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Responsible

Contracting

Project

Frequently Asked Questions

  • Contracts* are widely used to manage supply chain obligations and risks, including those related to human rights and environmental (HRE) performance. Unfortunately, companies often use their contracts to shift HRE responsibilities onto their suppliers, which can aggravate or contribute to HRE impacts. 

     

    The three main shortcomings of traditional contracting are that they: 

    1. Contain one-sided promises and unrealistic expectations. First, most contracts include a requirement that suppliers make an unrealistic and risky contractual promise (known as a “representation” or “warranty”) that there are no and will never be HRE issues anywhere in their supply chain. Such promises of perfection can be dangerous, as they incentivize suppliers to hide problems out of fear of losing the contract. 

    2. Ignore the impact of purchasing practices. Secondly, most contracts shift all responsibilities and costs associated with upholding HRE standards onto suppliers and do not require the buyer to engage in purchasing practices (e.g., responsible pricing, assistance, changes, and exit) that can support the supplier's HRE performance.

    3. Allow cut-and-run exits and don’t prioritize remediating harms. Finally, under traditional contracts, if an adverse HRE impact occurs and is discovered, the buyer is often permitted to suspend payments, cancel orders, terminate the contract, and sue the supplier for damages, even when the buyer contributed to the impact through, for example, its poor purchasing practices. What’s more, any resulting remedies or damages typically flow back to the buyer and not to the victims of HRE-related harms, e.g. workers and community members.

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  • Responsible contracting can incentivize better behaviors, better human rights and environmental (HRE) outcomes, and better legal compliance. Contracts* set legally binding parameters for the parties’ relationship and are therefore an obvious place to outline expectations about how to go about upholding HRE standards. What’s more, commercial contracts are a key vehicle by which companies can legally implement their HRE policies across their supply chains. By importing HRE policies, commitments, and codes of conduct into the contract, the latter become binding and are more likely to be put into practice as a result. 

     

    That being said, contracts are not a cure-all and alone are not sufficient to ensure good HRE outcomes, but improving outcomes is much harder if not impossible to do without improving contracts.

  • Environmental rights and human rights are closely interrelated, with environmental degradation often being linked to adverse human rights impacts and vice versa. For example, rising temperatures in factories due to climate change represent an increased risk to workers’ health and safety.

     

    The responsible contracting principles are relevant regardless of whether the risk being managed is related to human rights or the environment. Whether we are talking about environmental or social standards, traditional contracts that shift the risks, costs, and obligations related to upholding those standards onto suppliers (e.g. factories & farms) often increase commercial pressure, which can result in adverse impacts on people and planet.  

     

    For example, upholding environmental standards often requires significant investments in technical infrastructure and expertise at the supplier level. Suppliers may struggle to meet these standards without the necessary resources, a problem that is aggravated when buyers (e.g. brands & retailers) engage in poor purchasing practices, such as cost-squeezing or delayed payment. The RCP Toolkit can address this dynamic by outlining buyer obligations to engage in responsible purchasing practices, including fair pricing and adequate support to suppliers. 

  • The world of commercial contracting* might seem removed from the lives of real people, but responsible contracting creates the scaffolding for more balanced buyer-supplier* relationships that can directly benefit people and communities in supply chains in several ways.

     

    Here, we will provide three examples:
     

    Wages: Using the apparel industry as an example, according to some estimates, less than 10% of garment workers who produce clothing for major brands earn a living wage–and contracts rarely mention wages beyond a commitment for the supplier to abide by local minimum wage laws. By contrast, responsible contracts require buyers (e.g. brands & retailers) to commit to cooperating with the supplier (e.g. factories & farms) to agree to a price that can cover the costs associated with paying a living wage or the minimum wage, whichever one is higher. This would result in a higher quality of life for garment workers. See the Supplier Model Contract Clauses 1.0 (SMCs) and the European Model Clauses (EMCs) for tools with the most explicit language on living wages. 

     

    Working hours: Using apparel as an example again, it’s not unheard of for garment workers to endure 18-hour days to meet a deadline. Responsible contracting commits buyers to support better working conditions via, for example, cooperating with suppliers to set reasonable production timelines and negotiate order changes, so that working hours are more humane and predictable.
     

    Remediation: What happens if something goes wrong and a human rights violation occurs? In traditional contracts, the buyer usually has the right to cancel an order or the entire contract at the first sign of trouble and to simply cut ties with the supplier without remediating the injuries suffered by the victims of the human rights violation or taking measures to prevent the recurrence of the violations. We saw this in the wake of disasters like the 2013 Rana Plaza factory collapse in Bangladesh. While exit may help shore up the reputation of the buyer in the short term, it does little to remediate the injuries suffered by the victims of the human rights violation. Moreover, cutting ties can make adverse human rights impacts much, much worse. 


    Responsible contracts obligate the buyer to exit only as a last resort, and to cooperate with the supplier and other relevant actors to provide remedy to adversely-affected stakeholders. Using Rana Plaza as an example, victim-centered remedy was not required under contracts, and many of the victims and their families never received appropriate remedy (e.g., funds to cover their medical bills or lost wages) to help them recover from the disaster. Responsible contracting, which prioritizes remediation over exit, would shift this reality.

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The Principles

An overview of the Responsible Contracting Principles for upholding human rights throughout supply chains

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The Toolkit

Explore the RCP Toolkit which currently includes the EMCs, the SMCs, the MCCs and the Buyer Code

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Where you can learn about our past and upcoming events, publications, and podcasts

  • As RCP sees it, traditional contracting is flawed as a vehicle for upholding human rights because of its risk-shifting approach where suppliers are solely responsible for upholding human rights and environmental (HRE) standards. In addressing this imbalance, responsible contracting is driven by a core principle, which is that responsibility for upholding HRE standards should be shared between buyers (e.g. brands & retailers) and their suppliers (e.g. factories & farms). This principle is enshrined in the UNGPs* and the OECD Guidance*, which are the foundation of the RCP Toolkit. RCP’s tools are particularly well-suited for the supply contracts for the manufacture and sale and goods.

     

    RCP recommends integrating the three "Rs" of responsible contracting into supply contracts:

     

    1. Responsible allocation of risks and responsibilities: Set aside supplier-only guaranties of perfect compliance in favor of a joint commitment to cooperate in carrying out human rights and environmental due diligence (HREDD)
       

    2. Responsible purchasing practices: Commit the buyer to engage in purchasing practices that can support effective HREDD
       

    3. Remediation first and responsible exit: If an adverse impact happens, provide remedy to victims and take measures to ensure the harm stops and does not reoccur before turning to traditional contract remedies (e.g., suspending payment and canceling orders). Exit should only be pursued as a last resort, taking measures to mitigate the impact.

  • As the legal links of the supply chain, contracts* are a key mechanism for managing human rights and environmental (HRE) risks. They serve to set the parameters for supplier-buyer* relations and to allocate rights and obligations between the parties. However, not all contracts are created equal. How supply contracts are negotiated, the terms they contain, and how the parties behave toward one another in performing their obligations can affect HRE outcomes in the supply chain. We believe that fair–and fairly performed–contracts are critical for carrying out effective human rights and environmental due diligence (HREDD) and achieving better HRE outcomes.

     

    What’s more, contracts are legally enforceable. When a company’s HRE policies are included in a contract, they go from being non-binding to binding instruments. In this way, contracts make soft HRE policies hard and make it possible for these policies to “go global” by binding parties operating across borders, in different jurisdictions and parts of the world. 


    Responsible contracting is not only more effective for preventing and remedying adverse impacts, but also for achieving compliance with rapidly evolving legal requirements, including new HREDD laws in the EU, non-financial reporting laws, and trade sanctions laws in the US. 

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