Contract (as) Social Responsibility (Part 3): Model Contract Terms

My prior posts (#1 and #2) set up the idea that contract appears to be an increasingly attractive way to do some sort of “social justice,” for example by attempting to reduce labor trafficking in supply chain contracts.  I refer to this generally as “contract (as) social responsibility” (KSR).

A contradiction in terms?

I want to turn now to a thoughtful example of KSR terms, the Model Terms (Model Terms) being developed by the Working Group to Draft Human Rights Protections in Supply Contracts of the Business Law Section of the American Bar Association (Working Group).

The Working Group is led by Professor David Snyder (American University) and attorney Susan Maslow.  Although the Model Terms have not yet been posted, they should be shortly and, in any case, are available from David (dsnyder@wcl.american.edu) and Susan (smaslow@ammlaw.com).  The Working Group’s report and the Model Terms are slated to be published in The Business Lawyer later this year.  [Disclaimer:  I am a member of the Working Group and on the editorial board of The Business Lawyer.  Nothing I say on CoOp should be imputed to them.]

While I should probably post a “spoiler alert” here, I thought it would be helpful to summarize certain aspects of the Model Terms in order to identify some of the issues they and, by inference, other KSR terms may raise.

The Model Terms have two goals that are, perhaps, in tension.

On one hand, they seek to “move the commitments that companies require, whatever they may be, from corporate policy statements to the actual contract documents where those policies may have greater impact.”  That is, as suggested in a prior post, they seek to move beyond corporate social responsibility.  On the other hand, the Model Terms also “seek to minimize the risks inherent in the adoption of any corporate policy,” and thus to reduce the risk of liability for violations of positive law for, e.g., violations of human rights in the supply chain.

The Model Terms are as important for what they omit as what they contain, the most obvious omission being the substantive human rights standards they seek to implement.  Rather than specify practices or conditions that are mandated or forbidden (“thou shalt not use slaves to make chassis”), the Model Terms would require the contracting supplier to represent that it (and perhaps its sellers and agents) have complied with a “Schedule P” that would specify these protections.  [Model Terms § 1.1].

The Model Terms themselves do not say what should be in Schedule P, in part because they assume that the buyer (and perhaps supplier) already have corporate policies and codes which require them to meet baseline human rights standards.  In principle, Schedule P and the Model Terms provide a mechanism by which those standards are imposed throughout the supply chain, and create procedures for detecting and perhaps remedying breach.

Some may grouse about this omission.  The Model Terms could, for example, have incorporated the Model Principles of the ABA Model Business and Supplier Policies on Labor Trafficking and Child Labor (Model Principles).  Among other things, these would require parties to supply chain contracts to represent that they will not “knowingly tolerate any Labor Trafficking or Child Labor in its Operations.” The ABA has adopted the Model Principles as a statement of policy, so perhaps it would have been appropriate for the ABA to implement the substance of these principles in the supply chain agreement terms they would like market actors to use.

Still, from a business lawyer’s perspective, the Working Group’s decision to substitute process for substance is understandable:

  • While there may be normative appeal to incorporating specific terms (such as the Model Principles), there could also be significant disagreements within the Working Group—and among potential users—over what the standards should be and how to articulate them in a Schedule P.  As with other deal terms, why not leave that to the parties?
  • Business lawyers may not be especially well-suited to decide what the appropriate standards are—but they sure know process when they see it.
  • The Model Terms are meant to be broadly adaptable in global commerce, so standards responsive to one concern may be irrelevant to others.
  • Potential users of the Model Terms may react negatively if they perceive the ABA to be nagging them about particular practices.

The Model Terms make a key tactical connection between the goods sold and the conditions of their production.  Thus, they provide that “Each shipment and delivery of goods shall constitute a representation by Supplier and Representatives of compliance with Schedule P.” [Model Terms § 1.1].  This appears designed to connect human rights violations to, among other things, remedies under the UCC that permit the buyer to reject goods that were produced in violation of Schedule P.

The Model Terms would also require suppliers to ensure that their suppliers abide by Schedule P [Model Terms, § 1.2], have policies implementing Schedule P themselves [Id. § 1.3], and notify the buyer of any violations of the foregoing [Id.].  A violation of Schedule P would give the buyer the right to exit, even if the goods, themselves (as distinct from their production), were conforming, and to do so upon discovery of the human-rights-related violation, which may be some time after the buyer had already accepted the goods (presumably unaware of the problematic conditions). [Id. §§ 2.2 & 3].

And, while the Model Terms may link human rights provisions to the UCC, they make clear that the UCC’s laissez-faire approach to interpretive matters among merchants will not apply:  The Model Terms require “strict compliance” [§ 2.1], strip the supplier of most cure rights (although buyer may permit cure) [Id. § 2.5], and eliminate the supplier’s ability to reinterpret the Model Terms through course of performance, conduct, and so on.  [Id. § 4.1]. In other words, lest there be any doubt, the paper deal—not the “real deal”—governs the interpretation of the Model Terms.

The Model Terms also lay on the remedies thick.  In addition to just about every form of money damages you can imagine, the Model Terms expressly contemplate that the supplier may be liable to the buyer for reputational harm arising from human rights violations. [Model Terms § 5.4.d.].  Moreover, the Model Terms contemplate operational remedies—forcing the supplier to change its ways—through injunctive relief and the right to require the supplier to terminate malefactors. [Id. § 5.3.b&c].  The Model Terms also relieve the buyer of duties to mitigate or return goods, even though the buyer would have no obligation to pay for the goods produced in violation of Schedule P. [Id. § 5.5b].  Instead, the Model Terms give the buyer the right, within legal limits, to donate or destroy the goods.  [Id. § 5.5b].

At the same time, the Model Terms insulate the buyer from almost conceivable liability that could arise due to human rights violations in the supply chain.  They expressly disclaim any duty or power in the buyer to monitor or control the supplier. [Model Terms § 5.7.a, b & c].  They provide that there are no third-party beneficiaries to the contract [Id. § 5.7.d], and that the supplier will indemnify the buyer in the event the buyer is liable for any violations of Schedule P. [Model Terms § 5.6].

In short, the Model Terms seek to maximize assurance that the supplier (and its suppliers) meet agreed human rights protections, and to minimize the likelihood that buyer has any liability for breaches.  The Model Terms are, in a sense, a kind of contract for procedure, and not the substantive terms themselves, a set of loss allocation mechanisms, not aspirational standards.

Yet, even putting to one side questions about substance, the Model Terms may raise difficult questions about the role of contract doctrine and theory, and the institutional capacity of courts to solve these problems.  I hope to turn to those in subsequent posts.

 

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