Enforce This! Contract (as) Social Responsibility (Part 4)

A prior post made two basic points about the ABA’s Model Terms to protect human rights in the supply chain (Model Terms) as an example of “contract (as) social responsibility” (KSR): (i) they say nothing about substantive human rights standards (and that may be OK), and (ii) the desire to implement these standards through KSR terms may conflict with a desire to limit the buyer’s legal exposure for their violation.

Or not. . .

I want to turn now to what I suspect will be a central doctrinal question presented by KSR terms: enforceability.

I don’t mean enforceability in a technical sense—offer, acceptance, consideration (or equitable substitute)—but instead in a remedial sense:  Who can get a remedy for breach, and what would it look like?  Since the architecture of U.S. contract law sits on a foundation of privity and expectation, KSR may be an awkward fit, for at least three reasons.

First, consider the problem of third-party beneficiaries.  A supplier that honors the substantive commitments it makes in the Model Terms (through a so-called “Schedule P”) would presumably do things such as improve the pay and/or working conditions of its employees.  But those employees are not parties to this contract: they are literally third parties who would benefit from it.

The Restatement (Second) of Contracts tells us that “[a] promise in a contract creates a duty in the promisor to any intended beneficiary to perform the promise, and the intended beneficiary may enforce the duty.” An “intended beneficiary” is a person to whom “circumstances indicate that the promisee intends to give the . . . benefit of the promised performance.”

Here, the “circumstances” may send mixed signals.  On one hand,  it is not hard to imagine classes of plaintiff-workers arguing that the parties intended to protect them through Schedule P.  If Schedule P is not enforceable, why bother with it? The KSR terms in a supply chain agreement appear to be a deliberate effort to move beyond the vague aspirations of corporate social responsibility, into something harder, more “law-like,” workers might argue.

On the other hand, the Model Terms expressly disclaim that there are any third-party beneficiaries. [Model Terms §§ 5.7.c].   TPB disclaimers seem to work. [See Jeffries v. General Cas. Ins. Companies, 863 N.W.2d 36, 2017 WL 1046170 (Iowa Ct. App. 2015) (unpublished)(enforcing “contract [that] unambiguously disclaims third-party beneficiary status.”)].  Moreover, Doe v. Wal-Mart teaches that a remote supplier’s employees cannot enforce a buyer’s corporate code of conduct against the buyer.

But, KSR devotees may note, Wal-Mart involved a statement of corporate policy, not a contract term.  Moreover as David Epstein and coauthors have recently observed, “Every year, more than 100 reported court opinions consider the question of whether an outsider can sue for damages under a contract made by others-in part because the law is so ambiguous.”

Although it is difficult to imagine that a promisee—here, buyer—could be liable to a third-party, never say never. Contractual promises about the welfare of third parties might entice those third parties to sue if they are grumpy about their treatment by one of the contracting parties and they smell doctrinal ambiguity (blood) in the water.

Second, consider questions of interpretation.  The Model Terms call for “strict compliance,” which would seem to disclaim the capacity of off-contract conduct to affect the interpretation of KSR terms.   Canons of contract construction seem to focus on interpretation from the perspective of one or both parties, or perhaps a hypothetical “reasonable” person.  But if KSR terms are designed to protect others, should courts use their perspective?  Given the potential diffusion in potential membership, how would a court know what that was, or what it meant?

This might create questions for relationalists.  As I hope to discuss in a future post, KSR may become an interesting example of the complex interplay between the formal and informal that Lisa Bernstein has perhaps best developed.  Is this a species of “braiding” (Gilson et al.), or “scaffolding” (Hadfield et al.), or something else, entirely?

Third, and perhaps most obviously, consider remedies.  U.S. law seems strongly to prefer the expectation interest in remedies, even though that may be problematic in some contexts.  But, whatever trouble it makes elsewhere is nothing compared to challenges it presents in KSR, since a breach would seem impossible to remedy on an expectation theory.  Neither dollars nor force are likely to put the buyer where it expected to be for a violation of KSR terms.

Consider, for example, the Rana Plaza disaster, where 1,100 Bangladeshi garment workers died and thousands were injured when a building known to be dangerous collapsed.  This presented a reputational problem for brands, such as Zara, whose labels were found in the rubble.

The Model Terms provide that reputational harm may be part of a buyer’s damage claim against a breaching supplier, but how should that be measured?

One might look to the donations that some brands implicated in the disaster made as evidence of the cost of reputational repair.  But that turns out not to help much.  Some firms paid; some did not; some paid and did not disclose the amount, etc.

One can imagine a number of plausible explanations for variations in donative responses, but all that means is that it is hard to put a dollar figure on reputational harm from violations of human rights in the supply chain.  If that is the case ex post, it is hard to see how it would be easier ex ante.

While the Model Terms contemplate liquidated damages [§ 5.4], they must be measured against something to determine whether they are “reasonable” (and enforceable) or a “penalty” (and forbidden).  Given the difficulty of measuring reputational harm—one of several potential harms to buyer—how is a court supposed to know whether to enforce the liquidated damages clause?

Ordinarily, if money can’t fix the problem, we imagine that equitable remedies might.  Indeed, the Model Terms provide that buyer may obtain an injunction and, perhaps more controversially, require the supplier to remove employees or subcontractors.  [Model Terms § 5.3 b. & c.].  While there may be much to be said for specific performance under ordinary circumstances, courts are unlikely to consider KSR terms ordinary in this respect.

True, a court might try to shut a breaching supplier down.  But it is hard to see how that really helps the buyer.  The buyer presumably wants the supplier’s goods—it just wants them produced in a certain way.

All of this suggests that KSR terms will present examples of what Danzig calls the “capability problem”—the very limited power that courts have to provide meaningful remedies that cannot simply be cashed out.

Of course, there is another, more cynical view, which is that parties to these terms may not care about enforcing the human rights features (i.e., Schedule P), and so won’t even try to obtain a remedy for their breach.  Rather, they care about the liability limitation features. Although damages for reputational (and similar) harm may be difficult to measure, indemnification for costs of litigating with workers who claim to be third party beneficiaries won’t.  In the unlikely event the buyer pays out, it simply collects that amount from the breaching supplier.

On this view, KSR would not change behavior in the supply chain so much as limit exposure for buyers.  Unenforceable human rights terms would smuggle in enforceable hold-harmless terms, with the possible bonus of PC/PR points for the buyer.

True, the ability to push liability back down the chain may permit, indirectly, what TPB doctrine (and the Model Terms disclaimer) forbid, directly. But, how much is that worth–to buyer or supplier? Would the Model Terms’  indemnification pick up voluntary reputation-redeeming payments, like those Zara made?  Or, would it deter them, because future Zaras would rather be sued (to assure indemnification) than to take the chance on cosmetic generosity?

It is hard to know today whether a rosier or more cynical view is appropriate.  My hunch is that most companies, like most people, are neither purely altruistic nor purely cynical.  They are somewhere in between, and the interesting questions will involve the role (if any) that contract plays in finding the socially appropriate point in that continuum, and what “socially appropriate” means.  These are questions I hope to take up in my next posts on this.


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2 Responses

  1. Very interesting posts on this topic. If you’re like me, and think corporate law permits but does not require CSR, supply chain contracts and the like hold much promise as a way to force good behavior. They sidestep inadequacies in international law as well as problems where foreign labor/environmental/human rights laws are lax or not enforced. Of course to impose such requirements on vendors, suppliers, insureds, borrowers, etc., you might need the leverage of a Wal-Mart, Apple, or Frances McDormand.

    On the remedies point, I’ve always thought, probably based on Michael Vandenbergh’s work, that the main remedy for non-compliance is terminating the contract. If you don’t meet our standards, we’re dropping you from our supply chain, vendor list, or won’t continue to insure you. Depending on the contract, this can be done quickly and without going to court. Termination wouldn’t help the workers, but the threat of losing sought-after business might be enough to ensure compliance in the first place.

  2. Thanks very much for the thoughtful reply. Yes, I think that at the end of the day “exclusion”–and not “expectation”–will be the remedial lodestar here. That, in itself, has interesting implications for law, as it bespeaks limitations in law’s power. Moreover, it isn’t clear why or how much work formal contract needs to do to permit that outcome: rescission is a creature of equity under US law, so why bother with all of the rest? There are, I think good reasons to bother, but they may not always be because anyone thinks the contract will be binding in the conventional sense. Rather, contract as a formal instrument may do important work here, but it may be different than the work it does in more traditional contexts. Part of what is fun about KSR is thinking about what that work is, and whether any of it is likely to “succeed” (and what “success” even means).