attributes through national and international policies and laws. As they are not able to agree on substantive

38 The scope of relational assistance does not influence the result. It is practically the same regardless of whether relational assistance covers all the three topics or education and training alone.

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rules applicable to companies that are active across borders, meta-regulatory and procedurebased rules could be a good option. This discussion brings this book to its conclusion. The final part (Part V) summarizes the research conducted and the findings of the previous chapters and outlines future prospects for companies, regulators, and research with regard to SCCs.

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Part V Final conclusions

10

Synopsis, conclusions, and future prospects

The main purpose of the research presented in this book was to study in depth the topic of SCCs as a type of transnational regulation for achieving sustainable development. This was undertaken in the first four parts of this book, which are summarized in section 10.1. The findings from the research allow conclusions to be drawn regarding the principal and the ancillary research questions, which are included in section 10.2. Finally, the author concludes with some recommendations and comments on future prospects for companies, regulators, and research in section 10.3.

10.1

Synopsis of undertaken research

In Part I, a short background to the topic was introduced to frame the research, the principal hypothesis was developed, the chosen theoretical approach was explained, and the research methods were presented. The principal hypothesis was built on five underlying assumptions: a lack of transnational governmental regulation for sustainable development, deficiencies in transnational private regulation, the growing regulatory power of multinational enterprises, a widespread use of SCCs, and enforceability of international supply contracts through the existing framework of international contract law. Against these assumptions, the principal hypothesis suggested that SCCs might be an effective form of transnational regulation in the sustainability area. The effectiveness was defined in a limited manner, in terms of having a positive effect on suppliers’ sustainable behavior. The economic and other sides of effectiveness were not considered. Throughout the following discussions, the hypothesis was upheld. The theory and method have been of particular importance for the presented research, which although based in legal theory has also reached out into other disciplines. In terms of theory, the presented research is based on new legal realism focusing on law in action and legal pluralism, recognizing a broad definition of law comprising both state-made and private-made laws of various levels of hardness/softness. The distinction between public and private and soft and hard laws appears throughout the whole text and escalates in Chapter 8 (which discusses the legalization effects of SCCs). Regarding the method, this book has combined the traditional doctrinal method, although it has been applied to nontraditional legal sources, with empirical methods of socio-legal research (interviews and

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an empirical study of corporate CSR reports). The combination of methods made it possible to draw a comprehensive picture of the studied topic. After outlining the topic and the theoretical and methodological approach, Part II then described SCCs and their differences from other contractual clauses based on their characteristic features and theories of contract. It has been found that there is a list of defining features common to the majority of SCCs regarding their form (express provisions or implementation by reference), content (protection of public, rather than private, transaction-specific interests), extension beyond bilateral relationship (effects on further tiers of the supply chain and on third parties whose interests are protected), and enforcement (mix of relational and legal monitoring and enforcement tools). Considering these features, traditional legal theories of contract appear unsuitable to explain SCCs. Thus, the author suggested that through SCCs the discreteness of contracts recedes into the background, while contracts open up in terms of relational, organizational, and, most interestingly, regulatory effects. Part II concluded with an overview of the legal scholarship concerning SCCs. The review has revealed that legal literature dealing with SCCs as the main topic is only sparse, theoretical research prevails over empirical research, and the contract law perspective is largely missing. Having established the definition and theoretical foundation of the topic, Part III contains the main legal analysis of the topic, discussing the regulation of SCCs. Divided into two chapters, it firstly describes the legal framework that SCCs operate in. The legal framework was found to be created by two major groups of regulations: international contract law, providing default rules for issues that have not been agreed upon by the contractual parties in the contract,1 and CSR regulation, prescribing the use of SCCs as one of the CSR tools. Secondly, Part III describes SCCs’ specific features based on the empirical findings and analyzes them under international contract law. The analysis showed that while contract law is relied upon as the eventual enforcement power, if applied, the law of contract would not support the enforcement of a majority of existing SCCs because they do not constitute a valid part of the contract, are too vague, and do not intend to confer a right on a third person, or the enforcement is reserved to informal means only. A conclusion drawn in relation to these findings is that each of the specific features of SCCs may be modulated within the range of complete unenforceability to clear enforceability. It is thus up to the contractual parties to decide what force they want to give to SCCs. This decision will then most probably be primarily based on how they want to use them. For example, if a buyer plans to merely inspire his suppliers to behave ethically and use this effort as a marketing tool, he may chose to impose vague business principles on

1

However, if the parties agree on the application of a domestic contracts law or if the transaction does not fall under the application rules of international contract law, then the relevant domestic law applies. Nevertheless, this possibility is excluded from the scope of this book.

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them, rather than precise contractual provisions, and rely on relational monitoring and enforcement tools. On the contrary, if a buyer under strong stakeholders’ pressure wants to ensure that his suppliers behave ethically and thereby manage risks connected with potential complicity in suppliers’ unethical behavior, he may opt for a strong contractual commitment with precise language and a highly developed monitoring and enforcement mechanism building on relational tools with the backup of formal legal sanctions. Part IV progresses with the discussion from regulation of SCCs to regulation through SCCs. The focus of the first chapter in this part is on the effects that SCCs have on other CSR rules and on suppliers’ behavior. The theory of legalization, introduced earlier, frames the discussion. It is in this chapter that the research leaves the legal area to consider other disciplines. As the author neither has a relevant educational background nor enough time to discuss these issues into details, the arguments are merely outlined, and it is suggested that they are taken up by future interdisciplinary research. Nevertheless, from the discussion on the legalization effects, it may be concluded that SCCs clearly legalize other CSR regulations in terms of the obligation and delegation dimensions, which intensifies the CSR regulations’ effects on suppliers’ ethical behavior. The second chapter in Part IV ties together the findings from the previous chapters to assess the effectiveness of SCCs in the sustainable development endeavor. Using the model developed by Getz, the effectiveness is defined by the independent variable of the tractability of the regulated problem, i.e., suppliers’ ethical behavior, and the moderator variables of the SCCs’ attributes, namely, clarity of the contractual commitment, the clarity of the language, the level of relational assistance, and the completeness of the monitoring and enforcement system. The moderator attributes basically correspond to what were defined as SCCs’ defining features. Under the effectiveness assessment, it is concluded that SCCs have the potential to be an effective regulatory means to achieve sustainable development under the current legal framework; however, in order to have such an effect, their features must consciously fulfill the defined qualities. Based on the conducted analysis, it is possible to draw conclusions regarding the principal hypothesis as well as to answer the outlined ancillary research questions. This is done in the following section.

10.2

Conclusions

Some partial conclusions in relation to the discussions above have already been presented in the relevant parts of this book. In addition to these partial conclusions, there are five major overall findings that can be derived from the conducted research. The first finding that arises from this research is that SCCs have certain characteristic features, including a focus on the protection of public interests; an irrelevance to the subject

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matter of a specific contract or the tangible quality of the supplied goods or services; longterm value orientation; an out-of-contractual relationship scope; and relational implementation, monitoring, and enforcement tools. Although each of these features can be seen in other contractual clauses as well, it is their combination and the way they are used that distinguish SCCs from most of the other contractual content. Due to these specific features, mainstream theories of contract appear unsuitable to explain SCCs as enforceable parts of business contracts. It is the relational contract theory and the regulatory approach to contractual governance that seem to explain SCCs the best. The author suggests that SCCs can be viewed as a contract within a contract, usually consisting of all three typical parts: introductory provisions, the body of the contract, and final provisions. The second finding is that SCCs operate in a legal framework constituted by two main types of law: CSR regulation and international contract law. The former promotes the use of SCCs as a CSR tool; the latter provides default rules for issues not agreed by the contractual parties and for their formal enforcement. However, as it stands the majority of current SCCs would not be formally enforceable due to their unclear contractual form, frequent vagueness, and disconnectedness from the subject matter of the contract. The two types of regulation greatly differ in their purpose. While CSR regulation expresses and protects the values of society at large, contract law aims to promote the efficiency of private exchange. The double-edged regulation reflects the double-edged purpose of SCCs. SCCs aim both to align suppliers’ behavior with the sustainable development goals and to protect the private economic interests of contractual parties. In general terms, we may say that companies participate in CSR regulation and adopt CSR policies to express and signal their values and then they incorporate them into contracts to further their interest.2 It is this multifaceted character of SCCs that complicates their comprehension by a single discipline, such as law, as well as their effective regulation. Studying only one side of these provisions may provide an incomplete picture and produce incorrect results. A normative question arises in this context, namely, whether contract law should be amended to protect not only the economic interests of private parties but also general social and environmental values. The author inclines towards a negative answer, as this change might substantially undermine the legal certainty of contractual parties to transnational transactions and could thus lead to destabilization of the global economic order. However, in order to answer the question definitively, more research needs to be done to balance the protection of values and interests in international contract law. The necessity of examining both sides of the legal framework – CSR regulation and contract law – also stems from the fact that the regulatory effects of SCCs are tightly intertwined with the contract law default rules. The regulatory effects would most probably not happen without relying on the background law, and the theoretical discussions on the 2

Cf. Abbott and Snidal, note 52 (chapter 2), p. 424.

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background law alone are disconnected from the reality of the use and effects of the clauses. Thus, the regulatory perspective on SCCs should be supported by legal analysis and vice versa. Such a combined approach is almost missing in the current literature. A majority of legal scholarship applies the governance perspective, treating contracts as a means to harden soft CSR regulation while relying on the enforceability of contracts through international contract law; however, the authors rarely discuss whether courts would in fact find SCCs enforceable. The second part of the legal scholarship then discusses some legal aspects of SCCs, such as the possibility of claiming damages, but they rarely connect the technical discussion to the extra-legal purposes and effects of SCCs. Moreover, SCCs are seldom addressed in the scholarship on CSR regulation, probably because they are considered as implementation tools rather than regulations themselves, despite their regulatory effects. The third, and major, conclusion of this book is that the principal hypothesis is supported, i.e., that SCCs have the potential to be an effective form of transnational regulation for achieving global sustainable development. Within the confines of this book (particularly in relation to the definition of effectiveness), this means that SCCs may induce improvements in the sustainability performance of suppliers from developing countries. In order to achieve such improvement, it is not, however, sufficient to include environmental and social issues into the contractual text only, since effectiveness does not equal legal enforceability. Although the possibility of formally enforcing SCCs is crucial in achieving the sustainable development goals, the actual impact of SCCs depends on many of their attributes, namely, the strength of contractual commitment, how clearly the requirements are stipulated, the relational basis of parties’ cooperation, and the monitoring and enforcement system, combining formal with informal means. These attributes can be influenced by the contractual parties as well as by the underlying public and private regulations. Depending on their modifications, these attributes can trigger the legal and behavioral processes that have the potential to enhance the effectiveness of SCCs. In the legal sphere, modification of the attributes is essential for their formal enforceability under international contract law. In a non-legal sense, the modification of these attributes may influence the sociological and psychological processes underlying compliance, such as internalization of the requirements by suppliers or creation of a general demand for SCCs through standardization. The fourth conclusion that can be drawn from this research is that not only is it important to combine regulatory and contract law perspectives on SCCs, but it also seems inevitable to take a multidisciplinary approach in order to comprehensively describe SCCs’ effects. The presented research is based in the discipline of law, but the functioning of the legal instrument of contract in the regulation of global social and environmental areas seems incomplete without discussing its economic, sociological, ethical, and psychological aspects. Due to the legal background of the author and the feasibility issues with regard to

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this project, the possible arguments are only outlined here. It would be for future multidisciplinary research to draw clearer links between the outlined arguments and the effectiveness of SCCs in achieving global sustainable development. Furthermore, the multidisciplinarity of the topic also calls for a combination of various research methods. The author has primarily employed the legal dogmatic method. In addition, it has complemented the legal research by the socio-legal empirical methods of interviews and a review of self-reported corporate information on the use of SCCs, as well as involving theoretical discussions on the border between law and other disciplines, including psychology, political science, ethics, sociology, and economics. In particular, the review of self-reported corporate information has brought an important original contribution to this book, as well as research on SCCs as such. Although working with a relatively small sample of 55 subjects, it provided an interesting insight into the practice of SCCs. In addition to the specific results pertinent to the respective SCCs’ features discussed in chapter 7, two major patterns were observed. Firstly, there is a considerable gap between the information provided by American and European companies. In general terms, European companies report in greater detail on SCCs and seem to be more involved in their monitoring and enforcement. Secondly, the study seems to resonate with previous findings from other fields that close-to-customer industries engage more in CSR activities than companies in business-to-business industries. The author tends nevertheless not to support the general explanation that the greater involvement of the close-to-customers companies into CSR is driven by marketing purposes for the following reasons. Firstly, contracts are internal corporate documents that are not generally accessible. Therefore, their use for marketing purposes seems illogical. However, one could claim that the marketing purpose is connected to reporting on the use of SCCs rather than to the SCCs themselves. Yet several companies were found not to report on using SCCs while actually having them incorporated into their general terms and conditions. Therefore, the author is of the opinion that further research is needed in order to explain why close-to-consumer industries report greater use of SCCs. Overall, the empirical studies have related the theoretical research to practice and have directed the discussions towards topics that appeared from the empirical findings to be problematic. The author is persuaded that this development should be continued, because SCCs are a typical example of law in action, and thus purely theoretical analysis could be based on false assumptions and disconnected from SCCs’ actual use. The final, fifth, conclusion that arises from the undertaken research relates to the theoretical categorization of SCCs. A question has been posed within this book as to where SCCs lie on the public/private and hard/soft law continua. At first sight, it seems that as parts of contracts enforceable through international contract law, they are at the private end of the public/private law spectrum and at the hard end of the hard/soft law spectrum. However, as already discussed, this view is not completely accurate, because SCCs protect

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public interests rather than private and may not be formally enforceable after all. Thus, as it appears from the research undertaken, SCCs do not actually lie on the two continua, but rather bridge the categories. They help us to understand and work with the new phenomena of soft and/or private CSR regulations in traditional conceptual frameworks. Hand in hand with this finding goes the thought that with contracts leading to the legalization of social and environmental issues (which are traditionally external to business transactions) through the hardening of CSR regulation and with contractual governance proliferating “in almost all sectors of societal life,” by contrast the contracts themselves are in some respects becoming de-legalized.3 Contracts intentionally include an increasing number of unenforceable provisions, which makes them less frequently subject to formal enforcement and, thus, less legalized. These five major conclusions allow us to discuss some recommendations and future prospects with regard to the use and regulation of SCCs.

10.3

Recommendations and future prospects

The findings of the undertaken research contribute to the current discussion of the development of new regulatory and governance designs to facilitate sustainable development by informing regulators and the business community about the opportunities in relation to contractual governance. This book is thus of relevance to companies, public and private regulators, as well as future researchers. Stakeholder pressure in relation to companies’ ethical behavior is constantly increasing. While some commentators predicted that CSR would recede due to the recent financial crisis, in reality the outcome was the opposite: CSR has become even stronger.4 Supply chain sustainability is a major concern for companies, as this area is difficult to manage, especially in the case of large and complex supply chains. Although empirical results, including the results in this book, have shown that the use of SCCs as one of the tools to manage supply chain sustainability is widespread, there are no general rules as to how SCCs should look or how they should be enforced. Even though there are various guidelines and best practice has developed among business community regarding supply chain sustainability, the guidelines and recommendations are often drafted in rather general terms and are not specifically concerned with the content and implementation of SCCs. Therefore, the findings of this book may firstly serve as an inspiration for companies to focus the improvement of their supply chain strategies, whether in order to achieve sustainable development goals or to better protect their own interests. Understanding 3 4

Zumbansen, note 1 (chapter 1), p. 185. Quelch, J. A., Jocz, K. E., 2009, “Can Corporate Social Responsibility Survive Recession?,” Executive Forum, Leader to Leader, http://onlinelibrary.wiley.com/doi/10.1002/ltl.340/abstract (last accessed 13/7/2014).

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when a contractual clause is actually enforceable or what extra-legal effects it may cause is essential for their successful design and use. For example, companies that take CSR very seriously may take the findings on SCCs’ characteristic features and attributes to modify their SCCs to achieve the greatest effect or the effects they wish them to have. It would appear that language vagueness and an incomplete or underdeveloped monitoring and enforcement system are the two most common deficiencies of SCCs, which may radically influence their effects. On the other hand, if a company wishes to manage financial risks associated with potential complicity in unethical behavior of its suppliers rather than to induce positive change on the suppliers’ side, it may use the findings on the third parties’ rights as well as the possibility of claiming damages to carefully draft its disclaimers in SCCs and the provisions on contractual sanctions. As was observed in one case in practice, companies may include in their contracts a provision on the suppliers’ obligation to reimburse them for marketing costs incurred as a consequence of rebuilding their good reputation if that was harmed due to suppliers’ unethical conduct. In summary, companies may use the findings in this book both for protecting public values and for protecting their private interests. It may be the job of private and public regulators to direct companies to use SCCs for the former. As was confirmed by SRSG Professor Ruggie, states retain primary responsibility for protecting social and environmental interests. However, the practical reality is that while states are able to regulate these issues in their territory (albeit not without certain difficulties), they are unable to agree on international solutions in terms of accepting binding substantive rules, despite the fact that international cooperation is necessary because the problem areas produce effects that transcend national boundaries.5 In such a situation, it could thus be easier for national governments to adopt policies, laws, and regulations supporting corporate activities such as SCCs that may have the necessary transnational reach but mean lower negotiation costs for states. Furthermore, they are probably easier for the political and business communities to accept, and while focused on corporate processes, they avoid the lowest-common-denominator problem.6 Such laws could take the form of extending the CSR reporting obligation to the usage of SCCs,7 building institutional help with enforcement by third parties, or offering assistance in drafting SCCs (e.g., through official guidelines) or even their preapproval. Consideration could also be 5 6

7

Probably the best example is the issue of climate change. While CO2 and other emissions may be produced in one country, they travel in the atmosphere and cause detrimental effects in other parts of the globe. Raustiala, K., 2000, “Compliance & effectiveness in international regulatory cooperation,” Case Western Reserve Journal of International Law, 32(3), 387–440, pp. 324–325. For example, while it is difficult to adopt rules requiring specific levels of CO2 emission reductions, it may be easier to adopt laws providing incentives to companies that implement reduction efforts into their contracts. In similar line, it has been suggested that including supply chain members into environmental disclosure would drive incorporation of environmental requirements into supply chain contracting; see Vandenbergh and Cohen, note 120 (chapter 1), p. 229.

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Synopsis, conclusions, and future prospects

given to the possibility of adopting a special regime for SCCs, as it applies for example to consumer contracts. However, more research would need to be done, especially with regard to the suitability of using contract law to protect public values. The thoughts indicated above in relation to public regulators can be similarly applied to private regulators. Transnational private regulation has over the past fifteen years developed with great speed and variability. The range of subjects involved in current CSR regulatory activity is overwhelming, and so is the range of regulatory tools and types. Despite this development, most of the regulations do not provide any rules on SCCs. They do require or recommend to companies to use them but do not provide any guidance as to how, in what form, with what content, or how they should be implemented and enforced. In the light of the findings in this book, the potential of SCCs in achieving sustainable development goals seems significant; however, their actual effects depend on the way they are drafted and used. Therefore, it feels only appropriate that private regulators should pay more attention to this tool and possibly develop more precise guidelines and rules than has hitherto been the case. Finally, this book indicates some directions for future research on the use of contracts for global social and environmental purposes, both in the traditional legal sense and, maybe more importantly, in multidisciplinary areas connecting law with sociology, psychology, and management studies. In the legal field, two directions appear to be of a special importance. Firstly, further research could investigate the suitability of amending international contract law to account for the protection of global social and environmental interests. The focus would thus be on the interface between protection of values and interests. This type of research could then extend in the abovementioned direction of studying the advisability of establishing a special contract law regime for SCCs. Secondly, and probably more importantly, legal research should examine the possibility of supporting SCCs through national laws via meta-regulation. Although similar research is conducted in relation to general CSR policies, the author believes that a narrower focus on SCCs would be beneficial. Finally, due to the feasibility of this project, SCCs have been studied separately from other CSR legal tools, such as CSR reporting or labeling. Therefore, also the effectiveness of SCCs was not compared to the effectiveness of these tools but merely to the broad group of CSR regulation. This flaw could be taken up by a future comparative study. In the multidisciplinary area, it would be advisable for legal research to join with other disciplines to study the purposes and effects of SCCs. Understanding the purposes and effects is essential for building up effective regulation of the clauses, as well as for advising companies on their use. One of the possible courses this research could take is to experimentally investigate how contractual design influences suppliers’ level of compliance. To summarize, this book may serve as inspiration for the use of SCCs by companies, their regulation by various types of laws, as well as directing future research. Within this

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project, the phenomenon of SCCs has been explored, not only through its description but also via a qualitative evaluation against the global sustainable development goals. The findings have showed possibly great potential in the use of these clauses but also revealed that there is a considerable lack of knowledge of this issue both on the practical and theoretical sides that is waiting to be picked up in future research.

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Annexes Annex no. 1

Empirical part: Exploratory study This annex contains a list of questions prepared for conducting semi-structured, openended interviews as a part of case studies of three multinational companies based in Denmark that were used to help in developing the main hypothesis. The companies were selected from the list of Business Social Compliance Initiative Danish members; therefore, it was known that they include sustainability requirements in their contracts. 1) Identification of the company and respondent’s capacity: a) Which industry do you represent? b) What is your company’s size in terms of annual revenue? c) What is your current position in the company? d) Do you source goods or services from outside Denmark? Why? e) In which regions of the world are you involved in the agreement(s) or negotiation(s)? i (Europe, North America, Central and South America, East Asia, South Asia, Middle East, Africa, Australia, others) f) Are you aware if some of you business partners are located in the countries listed by BSCI? 2) Company’s CSR strategy: a What do you understand under corporate social responsibility? b Do you have formalized CSR strategy? c Is it publicly available? d What does it consist of? e What sources influence your company’s CSR policy and why? (Internal corporate policy, intergovernmental organizations’ guidelines, other guidelines or principles, national legislation, international legislation, etc.) f Are you a member of any private CSR or sustainability initiative except for Business Social Compliance Initiative? g How do you implement BSCI into your operations? h Do you motivate or expect your suppliers to become members of BSCI? 3) Sustainability clauses: a) Do you include some CSR requirements into your contracts?

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Purpose a) Why do you include these provisions into your contracts? b) Where do you see the advantage of contracts in comparison to other CSR tools, such as codes of conducts or reporting? c) What is the level of importance for including or excluding sustainability clauses in your contracts? d) Do you expect better economic performance after implementing CSR clauses? Do you have some economic incentives to implement those? e) Do you experience better economic performance after implementing CSR clauses? Legal framework and consequences a) Do you feel obliged to include these issues into you contracts? b) Do you think that special legal rules are needed to govern SCCs? Or do you think that business self-regulation is satisfactory? Do you prefer mandatory o voluntary basis of CSR? Why? c) Do you think that companies are legitimate regulators of social and environmental concerns? d) Do you consider legal consequences of incorporation of the clauses into contracts? e) What legal consequences would you like to achieve? f) Do you reflect on the local legal environment of your business partner? Formalities a) How do you call these contractual provisions? (Corporate accountability clauses, human rights clauses, sustainability clauses, ethical standards clauses, etc.) b) Who does draft such provisions? (Legal department, CSR department, etc.) c) In what form do you include sustainability clauses into contracts? (Expressed provisions, reference, code of conduct, etc.) d) Which areas are covered in your contracts? (Health and safety protections, environmental protections, labor standards, human rights standards, etc.) e) Do you have standardized sustainability clauses, or do you amend the wording according to the type or geographical location of your business partner? Do you include these provisions also into domestic contracts? Compliance and enforcement a) Do you include penalty clauses/sanctions/other remedies for the case of breach of these clauses?

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b) c) d) e)

What is the process if some supplier breaches its CSR-related contractual obligations? Have you ever encountered a dispute over interpretation of such a clause? How did you solve the dispute? What was the result? How does your company assess or evaluate the compliance of your contractual partners with the sustainability clauses? f) How do you proceed if a breach is discovered? g) Would you consider suing your business partner for breaching a sustainability clause? 4) Problematic issues: a) Are you satisfied with the outcomes of the clauses? b) Do you think the purpose is fulfilled? c) Do you think that your company gains economic or other benefits from using these clauses? d) Do you believe that if you did not have these issues covered in your contracts, consumers would buy fewer goods and investors would be less interested into your company? e) Do you encounter some problems when using sustainability clauses (e.g., relationship with the third-party auditor, costs, monitoring of further tiers in the supply chain, etc.)?

Annex no. 2

Empirical part: Law in action This annex contains coding instruction for the content analysis of sustainability reports of 55 companies from the 2012 Fortune 500 Global and the list of the sample companies. Codebook

Introduction This codebook provides the coding instructions for examination of companies’ sustainability reports in regard to social and environmental provisions in international supply chain contracts.

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Study: The studied companies are selected from the 2012 Fortune 500 Global list (http://money.cnn.com/magazines/fortune/global500/2012/full_list/) and represent the 55 biggest companies based on the revenues from the following sectors (according to their primary type of business): telecommunications, chemicals, metals, airlines, pharmaceuticals, aerospace and defense, and beverages and food & consumer products. The examined reports are all publicly available on www.corporateregister.com or GRI database http://database.globalreporting.org/search or companies’ home websites. The complete list of studied companies and their reports (including identification of their availability) are noted in a separate document included as annex no. 1 hereto.

Coding instructions The variables of interest are identified below. The variables are divided in three categories: (i) information on the company and report, (ii) information on CSR in the supply chain, and (iii) information concerning individual sustainability requirements. The general information on company and reports can be found on www.corporatergister.com website when entering the name of the company in the search field and clicking on the report. The values are entered into the data sheet in words or actual numbers for variable identified below as “W.” The values are encoded for the variables identified below as “N,” where “1” means that the answer to the specific question is positive (“yes”) or that this information is provided in the report and “0” means that the answer to the specific question is negative (“no”) or that this information is not provided in the report. The questions to the variables should be answered and the data sheet should be filled based on the text of the report only (and eventually the text of a corporate policy in case where variable “Corp. pol. avail.” is positive) and all other information, especially information on companies’ website, should be disregarded, unless the report has the form of an interactive website or the report directly refers to the specific part of corporate website. Example for variable “HR”: The instructions are as follows: HR (N)

Does the company impose any requirements regarding human rights as a part of its sustainability requirements on its suppliers (or business partners or contractors)? Enter “1” for yes; enter “0” for no. Human rights requirements may include obligations related to, e.g., freedom of speech, freedom of association, gender equality, or compliance with HR laws and standards (incl. UN GC).

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In case the report provides information that the company imposes such obligations on its suppliers, the registered value should be “1.” In case that the report is silent on this issue, the registered value should be “0.” In case that the report is silent on this issue, however, the company’s website states that the company imposes such obligation on its suppliers, the website should be disregarded, and the registered value should be “0.” In case the report does not provide any specific information, but refers the reader to find more information on a specific company’s website (e.g., www.company.sustainability.com), and the referred website states that the company imposes such obligation on its suppliers, the registered value should be “1.”

Company and report Company

The name of the company issuing the report (caution –

(W)

sometimes reports are issued for a group of companies, necessary to distinguish).

Country (W)

The country where the company is seated/registered.

Industry (W)

The branch of industry of the company’s main activities, according to the SIC codes for US companies or companies listed in the US and NACE codes for companies seated in the EU. SIC codes: http://www.sec.gov/info/edgar/siccodes.htm, NACE codes: http://ec.europa.eu/eurostat/ramon/nomenclatures/index.cfm?TargetUrl=LST_NOM_DTL& StrNom=NACE_REV2& StrLanguageCode=EN& IntPcKey=& StrLayoutCode=HIERARCHIC.

Report (N)

Does the company issue regularly a sustainability/ CSR/corporate citizen or similar report? Enter “1” for yes; enter “0” for no.

Pub. date

Date of the report’s publication. Enter the most complete

(W)

date available. Format: DD/MM/YY, MM/YY, YYYY.

Year (W)

Time period included in the report. Usually the report is issued for a calendar or fiscal year. Format: “C YYYY” for calendar year (e.g., C 2011) and “F YYYY” for fiscal year. If other reporting period, explain in words. If only year provided without information if it is fiscal or calendar year, register the year in “U YYYY” format.

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Audit (N)

Was the report, at least partly, audited, verified, or certified by an external/third party? Enter “1” for yes; enter “0” for no. The information can be found on www.corporateregister .com or, usually, at the very end of the report.

UN GC (N)

Was the report, at least partly, prepared according to the United Nation Global Compact reporting guidelines? Enter “1” for yes; enter “0” for no. The information can be found on www.corporateregister.com or within the report (usually in the introductory part of the report).

GRI (N)

Was the report, at least partly, prepared according to the Global Reporting Initiative guidelines? Enter “1” for yes; enter “0” for no. The information can be found on www.corporateregister.com or within the report (usually in the introductory part of the report).

Acc. stand.

Was the report prepared using any accounting or reporting

(N)

standards other than UN GC guidelines or GRI guidelines? Enter “1” for yes; enter “0” for no. The information can be found on www.corporateregister.com or within the report (usually in the introductory part of the report).

CSR in supply

Does the report include any information regarding com-

chain SC (N)

pany’s supply chain (SC)? Enter “1” for yes; enter “0” for no. The information may be provided anywhere within the report. The language used to describe supply chain will usually include some of the following terms: supply chain, value chain, supplier(s), business partner(s), contractor(s), SCM (supply chain management), and GSCM (green supply chain management).

Spec Sec (N)

Does the report include special section/part/chapter/subsection/subchapter regarding supply chain or relationships with suppliers (or business partners)? Enter “1” for yes; enter “0” for no. In the majority of the reports, the answer can be found in the table of content, otherwise going through the headings/titles used in the report.

Other Sec

Does the report include information on obligations of supply

(N)

chain or suppliers in other part than a specific part related to the suppliers? Enter “1” for yes; enter “0” for no. Sometimes, the report will deal with suppliers’ relationships also in special sections, e.g., concerning environment or corruption.

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Reason (N)

Does the report include any language explaining why does the company include its supply chain in its report or why does it engage with its supply chain in relation to sustainability? Enter “1” for yes; enter “0” for no. This kind of information can be usually found in the introductory part or in the introduction to the special section on suppliers’ relationship.

Reas. spec.

If the answer to the previous question was yes (“1”), provide

(W)

brief information on the character of the reason. If the previous answer was no (“0”), register “n/a.”

Sust. req. (N)

Does the company impose any sustainability- or CSR-related requirements (hereinafter “sustainability requirements”) on its suppliers? Enter “1” for yes; enter “0” for no. Sustainability and CSR (corporate social responsibility) areas include large number of issues, but for this study the scope of the issues is limited to environmental protection (incl. CO2 emissions), labor conditions, human rights (incl. personal data protection), and corruption. This information may be found anywhere within the report (most probably in the suppliers’ special section if included). The language used to describe sustainability and CSR requirements will usually include some of the following terms: expect/request/work with/audit suppliers, include in contracts, and choose suppliers based on green/sustainable/responsible policy/criteria. This variable is very wide, and “1” should be registered for any kind of sustainable requirement detected in relation to supply chains. If the answer to this question is negative (“0”), answer the following question (“Contr. Fut.”), then skip the rest of the questions, and move on to the next report.

Sust. req. fut

Does the company plan to implement or improve implemen-

(N)

tation of sustainability requirements in the future? Enter “1” for yes; enter “0” for no. The language in this respect may include expressions like “keep improving,” “priority,” “will/plan work with our suppliers on,” and similar.

Contracts (N)

Does the company include any sustainability requirement(s) in any contracts with its suppliers? Enter “1” for yes; enter “0” for no. The question aims to detect sustainability requirements in purely contractual relationships in supply chains; thus, the word “contract,” “agreement,” or “contractual” must be present.

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Contr. fut

Does the company plan to implement or improve implemen-

(N)

tation of sustainability requirements in its supply contracts in the future? Enter “1” for yes; enter “0” for no.

Contr. expl.

Briefly state what is the relationship between sustainability

(W)

requirements and company’s business contracts.

Contr. exam.

Is an example of contractual text available? Enter “1” for

(N)

yes; enter “0” for no. Such a text may be an actual contract, standard terms and conditions, or a master contract.

Corp. pol.

Does the report refer to any internal company’s document

(N)

or policy regarding sustainability requirements in its supply chain? Enter “1” for yes; enter “0” for no. Such internal documents may include, e.g., code of conduct, purchasing requirement, purchasing guidelines, suppliers’ sustainability requirements, or sustainability policy.

Corp. pol.

In case that the answer to the previous question is positive

spec. (W)

(“1”), list the referred corporate policies by the name as they are referred to.

Corp. pol.

In case the answer to the corp. pol. question is positive (“1”),

avail. (N)

try to retrieve the referred document using the reference in the report or from the company’s website. If the policy is available, enter “1” in the data sheet. If the policy is not accessible, enter “0” in the data sheet. If the report/website refers to more than one policy, all of them should be retrievable, i.e., enter “0” in case that any of the policies is not accessible. If the policy is available, the policy should be understood as a part of the report for answering of the following questions, i.e., when scoring the content of the report, the corporate policy should be read as its integral part.

Coll. stand.

Does the report refer in relation to sustainability require-

(N)

ments to any collective standards concerning sustainability or CSR in supply chains? Enter “1” for yes; enter “0” for no. Such collective standards may include, e.g., industrial codes of conduct, environmental management system schemes, ISO standards, labeling schemes, UN Global Compact, OECD Guidelines for Multinational Enterprises, UN Norms on the Responsibilities of Transnational Corporations, and other business enterprises with regard to Human Rights or various business initiatives.

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Coll. stand.

In case that the answer to the previous question is positive

spec. (W)

(“1”), list the referred collective standards by the name as they are referred to.

2

nd

tier (N)

Does the report contain any information regarding company’s second-tier (and beyond) suppliers in relation to sustainability requirement? Enter “1” for yes; enter “0” for no. Suppliers of second tier and beyond are often referred to as sub-suppliers, subcontractors, indirect suppliers/contractors, and second-tier (third tier, fourth tier, etc.) suppliers/contractors. If the answer to the previous question is negative (“0”), skip the following 2 questions.

Tier req. (N)

Does the company request their suppliers to impose sustainability requirements on the sub-suppliers and beyond? Enter “1” for yes; enter “0” for no.

Tier rec. (N)

Does the company recommend their suppliers to impose sustainability requirements on the sub-suppliers and beyond? Enter “1” for yes; enter “0” for no.

Tier vague

Enter “1” if the company refers to sub-suppliers and beyond;

(N)

however, it is not possible to classify it as a requirement or recommendation. Enter “0” if the reference to sub-suppliers was classified as requirement or recommendation or where there is no such reference.

Tier assess

Does the company conduct any kind of assessment of its

(N)

sub-suppliers’ compliance with the sustainability requirements? Enter “1” for yes; enter “0” for no. In case the company requests its sub-suppliers’ compliance with the sustainability requirements, it may also reserve the right to audit them or to request their self-assessment even though it does not have a direct contractual relationship with them.

Expl. (W)

In case that the “tier vague” has a positive answer (“1”), explain why.

Enf. (N)

Does the report provide information on any type of private monitoring and enforcement of sustainability requirements? Enter “1” for yes; enter “0” for no. This information is usually provided in immediate connection to the information on existence of any sustainability requirements. It may include various types of suppliers’ self-assessment, recovery or progress action plans, internal and external audits, or contract termi-

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nation. Sometimes, the report summarizes the numbers in a separate table. Enf. proced

Does the company have an established procedure for case

(N)

of supplier’s non-compliance with a sustainable requirement? Enter “1” for yes; enter “0” for no. If the report describes the steps to be taken by a company in a case of supplier’s non-compliance, the answer to this question will be positive. If it refers to any enforcement mechanism separately in an unstructured way, the answer will be negative. General guidance can be that an established enforcement procedure covers 4–5 of the following monitoring and enforcement tools: self-assessment, internal audit, external audit, corrective action plan, and termination.

Self-assess.

Are the suppliers required to provide self-assessment of or

(N)

report to the company on their compliance with any sustainability requirement? Enter “1” for yes; enter “0” for no. The language used in this context may include, e.g., requirements to regularly report on or evaluate progress, report on any concerns in regard to sustainability requirements, or fill in forms specified by the company.

Int. audit (N)

Does the company audit suppliers’ compliance with any sustainability requirements? Enter “1” for yes; enter “0” for no. It is not important if the audits are regular or announced; both regular and irregular, announced and not announced audits are relevant. The language used in this context may include the following terms: audits/checks/inspections/control by the company/company representative. The answer is also positive if the report states that compliance is audited but is not specific if it is conducted by company itself or third parties.

Ext. audit (N)

Does the company employ an external party to audit suppliers’ compliance with any sustainability requirements? Enter “1” for yes; enter “0” for no. It is not important if the audits are regular or announced; both regular and irregular, announced and not announced audits are relevant. The language used in this context may include the following terms: audits/checks/inspections/control/verification/certification by an external party/auditor/accountant company/third party appointed by the company.

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Act. plan (N)

Does the party provide suppliers who do not comply with any sustainability requirement with the possibility to recover the compliance through an action plan? Enter “1” for yes; enter “0” for no. Often when a non-compliance with the sustainability requirements is discovered, suppliers are given the opportunity to correct or improve their performance according to a plan (usually time limited and supervised by the company) designed by themselves or by the company. Both actions plans defined by suppliers themselves and plans imposed by the company are of interest. The language used in this context may include the following terms: corrective action/plan, action/progress/development plan.

Term. (N)

Does the company reserve the right to terminate the contract with its supplier in case of non-compliance with any sustainability requirements? Enter “1” for yes; enter “0” for no. The language used in this context may include the following terms: termination/interruption/discontinuance of contractual/business relationship. In case the answer to this question is negative “0,” skip the following question.

Term. No.

If the report provides information on how many con-

(W)

tracts/contractual relationships with its suppliers did the company terminate due to any non-compliance with the sustainability requirements, enter the given number.

Non-compl.

Does the company provide information on the number of

(N)

non-compliance with sustainability requirements discovered? If yes, enter the provided number; if no, enter “n/a.”

Severe non-

Does the company provide information on how many from

compl. (N)

discovered non-compliances were considered as “severe”?

Compl.rev.

Does the company reward positively suppliers for their

(N)

compliance with sustainability requirements? Enter “1” for

If yes, enter the provided number; if no, enter “n/a.”

yes; enter “0” for no. A reward may have a form of a CSR or sustainability award or better business conditions (such as long-term engagement). The information that the company prefers to do business with compliant suppliers shall not be considered as positive reward for the purpose of this question. Comments

Enter any comments of interest in relation to the general

(W)

information on sustainability.

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Individual sustainability requirements Each requirement (environment, human rights, and labor conditions and corruption) has a separate list in the Excel data sheet. Some of the variables are identical to variables registered in the part related to CSR in supply chain, but here they are to be answered specifically in relation to the specific sustainability requirement. All requirements have a set of the same variables to be coded (“common variables”). Some have a special variables added (“specific variables”).

Common variables Contract (N)

Does the company include compliance with the specific sustainability requirement(s) into its supply chain contracts? Enter “1” for definite yes; enter “0” for no or for ambiguous information. The words “contract,” “agreement,” and “contractual” must be present to answer positively.

PrecontrCom

Does the company require from its suppliers a pre-contrac-

(N)

tual commitment to comply with the specific sustainability requirement(s)? Enter “1” for definite yes; enter “0” for no or for ambiguous information. The report may use the following language: the suppliers shall “declare to be willing to comply,” “commit in writing to comply,” “must confirm their commitment in advance,” or similar.

Business req.

Does the company request its suppliers to comply with the

(N)

specific sustainability requirement(s), however, without mentioning contracts or pre-contractual commitment? Enter “1” for yes; enter “0” for no. The report may use the following language: the suppliers are requested to/shall comply/follow/adhere to our principles/values/code of conduct. The language must suggest that the compliance is necessary for conducting business.

Recomm. (N)

Does the company recommend suppliers to comply with the specific sustainability requirement(s)? Enter “1” for yes; enter “0” for no. The report may use the following language: the suppliers are expected to follow/respect our principles/values/code of conduct. The language usually suggests that the compliance is favorable, but it is not a necessary condition for conducting business.

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Vague (N)

Register “1” if the report refers to the specific sustainability requirement; however, it is not possible, or you are not sure how to classify it within the three precedent categories. Enter “0” if the requirement is not referred to at all.

Expl. (W)

Briefly state what the relationship between the specific sustainability requirement and company’s business contracts is.

Leg. compl.

Does the company request that suppliers comply with the

(N)

applicable laws and regulations? Enter “1” for yes; enter “0” for no.

Law-beyond

Does the company request that suppliers go beyond applica-

(N)

ble laws and regulations? Enter “1” for yes; enter “0” for no. Since we do not know all laws and regulations in all jurisdictions, the report has to expressly state that action beyond legal compliance is requested.

Law-cross

Does the report include information on the relation between

(N)

the specific sustainability requirement and local law of suppliers? Enter “1” for yes; enter “0” for no. Such information may be usually found in the part of the report dealing specifically with suppliers and will usually include, e.g., requirement that suppliers comply with applicable laws or requirement to follow the stricter from the sustainability requirements and applicable law.

Screen. crit.

Does the company check for the performance of suppliers

(N)

in relation to the specific sustainability requirement before entering into contracts with them? Enter “1” for yes; enter “0” for no. The language used in this context may include, e.g., screening criteria, supplier selection criteria, pre-contractual audit, or similar.

Precond. (N)

Is compliance with the specific sustainability requirement a necessary precondition to enter into contract with the company? Enter “1” for yes; enter “0” for no. Sustainability requirements are precondition of contracting with the company in case that the report refers to them as necessary conditions to enter into contract. Usually, pre-contractual audit/due diligence will be conducted and self-assessment requested. It is important to distinguish from Screen crit. variable, where compliance with the sustainability require-

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Sustainability Clauses in International Business Contracts

ments is assessed before contracting, but it is not an ultimately decisive factor for granting a contract. Prefer. (N)

Does the company prefer to do business with or provide preferable treatment to suppliers compliant with the specific sustainability requirements? Enter “1” for yes; enter “0” for no. If compliance with sustainability requirements is not a strict precondition to contract, the company may motivate suppliers’ compliance by promising a preferable treatment to those who comply (including various types of scorecard systems). The language in this context will include, e.g., look preferably on suppliers with sustainability policies/striving to do business with compliant suppliers/prefer to contract with suppliers who implement company’s code of conduct.

Monit. (N)

Does the report provide information on any type of private monitoring of the specific sustainability requirement (specific enforcement processes detailed in subsequent questions)? Enter “1” for yes; enter “0” for no. This information is usually provided in immediate connection to the information on existence of any sustainability requirements. It may include various types of suppliers’ self-assessment, questionnaires, and internal and external audits. Sometimes, the report summarizes the numbers in a separate table.

Enf. (N)

Does the report provide information on any type of private enforcement of the specific sustainability requirement (specific enforcement processes detailed in subsequent questions)? Enter “1” for yes; enter “0” for no. This information is usually provided in immediate connection to the information on existence of any sustainability requirements. It may include various types of suppliers’ progress action plans and ultimately contract termination. Sometimes, the report summarizes the numbers in a separate table.

Self-assess.

Are the suppliers required to provide self-assessment of or

(N)

report to the company on their compliance with the specific sustainability requirement? Enter “1” for yes; enter “0” for no. The language used in this context may include, e.g., requirements to regularly report on or evaluate progress, report on any concerns in regard to sustainability requirements, or fill in forms specified by the company.

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Int. audit (N)

Does the company audit suppliers’ compliance with the specific sustainability requirement? Enter “1” for yes; enter “0” for no. It is not important if the audits are regular, both regular and irregular, announced and not announced audits are relevant. The language used in this context may include the following terms: audits/checks/inspections/control by the company/company representative. The answer is also positive if the report states that compliance is audited but is not specific if it is conducted by company itself or third parties.

Ext. audit (N)

Does the company employ an external party to audit suppliers’ compliance with the specific sustainability requirement? Enter “1” for yes; enter “0” for no. It is not important if the audits are regular or announced, both regular and irregular, announced and not announced audits are relevant. The language used in this context may include the following terms: audits/checks/inspections/control/verification/certification by an external party/auditor/accountant company/third party appointed by the company.

Act. plan (N)

Does the party provide suppliers who do not comply with the specific sustainability requirement with the possibility to recover the compliance through an action plan? Enter “1” for yes; enter “0” for no. Often when a non-compliance with the sustainability requirements is discovered, suppliers are given the opportunity to correct or improve their performance according to a plan (usually time limited and supervised by the company) designed by themselves or by the company. Both actions plans defined by suppliers themselves and plans imposed by the company are of interest. The language used in this context may include the following terms: corrective action/plan, action/progress/development plan.

Term. (N)

Does the company reserve the right to terminate the contract with its supplier in case of non-compliance with the specific sustainability requirement? Enter “1” for yes; enter “0” for no. The language used in this context may include the following terms: termination/interruption/discontinuance of contractual/business relationship. In case the answer to this question is negative “0,” skip the following question.

Term. No.

If the report provides information on how many con-

(W)

tracts/contractual relationships with its suppliers did the

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company terminate due to any non-compliance with the specific sustainability requirements, enter the given number. Non-compl.

Does the company provide information on the number of

(N)

non-compliance with the specific sustainability requirements discovered? If yes, enter the provided number; if no, enter “n/a.”

Severe non-

Does the company provide information on how many from

compl. (N)

discovered non-compliances were considered as “severe”? If yes, enter the provided number; if no, enter “n/a.”

Cooperat.

Does the company cooperate with its suppliers to improve

(N)

their compliance with the specific sustainability requirements? Enter “1” for yes; enter “0” for no. The language used in this context may include the following terms: cooperate/work together/partner with suppliers. The form of cooperation is not decisive; all forms (exchange of information, resources, or not specified cooperation) are relevant; however only education of suppliers is not.

Educ. (N)

Does the company provide any support to the suppliers to help them comply with the specific sustainability requirements? Enter “1” for yes; enter “0” for no. The language used in this context may include, e.g., help telephone line/conference/symposia.

Compl. rev.

Does the company reward positively suppliers for their

(N)

compliance with the specific sustainability requirement? Enter “1” for yes; enter “0” for no. A reward may have a form of a CSR or sustainability award or better business conditions (such as long-term engagement). The information that the company prefers to do business with compliant suppliers shall not be considered as positive reward for the purpose of this question.

Comments

Any other information of interest.

Specific variables ENV = Environment Env. (N)

Does the company impose any environmental requirements as a part of its sustainability requirements on its suppliers? Enter “1” for yes; enter “0” for no. Environmental require-

304

Annexes ments may include obligations related to, e.g., CO2 emissions, waste, hazardous substances, greenhouse gas emissions, energy efficiency, compliance with environmental laws and regulations, or environmental management systems. GHG (N)

Does the company impose any requirements regarding CO2 emissions as a part of its sustainability requirements on its suppliers? Enter “1” for yes; enter “0” for no. CO2 requirements may include obligations related to, e.g., greenhouse gas emissions, CO2 emissions, carbon footprint, or carbon emissions.

Imp. spec. g.

Does the company prescribe or plan to prescribe to its sup-

(N)

pliers specific quantifiable goals regarding reduction of GHG emissions or energy efficiency? Enter “1” for yes; enter “0” for no.

Req. spec. g.

Does the company expect its suppliers to set for themselves

(N)

specific quantifiable goals regarding reduction of GHG emissions or energy efficiency? Enter “1” for yes; enter “0” for no.

Comp. rep.

Does the company report or plan to report its suppliers’

(N)

(scope 3) GHG emissions? Enter “1” for yes; enter “0” for no.

Sup. rep. (N)

Does the company require its suppliers to monitor, report, and/or disclose their GHG emissions or contract only with suppliers who monitor, report, and/or disclose their GHG emissions? Enter “1” for yes; enter “0” for no.

Energy (N)

Does the company impose any requirements regarding energy efficiency as a part of its sustainability requirements on its suppliers? Enter “1” for yes; enter “0” for no. CO2 requirements may include obligations related to, e.g., energy efficiency or intensity in relation to products or processes.

Tech. dev.

Does the company engage in collaboration with its suppliers

(N)

to develop environmentally sustainable technologies, products, or processes? Enter “1” for yes; enter “0” for no.

LABOR Lab. (N)

Does the company impose any requirements regarding labor conditions as a part of its sustainability requirements on its suppliers? Enter “1” for yes; enter “0” for no. Labor-related

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requirements may include obligations related to, e.g., child labor, forced labor, working hours, fair remuneration, health and safety issues, or compliance with labor laws and standards (incl. UN GC). HR = Human rights HR (N)

Does the company impose any requirements regarding human rights as a part of its sustainability requirements on its suppliers? Enter “1” for yes; enter “0” for no. Human rights requirements may include obligations related to, e.g., freedom of speech, freedom of association, gender equality, or compliance with HR laws and standards (incl. UN GC).

CORR = Corruption Corr. (N)

Does the company impose any requirements regarding prevention of corruption as a part of its sustainability requirements on its suppliers? Enter “1” for yes; enter “0” for no. Requirements related to corruption prevention may include obligations related to, e.g., compliance with anticorruption laws and standards (incl. FCPA and UN GC), whistle-blowing system, anti-corruption management system, or prohibition of provision of anything of value to governmental officials and business partners.

List of sample companies

• Telecommunication • Verizon Communications Inc. • AT&T Inc. • France Telecom-Orange • Telefónica S.A. • Sprint Nextel Corporation • Comcast Corporation • Vodafone Group Plc. • BT Group Plc. • Telecom Italia Group • Deutsche Telekom • Chemicals

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Annexes

• • • • • •

BASF group Bayer Group Dow Chemical DuPont LyondellBasell Ineos Group Holdings

• Metals • Alcoa Inc. • ArcelorMittal • Heraeus Holding • ThyssenKrupp • Glencore International • Airlines • Air France-KLM Group • AMR • Delta Air Lines • Lufthansa Group • International Airlines Group – Iberia • International Airlines Group – British Airlines • United Continental Holdings • Pharmaceuticals • Abbott Laboratories • AstraZeneca • Eli Lilly • GlaxoSmithKline • Johnson & Johnson • Merck • Novartis • Pfizer • Roche Group • Sanofi • Aerospace and defense • BAE Systems • Boeing • EADS • Finmeccanica • General Dynamics • Honeywell International • Lockheed Martin

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• Northrop Grumman • Raytheon • United Technologies • Beverages and food & consumer products • Anheuser-Busch InBev • Coca-Cola • Danone • Heineken Holding • Kraft Foods • Nestlé • PepsiCo • Unilever

308

Annexes

Annex no. 3

Verizon Australia Supply Agreement This annex contains excerpts from the Verizon Australia Supply Agreement used as an example on multiple places within this book.

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310

Annexes

311

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Sustainability Clauses in International Business Contracts

The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd-1, et seq. (USA). California Transparency in Supply Chains Act of 2010, CA Senate Bill No. 657 (California, USA).

International conventions United Nations Convention against Corruption (adopted 31 October 2003, entered into force 14 December 2005) 2349 UNTS 41. United Nations Convention on Contracts for the International Sale of Goods (adopted 10 March to 11 April 1980, entered into force 1 January 1988) 1489 UNTS 3. (CISG). UN GA resolution 217A (III): Universal Declaration of Human Rights, U.N. Doc A/810 at 71, 10 December 1948.

Soft and private law instruments Business Social Compliance Initiative (BSCI). International Organization for Certification, ISO 26000:2010, Guidance on social responsibility (ISO 26000). OECD (2011), OECD Guidelines for Multinational Enterprises, OECD Publishing, (OECD Guidelines for MNEs 2011). OECD (2008), OECD Guidelines for Multinational Enterprises, OECD Publishing (OECD Guidelines for MNEs 2008). Principles of European Contract Law (PECL). UNIDROIT Principles of International Commercial Contracts 2004 (UNIDROIT Principles). United Nations Global Compact (UNGC).

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References

Case law

USA Comer, et al. v. Murphy Oil USA, et al., No. 1:11-cv-00220 (S.D. Miss.), referred to as “Comer II” Doe v. Wal-Mart Stores, Inc., 572 F.3d 677 (9th Cir. 2009), referred to as “Walmart case” Weber Shandwick Worldwide v. Reid, No. 05 C 709, 2005 U.S. Dist. LEXIS 14482 (N.D.Ill. 2005) Caterpillar, Inc. v. Usinor Industeel, 393 F. Supp 2d 659 (N.D.Ill. 2005), referred to as “Caterpillar Case” Nike, Inc. v. Kasky – 539 U.S. 654 (2003) Kasky v. Nike, Inc., 45 P.3d 243 (Cal. 2002), referred to as “Kasky v. Nike, Inc.” Duldulao v. St. Mary of Nazareth Hospital, 505 N.E.2d 314 (Ill. 1987) Pine River State Bank v. Mettille, 333 N.W.2d 622, 115 L.R.R.M. 4493 (Minn. 1983)

CISG case law Germany: BGH, 31 October 2001, VIII ZR 60/01, referred to as “Machinery Case” LG Darmstadt, 9 May 2000, 10 O 72/00 BGH, 8 March 1995, VIII ZR 159/94 Switzerland: Handelsgericht Zürich, 30.11.1998, HG 930634 Zivilgericht Kanton Basel-Stadt, 03.12.1997, P4 1996/00448

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Sustainability Clauses in International Business Contracts

Handelsgericht Aargau, 26.09.1997, OR.960-0013 Austria: Oberster Gerichtshof, 21.03.2000, 10 Ob 344/99g France: Cour d’Appel de Grenoble, 96J/00101, 21.10.1999 Arbitration awards: International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation, 05.06.1997, No. 229/1996 ICC International Court of Arbitration, November 1996, Award No. 8502 of 1996

EU Case C-513/99, Concordia Bus Finland Oy Ab v Helsingin kaupunki and HKL-Bussiliikenne, [2002] ECR I-7213, referred to as “Concordia case”

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List of graphs and figures Graph 7.1: Type of commitments (USA x Europe) Graph 7.2: Pre-contractual commitments (USA x Europe) Graph 7.3: Pre-contractual commitments (industries) Graph 7.4: Interaction with underlying legal rules Graph 7.5: Monitoring and enforcement tools in telecommunication industry (10 largest telecommunication companies from the 2012 Fortune 500 Global list) Graph 7.6: Reaching beyond first tier (USA x Europe) Graph 7.7: Reaching beyond first tier (industries) Graph 7.8: Monitoring (industries) Graph 7.9: Monitoring (USA x Europe) Graph 7.10: Enforcement tools (USA x Europe) Graph 7.11: Enforcement tools (industries) Graph 7.12: Best practice in enforcement (USA x Europe) Graph 7.13: Best practice in enforcement (industries) Graph 9.1: Effectiveness attributes (USA x Europe) Figure 1.1: Sustainability & sustainable development & CSR Figure 2.1: Hard/soft, public/private map Table 3.1: Features of SCCs & examples

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Sustainability Clauses in International Business Contracts

Figure 6.1 Buyers decision logic matrix Table 6.1 Overview and classification of CSR regulation Figure 7.1 Enforcement of SCCs by third parties Figure 7.2 Enforcement of SCCs beyond first-tier suppliers Figure 8.1 Effect of contractual form on Codes of Conduct and other soft law instru- ments Figure 9.1: Getz model Figure 9.2: Amended Getz model

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