This project was born of challenge, frustration, and hope. There is little doubt that workers in international supply chains are being abused, in the most horrifying ways, even as they work to produce the staples of our everyday lives and indeed support much of our economy. Young children and enslaved people pick and process cocoa and coffee beans; they pick and process cotton; they sew clothes, weld steel, and assemble sporting goods; they mine rare minerals and extract valuable sources of energy. Many workers find themselves in injurious and even deadly working conditions, with people hurt and killed by the hundreds. Supply chains can be riddled with modern forms of slavery, particularly debt-bonded labor. Much has been invested in ameliorating these conditions but not enough. They continue, and they are now sharpened and heightened by the enveloping crisis of the COVID-19 pandemic.
One of the crucial tools for addressing these problems is the contractual governance of supply chains. The Model Contract Clauses (MCCs) offered here seek to help companies implement healthy corporate policies in their supply chains in a way that is both legally effective and operationally likely. In general, the MCCs do not state the human rights performance standards themselves. The MCCs do not state what the working conditions must be like, how many fire exits are necessary, or what measures must safeguard against conflict minerals. The MCCs are designed for use across sectors, so the substantive standards will vary (clothing brands need no standards on conflict minerals, and electronics makers are not concerned with cotton sourcing). The human rights standards that the supplier must follow are assumed to be stated in what is here called Schedule P (P for Policy), and the standards that the buyer must follow are assumed to be stated in Schedule Q. Both Schedules P and Q are likely to take the form of codes of conduct, one for the supplier and one for the buyer. They are outside the scope of the MCCs themselves. This practice is typical. A purchase agreement consists largely, if not entirely, of legal obligations; the specifications for the goods themselves are often contained in separate schedules or in other documents. Although the Working Group cannot offer a model Schedule P because of the wide variation across industries, we do provide the building blocks for Schedule P for buyers that are starting to consider or are revising their expectations of their contracting partners. Because it is less industry-specific, a standard Schedule Q is offered, enumerating and explaining the responsible purchasing practices that buyers may be expected to follow.
The Model Contract Clauses offered below (MCCs 2.0) are designed as an improvement on and an alternative to those published three years ago (MCCs 1.0). MCCs 1.0 were intended to harness supply contracts as one critical tool—among many—to put human rights policies into operation while managing company risk. Although many corporations have admirable human rights policies, mere policies can languish if they are not integrated into the operational and legal life of the company and particularly into the company’s supply chains. MCCs 1.0 were drafted to give counsel a model to follow in operationalizing their companies’ human rights policies, easing the task for overburdened corporate counsel, and giving the benefit of extensive research conducted by the Working Group.
MCCs 1.0 met with considerable interest and enthusiasm, and the Working Group received extensive feedback that was often supportive, sometimes critical, and sometimes both. The great interest in the project also led to the informal augmentation of the Working Group with many voices from outside the Business Law Section, which is the official location of the Working Group (under the auspices of the Uniform Commercial Code [U.C.C.] Committee). With that feedback, the Working Group embarked on a new version of the MCCs. Version 1.0 envisioned a business model where buyers were confronted with troublesome suppliers who would violate the human rights of workers; the buyers would need to manage this problem through contractual control of their suppliers, and the MCCs could help them do so. Additional research reveals, however, that human rights violations at the supplier level are often rooted in the buyers’ own purchasing practices, particularly by timing demands, pricing pressures, and last-minute order modifications, as well as a lack of due diligence—turning a blind eye—to human rights issues. MCCs 2.0 accordingly assign contractual responsibility for human rights in the supply chain to the buyers as well as the suppliers. In these revised clauses, buyers commit to responsible purchasing practices while suppliers commit to responsible and ethical management of their workforce and their subsuppliers. Crucially, both buyers and suppliers are required to engage in “human rights due diligence.” These responsibilities are enforceable, although the legal remedies are not facile. MCCs 2.0 now include extensive provisions on human rights remediation as well as more standard contract remedies.
To many lawyers, the addition of buyer responsibilities is the most significant change from MCCs 1.0, but the shift from a regime of representations and warranties in MCCs 1.0 to a regime of human rights due diligence in MCCs 2.0 is at least as important. Several strong forces motivated this move. In any case, large multinational enterprises (MNEs) will likely find themselves subject to mandatory human rights due diligence. Human rights due diligence is already mandatory for companies meeting certain criteria under French law, and regulatory efforts in a similar direction are well underway in European Union law. Small and medium enterprises (SMEs) will benefit from a more realistic regime of due diligence rather than the strict liability of representations and warranties that, as a practical matter, will often be untrue and therefore routinely breached. In other words, MCCs 2.0 move from a demand that the supplier make a number of representations and warranties that both parties will perhaps know to be false, or doubtful, to a contractual expectation that all parties in the supply chain, from the buyer itself to its top-tier suppliers to the lowest level subcontractors, will all be duly diligent about human rights impacts. In some ways, due diligence is familiar as it is a constant in corporate practice. Still, many lawyers will find it new in two ways. Obviously, it is a move away from more traditional contract drafting that centers on standard “reps and warranties.” More fundamentally, human rights due diligence is not simply about assessment of corporate risk and assuring legal compliance but instead requires a consideration of stakeholders’ (including workers’) interests that are not identical to those of the contracting parties.
More broadly, MCCs 2.0 seek to align much more closely with the 2011 UN Guiding Principles on Business and Human Rights (UNGPs) and with the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises as well as the OECD Due Diligence Guidance for Responsible Business Conduct. The UNGPs and OECD Guidelines and Guidance have enjoyed wide uptake by many businesses already, and the ABA itself has officially endorsed the UNGPs, as have numerous other bar organizations. Aside from human rights due diligence, the UNGPs and the Guidelines drove several significant changes in MCCs 2.0. Human rights remediation is generally prioritized over typical contract remedies (like money damages), and issues like pricing, changes of circumstances (such as COVID-19), timing, and modifications are addressed expressly. In addition, the Working Group discovered that while many companies already have committed to respect human rights in their corporate codes of conduct, many are looking for help in doing so in their supply chains. Accordingly, we are offering guidance with respect to what buyers may require of their suppliers in the form of “Building Blocks for Schedule P” as well as guidance in the form of a Schedule Q that states the buyer’s responsibilities. Schedule Q fills a gap in the supply chain governance arena because most codes of conduct apply to suppliers, not buyers. As there are few, if any, examples of buyer codes, Schedule Q is specific and detailed.
Some of these changes are path-breaking but necessary. As detailed below, the legislative move to mandatory human rights due diligence has already started. France led the way, with other countries considering similar legislation, and the European Union has announced that it will be moving in this direction. Large MNEs may already be subject to such rules because of their business in France or the Netherlands, and others may soon find themselves in a like position. That said, many companies find themselves very differently situated, and this project has always been intended for a broad range of companies, including SMEs. Further, different companies are in different places with respect to the commitments they want to make and the responsibilities they can undertake. For these reasons, the MCCs 2.0 retain a fully modular approach so that companies can choose the commitments that best reflect their positions, their goals, and their sector of activity. This is not a certification document; it is not a prix fixe menu. Companies are fully free to order their contractual provisions à la carte, choosing the clauses and the commitments that are right for them.
This project was originally conceived as an effort in legal problem-solving, careful drafting, and research in order to move corporate commitments from mere policy statements to the legal and operational side of companies. It was instigated by a previous ABA project: after much effort and negotiation, the ABA adopted model principles against labor trafficking and child labor. The Business Law Section had achieved some success in convincing companies to adopt these principles, but there was considerable concern that they were ineffective as mere policy statements. The Working Group was formed to operationalize them, in corporate parlance. The Working Group saw its mission as making corporate human rights policies legally effective and operationally likely. These twin goals remain our mantra.
The main challenge at the initial stage of the work was to solve the mismatch between commercial law rules and human rights law and standards. The problem is that goods made in unacceptable conditions might fully conform to product specifications. As we said then, “The background law does not deal easily with the problem of soccer balls that are perfectly stitched but that were sewn by child slaves.” The problem manifests itself primarily with respect to conformity and remedies, and MCCs 1.0 took on the task of resolving those issues. The first version of the MCCs was geared to solve a commercial law problem and to assure that the clauses would be likely to work with typical purchasing documents. They were designed as a helpful resource for companies’ counsel.
The chief issues were making supplier obligations flow through the entire supply chain; allowing for traditional contract remedies along with human rights remediation even if suppliers’ defaults did not lead to defective goods (e.g., perfect shirts that were made in extremely dangerous conditions); conceiving of mitigation as something other than resale at market prices (because the goods may be “perfect” but nevertheless tainted by their reprehensible provenance); allowing a full range of remedies in a less-than-promising international transaction; and structuring the relationship through the use of disclaimers to limit the liability of buyers. MCCs 1.0 offered solutions to these issues, and for the most part they remain in MCCs 2.0, although no solution is ideal. They were (and are) as follows.
The treatment of disclaimers deserves further consideration. The problem is that a variety of legal doctrines may perversely discourage buyers from taking affirmative steps to identify and address human rights abuses in their supply chains. Typically, buyers have no enforceable duties to workers who are legally separated from the buyers, and in most international supply chains, the workers are legally remote from the ultimate buyers (although buyers are prohibited under U.S. law from importing goods made with forced labor). If the buyer takes affirmative steps, however, it may become liable to workers for failing to use reasonable care in an undertaking that it willingly undertook. Further, some types of control by buyers over suppliers may sacrifice the suppliers’ independent contractor status, which can be so important in shielding buyers from liability. For these reasons, the disclaimers in MCCs 1.0 sought to maintain the legal independence of the suppliers, even though the buyer was imposing duties on its suppliers to keep the supply chain clean. For example, while a buyer might monitor its suppliers, MCCs 1.0 provide that the buyer assumes no duty to do so.
Some buyers, of course, may have noncontractual legal duties to monitor, to disclose information, and so on; for instance, buyers who are federal contractors and therefore bound by the Federal Acquisition Regulation must “monitor, detect, and terminate the contract with a subcontractor or agent engaging in prohibited activities.” And all buyers may have a duty to disclose the discovery of forced labor in their supply chains under some circumstances. Further, buyers who commit to abide by the UNGPs or other norms may be under their own corporate duty to do just that, which will involve considerable involvement in keeping their supply chains clean. Such buyers will monitor their suppliers on an ongoing basis to determine whether they are in compliance with Schedule P, and they must map their supply chains to determine whether their products are produced with human rights abuse at more remote links in the chain, below those suppliers with whom they have a direct contractual relationship. Such monitoring and mapping are fundamental to human rights due diligence under the UNGPs. None of this, however, means that contractual disclaimers are inappropriate. That buyers may have a regulatory or statutory duty, enforceable by the government, or their own corporate commitments to the UNGPs or other norms, does not mean that buyers will also want to incur parallel contractual (or tort) liability, enforceable by their contracting counterparties or other private plaintiffs, except as stated explicitly in the contract.
Buyer reluctance to take on additional liability to private plaintiffs should come as no surprise; millions of dollars are spent in litigation over implied private rights of action. The disclaimers simply say that the buyer takes on no contractual duties beyond those explicitly stated; the buyer may or may not owe duties for some other reason, but the disclaimer expressly rejects private contractual enforcement of such duties. The disclaimers thus do important work in protecting buyers who choose to become more involved in managing their supply chains rather than burying their heads in the sand. In short, they help companies manage their risk while they comply with their duties, being clear that some companies may wish to limit who can sue under the contract for alleged breaches of those duties. And to be clear, as just noted, the buyer in MCCs 2.0 does take on some explicitly stated contractual duties, as discussed in the next section. The disclaimers as drafted in MCCs 1.0 are flat, but in Version 2.0 the disclaimers are necessarily qualified: it would not be true to say that the buyer is taking on no obligation to monitor its supply chain, for instance. The buyer is taking on that and other responsibilities as part of its human rights due diligence in Article 1. Thus, the disclaimers remain in MCCs 2.0, but with exceptions for the obligations that the buyer takes on elsewhere in the agreement.
A number of reasons have motivated the addition of buyer responsibilities, but two are compelling: protection for workers cannot happen successfully without buyer responsibility, and many buyers are now or will soon be legally required to take on this responsibility. These twin reasons are all the stronger because they are intertwined.
Buyers’ purchasing practices can play a key role both in protecting and in harming workers. Version 1.0 of the MCCs was conceived on the notion that problems in the supply chain are caused by irresponsible suppliers, not by the ultimate buyer. This is in tension with the UNGPs, the research that supports them, and more recent research in conjunction with the drafting of MCCs 2.0. In short, if the MCCs are to be successful, buyers need to follow responsible purchasing practices.
Extensive research has shed light on the realities of international supply chain contracting and the role of buyers’ purchasing practices. The leaders of the Principled Purchasing Project, which is part of the Working Group, put together an extraordinary set of consultations during the summer of 2020. It is not necessarily the kind of rigorous empirical research from which findings may be generalized, but we did hear from many people in many sectors. Consultations were held with representatives of large Western buyers (including three companies that are certainly household names), with a third party that is often involved in remediation, with nongovernmental organizations and others from civil society, with investors committed to ESG values, with representatives of multilateral international organizations, with standard setters and auditors, with union and labor advocates, with industry associations, and with suppliers from several countries in East and South Asia. After these consultations and other research, the Working Group has no doubt that buyer demands, typically related to production times, price requirements, or change orders, can often cause or contribute to human rights violations. It has become clear that improving buyers’ purchasing practices is central to protecting workers from human rights abuses. To be effective, the MCCs must provide mechanisms for buyers to share responsibility with suppliers.
To the business-minded lawyer, effectiveness must always be the ultimate goal, but any lawyer’s mind is trained to home in on legal risks; developing legal requirements on human rights due diligence and increased legal enforcement of existing regulations heighten the need for buyers to focus on their responsibility. It is still true that policing supply chains carries risks, and candid lawyers must acknowledge as much to their clients. But the countervailing risks have been heavy for some time, and they are becoming even weightier now. When MCCs 1.0 were published, companies were already concerned with a variety of compliance obligations, particularly around federal trafficking, forced labor, and child labor statutes, as well as disclosure obligations under some state and foreign laws. Many of these may have seemed like paper obligations, and companies seldom if ever felt the brunt of any enforcement. That has changed, and U.S. Customs and Border Protection has now seized numerous cargoes under withhold release orders issued pursuant to antitrafficking laws. Corporate boards and officers can no longer afford attractive but ineffective corporate policies. Few current risk assessments will be able to justify turning a blind eye to the problems.
And if U.S. Customs enforcement were not enough to spur action, new legislation has also begun to require companies to be responsible for their supply chains, and not just concerning child labor, forced labor, and conflict minerals, but also with respect to working conditions and workers’ health and safety. For many years, admittedly, companies had few seriously enforced legal incentives to clean their supply chains. That landscape changed when France passed its duty of vigilance law in 2017 and the Netherlands passed a similar Child Labor Diligence Act in 2019. The EU is now showing every sign of following suit. These changes are discussed in the next section, but the point for now is that both operational effectiveness and legal obligation, in practice and on paper, require buyers to take responsibility for their supply chains. MCCs 2.0 help them to do that.
The same two reasons—operational effectiveness and enforced legal requirements—that compel the addition of buyer responsibilities within MCCs 2.0 also require the move from representations and warranties to human rights due diligence. For many MNEs there is not much of a risk calculus on this score; simply put, human rights due diligence is currently required by French law and Dutch law and will likely be required very soon by EU law. Even for MNEs that are not subject to French and Dutch law and that will not be subject to EU law, and for SMEs in similar circumstances, the move still makes sense. The regime of representations and warranties, with their accompanying strict liability—if they are not true, there is breach—is unrealistic and ineffective, and often so much so as to be downright fictitious. Frequently, this regime is thought to lead to what is called a “tickbox” or “checkbox” approach to supply chain management in which buyers require a laundry list of representations of compliance from their suppliers. Suppliers mechanistically provide them by checking the boxes, and everyone goes home happy (although they may be more than a little resentful of time wasted filling forms). Little is achieved.
The move from representation-and-warranty to due diligence is eminently practical, then, and should be reassuring to the parties. The participants in the supply chain are no longer being asked, unrealistically and fictitiously, to literally guarantee perfect compliance with the human rights and safety standards in Schedule P and the principled purchasing practices in Schedule Q. Instead, they are being required to be duly diligent, on an ongoing basis, about achieving those goals. This is not mere aspiration; the parties are contractually obligated to use reasonable means to achieve the goal. But there is no longer strict liability for failure of perfect compliance. And there is no longer the knowledge, certain to both parties, that the human rights obligations of the contract are breached the moment it is signed.
Although warranty rather than due diligence is the usual style of contract drafting in common law countries, diligence obligations are no stranger to the common law. Notions of good faith efforts or best efforts are standard in many contracts for sales of goods, and due diligence accords well with the obligation de moyens, which is sometimes even called an obligation de diligence, in the civil law. To some, the switch may seem surprising; after all, if human rights are so crucial, should the parties not be expected to be strictly liable rather than merely to use appropriate efforts? Yet, given the size and complexity of many supply chains, the varying capabilities of different companies, from the largest MNEs to the most modest SMEs, due diligence is the better regime. These inescapable facts are recognized in the UNGPs. Under Guiding Principle 24, businesses are entitled to prioritize and focus their attention on the most severe human rights harms or on harms that would become irremediable in the event of a delayed response. Not everything can be made perfect, ever, much less all at once. Perfection is not and cannot be the standard. Priorities are necessary, as is reflected in MCCs 2.0, particularly sections 2.3(c) and 2.5.
Human rights due diligence is a prospective, retrospective, and ongoing risk management process that enables businesses to respect human rights by identifying, preventing, mitigating, and accounting for how they address the impacts of their activities on human rights. To be effective, it requires understanding the perspective of potentially affected individuals or “stakeholders,” and engagement with stakeholders pervades each stage of the process. It is understood within the context of the UNGPs and the subsequent OECD Guidelines and Guidance. The OECD Due Diligence Guidance provides enterprises with the flexibility to adapt due diligence to their circumstances, recognizing that the nature and extent of diligence will be affected by the size of the enterprise, the context of its operations, and other factors. Specific guidance for SMEs seeking to implement effective human rights due diligence processes can also be found in the Guidance. In addition, the OECD has produced sector-specific due diligence guidance for the minerals, extractives, agriculture, garment and footwear, and financial sectors, as well as guidance that applies across sectors. Like the Guiding Principles, a key aspect of the OECD Due Diligence Guidance is to carry out and improve the diligence process on an ongoing basis. Although the language is not well suited for contract clauses, the following list provides a good, though not exhaustive, understanding of the concept. Human rights due diligence includes:
As can be appreciated from this list, while due diligence is familiar to corporations and their counsel, human rights due diligence is not coterminous with the kind of due diligence undertaken for a merger or a public offering. Human rights due diligence goes beyond technical legal compliance and includes the need to look at risks through the perspective of the stakeholder, as learned through engagement with the stakeholder; the prioritization of responsive action by severity of impact on the stakeholder; the need to search on an ongoing basis for human rights risks throughout the entire supply chain, and not just the first few tiers; the development of leverage to influence contractual parties to refrain from, mitigate, or remediate harm to human rights; and the need to go beyond the limits of local law. In other words, human rights due diligence is a necessary part of ongoing supply chain management; it is proactive, forward and backward looking, responsive to actual or potential impacts, and requires meaningful and regular engagement with stakeholders. Under the present law, to some degree, and under the law as it is developing, those impacts are part of the inescapable responsibility of the contracting parties, and that is why they are the focus of the first obligation stated in MCCs 2.0.
Human rights remediation receives extensive treatment in MCCs 2.0. In contrast, MCCs 1.0 provide for termination on breach but assume the parties would not actually move to termination except in the rarest and most egregious circumstances. Instead, the parties would work to remediate the problem by taking measures to stop and correct the harm and to address any grievances. Termination, generally speaking, is in no one’s interest. The buyer does not want to suffer the disruption and incur the delay or switching costs to transfer its business to new suppliers. The supplier certainly does not want to lose business. And except in the most extreme circumstances, the workers do not want to lose their jobs and their livelihood, such as it is. MCCs 1.0 give the buyer a termination right, which would increase the buyer’s leverage, as contemplated by the UNGPs and OECD Guidelines, in order to require human rights remediation by the supplier. In this way MCCs 1.0 are similar to many loan documents that allow a lender to call a loan upon default, accelerating all amounts due and requiring immediate payment, even though in most circumstances everyone expects the loan to be sent to “workouts” where efforts can be made to salvage the loan. Of course, not all loan documentation works this way, and similarly, MCCs 1.0 provide an alternative for notice and cure if the parties want to provide contractually for human rights remediation.
Because everyone should contemplate remediation in almost all circumstances, MCCs 2.0 flip the position of MCCs 1.0 and provide for remediation expressly and extensively. In addition, remediation is not solely the responsibility of the supplier; the buyer must participate if it has caused or contributed to the problem. These provisions are not only in keeping with the shared responsibility of buyers and suppliers but also seem especially appropriate in cases where the buyer has caused or contributed to the harm. On the other hand, and perhaps just as obviously, cases may arise where the conduct is so egregious that immediate termination is required, with no opportunity for remediation, and MCCs 2.0 provide expressly for this as well. These cases involve what are often called zero-tolerance activities.
The radical disruptions of COVID have caused new problems in supply chains and exacerbated old ones. MCCs 2.0 address these problems with two innovative provisions. MCCs 2.0 acknowledge that the intervention of an event like COVID, or a particularly vicious monsoon, or political unrest, or countless other events, could upset the supply chain in a way that the goods could only be produced in violation of the commitments in Schedule P. Often these violations occur because of unauthorized subcontracting. In the case of COVID, lack of personal protective equipment could make production unsafe. These events may or may not constitute a force majeure, and the outcomes of judicial decisions on this issue are notoriously unpredictable under the U.C.C. and international sales law. Judicial resolution of disputes in international supply chains is often impractical anyway. For these reasons, the clauses themselves provide guidance.
Notably, they apply to any “reasonably unforeseeable, industry-wide or geographically specific, material change” regardless of whether the change constitutes a force majeure. A supplier may exit the relationship without default if staying in the relationship would force it to breach Schedule P. When it comes to buyers wanting to exit the relationship, for whatever reason, including a force majeure event or something similar, the clauses impose on the buyer a duty to “consider the potential adverse human rights impacts and employ commercially reasonable efforts to avoid or mitigate them,” regardless of the reason for exit. In light of claims that many buyers abandoned their suppliers when the COVID-19 lockdowns set in without compensating them—even for completely manufactured goods, and, in some cases, even for goods that had already been shipped—MCCs 2.0 add that “[t]ermination of this Agreement shall be without prejudice to any rights or obligations accrued prior to the date of termination, including, without limitation, payment that is due for goods.”
These clauses hardly solve all the problems of force majeure, COVID, and similar events. Nothing can. But they bring human rights into the equation and may help the parties reach resolutions that take into account a broad view of the interests involved.
Because the MCCs are drafted as an addition to a primary sales agreement, Version 1.0 contains no provision for dispute resolution. Presumably choice of law, choice of forum, arbitration, or the like would be treated in the main agreement. After publication of MCCs 1.0, the Working Group learned more about the special context of dispute resolution that involves human rights, and for that reason MCCs 2.0 add two relevant provisions.
Most prominently, clauses on nonjudicial dispute resolution have been added. For companies that prefer to litigate rather than arbitrate, litigation remains an option. (Alternative drafting is offered in MCCs 2.0 ¶ 8.6, so companies can choose arbitration or litigation.) Still, even companies that want judicial resolution of ultimate disputes may benefit from pre-litigation efforts at amicable resolution, and these mechanisms are set up in this new version. This kind of collaborative resolution is consonant with the more cooperative approach now taken in much cutting-edge supply chain management. Many companies will find the “up the line” scheme to be consistent with their management practices in many other business contexts.
In addition, as MCCs 2.0 align more closely with the UNGPs, an “operational level grievance mechanism” is set up to address problems as they arise. This mechanism is informal, but it is nevertheless required, and it must be fully functional. Again, its purpose—to be “legitimate, accessible, predictable, equitable, transparent, rights-compatible, a source of continuous learning and based on engagement and dialogue with affected stakeholders, including workers”—will align with many companies’ efforts toward collaborative supply chain management. Further, it is required for consistency with the UNGPs.
A modular approach is the central drafting strategy of the MCCs in both versions. The Working Group fully recognizes that not all companies are in the same place. Not only do they possess differing capabilities and face varying contexts, they are simply in different positions in their approach to human rights. Some companies—often those that have been involved in the worst problems—have advanced far in taking responsibility for the effects of their business on human rights. Other companies have taken only a few steps, and many have not yet started on the path. The MCCs are drafted for all of these companies and are designed so that counsel, with a minimum of effort, can adapt them to the particular circumstances of each company.
The Working Group has faced calls to require buyers to agree to all of the clauses, to prohibit “cherry-picking,” and to mandate a particular allocation of responsibility. And the Working Group has faced criticism for failing to do so, or for rejecting goals that can only be aspirational. These calls and criticisms misconceive the place of the Working Group. We cannot impose duties or mandate compliance. Nor have we chosen an aspirational mission. We are a creature of the Uniform Commercial Code Committee of the ABA Business Law Section, and we see ourselves as practical lawyers. The original and ongoing goal to draft clauses that are “legally effective and operationally likely” can only be achieved if companies adopt the clauses. Otherwise the MCCs will be relegated to even greater irrelevance than the corporate policies that languish, unused, in the minute books of board meetings. Accordingly, the MCCs are drafted so that companies can eliminate clauses that do not fit their goals; they can use MCCs 1.0 if MCCs 2.0 are too much; they can adapt everything to meet their needs. For many companies, the most critical step is the first one—to start taking measures to improve their contracts. If the Working Group can make it easier to take that first step, we will have accomplished one of our most important objectives. That is not our only objective, however. We hope to provide guidance for companies that would like to move into a leadership position. We have tried to achieve balance while understanding that different companies walk on different tightropes in different tents.
We began with the confession that challenge, frustration, and hope were the catalysts for this project, and their powerful combustion continues to move the project forward. After publication of MCCs 1.0, it became clear that an ambitious effort toward revision would be needed to meet the goals of the project, which at its center is focused on improving the human rights of workers and other stakeholders, practically and immediately, through contracts—one of the most potent tools available. At the same time, we know that more needs to be learned, that new methods of supply chain management are coming into use, that new laws are in the offing, and that more work will need to be done. For now, we believe MCCs 2.0 offer a practical tool for companies that want to commit to protecting workers and other stakeholders in their international supply chains. It is not an easy task. The problem is spread across the world and results from countless factors, including basic economic realities. It will not be fixed soon, and it will not be fixed by supply chain reform alone or by contract clauses standing by themselves. This is the challenge. And it is sometimes frustrating that the problem can seem intractable, particularly since so many people, with different missions, different incentives, and different perspectives, contend for so many different solutions. Still, we believe that every effort can help and that practical solutions offered for even the most complex problems can result in real improvements in the lives of real people. That is our ultimate objective.
Contents
Clauses to be inserted into supply contracts, purchase orders, or similar documents for the sale of goods
The text proposed assumes that buyers are located in the United States and that the applicable law is either (a) U.S. state law that implements the Uniform Commercial Code without material nonuniform amendment or (b) the United Nations Convention on Contracts for the International Sale of Goods (the CISG, a treaty to which the United States is a party and which applies to many international sales of goods under CISG article 1(1)(a)).
For the most part, substantive human rights standards and ethical purchasing practices are not contained in these clauses and are instead assumed to be specified in Schedule P and Schedule Q, respectively. For companies that do not already have substantive human rights requirements for their suppliers, “Building Blocks for Schedule P” is included separately to provide guidance. A pro forma Schedule Q is also provided separately. In the clauses below, please refer to the footnotes for explanations of risks, statutory and case law, and human rights guidance from the UN Guiding Principles on Business and Human Rights (the Guiding Principles or UNGPs) and the 2011 OECD Guidelines for Multinational Enterprises (the OECD Guidelines) as well as the 2018 OECD Due Diligence Guidance for Responsible Business Conduct (the OECD Due Diligence Guidance).
The development of an enterprise-wide culture to address human rights violations in the workplace is essential. These violations include not only modern slavery and child labor but also recruitment fees, confiscation of travel documents, travel permits, or room and board fees, insufficient pay, harassment, brutal hourly demands, restrictions on freedom of association, toxic exposure on the job site, and dangerous facility conditions. Only such a pervasive culture can identify the risks of a company’s involvement in potential human rights harms that could violate both current and emerging global regulations. A generalized reference in Schedule P to observance by the supplier of all international human rights or a boilerplate reference to supplier codes cannot yield an effective tool to identify and manage the appropriate response to very real and ongoing threats to human rights given “salient risks” within a supply chain.
The UN Guiding Principles on Business and Human Rights (“UNGPs”) were unanimously adopted by the UN Human Rights Council in June 2011. The Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises (“OECD MNE Guidelines”) were revised to include a new human rights chapter that was consistent with the UNGPs that same year. Since 2011, the UNGPs and the OECD MNE Guidelines have enjoyed ever-growing recognition in the international business community across sectors as documents that define responsible business conduct (“RBC”), notwithstanding characterization as voluntary standards and therefore “soft law.”
The UNGPs consist of thirty-one principles grounded in recognition of the following three pillars: (1) states’ existing obligations to respect, protect, and fulfill human rights and fundamental freedoms (UNGPs 1–10); (2) the role of business enterprises as specialized organs of society performing specialized functions, required to comply with all applicable laws and to respect human rights (UNGPs 11–24); and (3) the need to match rights and obligations to appropriate and effective remedies (UNGPs 25–31).
Schedule P must focus on the second of the three mutually supporting pillars of the “Protect, Respect, and Remedy” framework from the UNGPs: corporate responsibility to respect human rights. The UNGPs insist that corporate responsibility to respect human rights is a global standard of expected conduct for all business enterprises wherever they operate and independently of any states’ abilities and/or willingness to fulfill their own human rights obligations. The UNGPs further explain that such corporate responsibility also exists over and above compliance with national laws and regulations. To protect human rights and address adverse human rights impacts, companies must take adequate measures for the prevention, mitigation, and, where appropriate, remediation of adverse impacts. Businesses are expected to (1) publicize a high-level commitment to respect human rights and embed it in the organization; (2) conduct human rights due diligence (“HRDD”); and (3) remedy harm that it caused or contributed to through a business relationship or through its own actions in tandem with another actor or harm linked to its operations, products, or services.
To comply with the UNGPs, a company must conduct due diligence to measure its human rights impacts according to substantive human rights benchmarks expressed in the International Bill of Human Rights (“IBHR”) and International Labour Organization (“ILO”) Declaration on Fundamental Principles and Rights at Work.
Identifying a need to promote a common understanding of the meaning and scope of due diligence for RBC, the OECD developed OECD Due Diligence Guidance for Responsible Business Conduct (“Guidance”) in 2018 to provide practical support to enterprises on implementation of the OECD Guidelines, with explanations of its due diligence recommendations. The Guidance seeks to align with the UNGPs, the ILO Declaration on Fundamental Principles and Rights at Work, the ILO Conventions and Recommendations referenced with the OECD MNE Guidelines, and the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy. Note that the OECD has also developed sector-specific due diligence guidance for the minerals, agriculture, and garment and footwear supply chains and good practice papers for the extractives and financial sectors.
The Guidance explains that enterprises should carry out due diligence to identify, prevent, mitigate, and account for how they address actual and potential adverse impacts in their own operations, their supply chain, and other business relationships as recommended in the OECD MNE Guidelines. Effective HRDD should, per the Guidance, be supported by efforts to embed RBC into policies and management systems to enable enterprises to remediate adverse impacts that they cause or to which they contribute. HRDD is an ongoing process that should commence prior to contracting and must continue during the life cycle of the contract, including its end. It should be designed to assess and govern a business enterprise’s impact on human rights and not the impact of human rights on a business enterprise. After properly diagnosing risks, ongoing HRDD should ensure that corporate responses are fit to context and provide individuals with the type of support they need, actually mitigating and preventing further harm and producing positive human rights outcomes.
Schedule P should refer specifically to the salient risks that the business discovers in its supply chain after extensive HRDD, including not only the possibility of modern slavery and child labor but also, for example, environmental catastrophe, violence from company security forces, compromised workplace safety, or discrimination and harassment. Schedule P should be as clear as possible when defining salient risks within the supply chain.
Such clarity is not possible without comprehensive HRDD. Due diligence is mandatory in some European countries, and many other countries are now considering similar bills. On April 29, 2020, the European Commissioner of Justice, Didier Reynders, announced that the European Union would propose new mandatory HRDD legislation. Whether that legislation or regulations promulgated under it will identify specific HRDD acts or a safe harbor process is yet to be seen.
The ETI Base Code, founded on ILO conventions and used widely across sectors, is an “internationally recognized code of good labor practice . . . used as a benchmark against which to conduct social audits and develop ethical trade action plans.” “The provisions of the Base Code constitute minimum and not maximum standards” but nevertheless include nine categories, as follows: “1. Employment is freely chosen [i.e., no forced labor]; 2. Freedom of association and the right to collective bargaining are respected; 3. Working conditions are safe and hygienic; 4. Child labor shall not be used; 5. Living wages are paid; 6. Working hours are not excessive; 7. No discrimination is practiced; 8. Regular employment is provided; and 9. No harsh or inhumane treatment is allowed.” Some codes expand on these categories to include community-wide impact, environmental issues, and land rights. SMETA is an audit methodology providing a compilation of what are recognized as practical and ethical techniques. It includes a rating system for the severity of non-compliance when evaluating any one of the nine categories above, from “[b]usiness critical non-compliance” being the most severe to “[c]ritical non-compliance,” “[m]ajor non-compliance,” or “[m]inor non-compliance,” the last-named being the least severe. The corresponding timescales for remediation range from zero to ninety days, with “business critical issues” requiring an immediate response (i.e., zero days) to correct the issue. Once a customer begins or takes corrective action, an auditor verifies the adequacy of the business’s actions either remotely or onsite. SMETA should be used to supplement a business’s systems, as it is not “intended as a standalone document.”
Almost all codes adopt a similar approach, with varying emphasis and different levels of tolerance for certain non-compliances. The drafters of a company’s Schedule P could use the ETI Base Code and SMETA audit framework as a starting point to identify and map risks determined in the company’s essential, precontract due diligence. Schedule P should define what the buyer and supplier agreed will constitute important terms, such as “severity,” “salient risks,” and “child labor.” Schedule P also should include a process for handling discovered non-compliances that prioritizes attention to salient risks and expects buyer and/or supplier to respond based on their level of involvement depending on findings of “cause,” “contribution,” and “linkage.” A finding of “cause” should trigger a need to fix, remedy, and prevent, while a finding of “contribution” triggers a need to fix, remedy, and prevent through leverage and possible contract suspension and even termination. A finding of “linkage” should trigger efforts to prevent through leverage and possible contract suspension or termination.
The contents of each company’s Schedule P policy statement will vary depending on the parties, the contract, and the salient risks at different tiers of the chain. Schedule P should be the result of extensive, ongoing HRDD. UN Guiding Principles 17 through 21 enumerate the due diligence process: (1) identify risks of harm to people and their environment; (2) respond to risk in an integrated fashion (which varies according to the mode of involvement; that is, cause, contribution, or linkage); (3) monitor and track performance; and (4) disclose risks and impacts to affected stakeholders. This same process can be broken down to include: (a) risk mapping; (b) regular assessment; (c) actions to mitigate; (d) alert mechanisms; and (e) monitoring and evaluating for specific issues and possible routes to address those issues. For example, there may be pollution of drinking water at one tier, security force violence at a second tier, and dangerous working conditions at a third. Boilerplate text to cover all potential risks will not result in the parties’ clear understanding of what needs to be done and may be useful only to identify a breach rather than guide conduct. Schedule P should not consist solely of a list of possible internationally recognized human rights that the supplier reviews and checks off as an assurance of current and ongoing compliance without true investigation. Rather, it should specify in practical and concrete terms the types of conduct by the parties that would constitute human rights abuse and identify which abuses justify suspension or even termination of the contract. Schedule P must also acknowledge the potential existence of other risks or abuses in the supply chain identified later or inadequately during the initial due diligence processes that may have to be addressed with a response other than, or including, suspension or termination. Sector- and conduct-specific multi-stakeholder human rights standards, such as the Voluntary Principles on Security and Human Rights and the Fair Labor Association’s revised Principles of Fair Labor and Responsible Supply Chains of Minerals from Conflict-Affected and High Risk Areas, as supplemented, might be incorporated or referenced where appropriate. A meaningful Schedule P is the result of extensive and ongoing due diligence and a history of dialogue between buyer and supplier that establishes clear and enforceable standards preserved in a written and understood action plan.
At a minimum, the content of a Schedule P, which is consistent with international standards, should:
For companies looking for a more comprehensive list of Schedule P building blocks, a number of concrete tools are available to assist a company in designing an effective Schedule P statement that articulates its human rights policies. Schedule P should address precontract due diligence at length, and a concrete remediation plan should be derived therefrom. This seems logical: buyer and supplier should both be reluctant to enter into agreements without knowing in advance whether they might, and how they might, address hypothetical, let alone known, existing problems. Hence, Schedule P is expected to lead to some form of “remediation plan” that exists at the outset or that the parties agree to develop soon after signing. This plan would articulate long-term goals (on a prioritized basis) and interim steps that each party will take, either alone or in conjunction with others, as well as dates for achieving these steps and reporting and monitoring requirements.
One highly useful practical tool is the 2016 report, Doing Business with Respect for Human Rights: A Guidance Tool for Companies, a collaboration between the Global Compact Network Netherlands, Oxfam, and Shift. The report provides practical guidance on how a company can set the overall tone on human rights through its policy commitments, how it can embed those commitments into the company’s DNA, how it can move from reactively to proactively assessing its impacts, how it can integrate its human rights policy into its interactions with business partners and act in response to discovered human rights risks, how it can evaluate its successes and failures, how it can make the stated commitments meaningful by engaging with stakeholders, and how to respond promptly and effectively to solve human rights problems. Appendix B to the report provides a detailed summary of what should go into a policy commitment, including types of general and specific statements, implementation processes, and who is responsible for implementation, evaluation, and updates to the policy.
Another widely used resource is the 2017 UN Guiding Principles Reporting Framework, a collaboration between the Shift Project and international accounting firm, Mazars LLP. It consists of a short list of targeted questions designed to increase internal and external understanding of a company’s human rights policies and practices by assessing the quality of how the company identifies and manages each of its salient human rights risks.
To be effective, the human rights expectations of Buyer in the Model Clauses have to be articulated and then enforced at every level of the supply chain. Supplier, as well as every lower tier supplier, must certify that it is fully familiar with all of the terms of the agreed upon Schedule P and the conditions under which the services are to be performed. Each tier supplier must enter into its agreement based on its own ongoing investigation of all human rights matters within the scope of its operations and cannot rely on the opinions or representations of other suppliers. Schedule P must, therefore, include a “perpetual clause” such that each supplier binds its lower tier supplier(s) to all of the performance obligations and responsibilities that Supplier assumes toward Buyer under Schedule P.
In this manner, Schedule P would be incorporated into every subsequent agreement or arrangement in the supply chain, insofar as it relates in any way, directly or indirectly, to the services or products in the chain. Each supplier agrees to be bound to the supplier that engaged its services in the same manner and to the same extent as the Supplier who contracted with Buyer in the master agreement. Where, in Schedule P and the Model Clauses, reference is made to Supplier and the work or specifications pertain to Supplier’s trade, craft, or type of work, such work or specifications shall be primarily interpreted to apply to the next tier supplier. To be precise, there would be a general reference to a requirement, say, for example, no forced labor, and a more specific section prohibiting the use of conflict minerals in a contract for electronics or, in a contract for garments, no cotton from particular named places.
It is the Working Group’s intention that Supplier shall have the benefit of all rights, remedies, and redress against a subsequent tier supplier that Buyer has against Supplier under the prime contract, and each lower tier supplier shall have the benefit of all rights, remedies, and redress against Supplier that Supplier has against Buyer under the prime contract, subject to the restrictions and limitations of the Model Clauses and only insofar as any of the foregoing is applicable to Schedule P. If deemed desirable and appropriate, both Schedule P and the Model Clauses can make it clear that Buyer has the direct right to claim a human rights breach by a supplier within the chain below the Supplier that is a party to the master agreement and that Supplier and each lower tier supplier has the same right in its role as a lower tier buyer vis-à-vis the lower tier supplier.
Even if Schedule P goes beyond traditional privity and applies up and down the chain, many insist that there is little likely enforcement of the Model Clauses or Schedule P that effectively addresses human rights representations without the inclusion of impacted stakeholders. “Next Generation Supplier Codes,” a phrase adopted by the Corporate Accountability Lab, include provisions and enforcement mechanisms that:
Sample third-party beneficiary clauses to be added to a buyer-supplier agreement can be found at Corporate Accountability Lab, “Towards Operationalizing Human Rights and Environmental Protection in Supply Chains: Worker-Enforceable Codes of Conduct” (Feb. 2021), https://corpaccountabilitylab.org/publications.
This report is the product of the Working Group and reflects its rough (and sometimes hotly debated) consensus. While produced under the auspices of the Uniform Commercial Code Committee of the American Bar Association Business Law Section, the report has not been approved or endorsed
by the Committee, the Section, or the Association. Accordingly, the report should not be construed to be the action of either the American Bar Association or the Business Law Section. Nothing contained herein, including the clauses to be considered for adoption, is intended, nor should it be considered, as the rendering of legal advice for specific cases or particular situations, and readers are responsible for obtaining such advice from their own legal counsel. This report and the clauses and other materials herein are intended for educational and informational purposes only. The lawyer
who advises on the use of these clauses must take responsibility for the legal advice offered. ** David Snyder as chair and Susan Maslow as vice chair served as principal drafters of this report, particularly the introductory text and Version 1.0 of the MCCs, which served as the groundwork for this Version 2.0. Much of the drafting of the new contract clauses in Version 2.0 was undertaken pro bono publico by a team at Linklaters LLP, although the ultimate drafting was done (and ultimate drafting decisions made) by Snyder and Maslow with the support or at least acquiescence of the Working Group. David Snyder is Professor of Law and Director of the Business Law Program at American University, Washington College of Law, in Washington, D.C., and would like to acknowledge grant funding from the law school as well as travel funding from the American Bar Association. During the final stages of this project he served as a Fernand Braudel Senior Fellow at the European University Institute (Florence), whose grant support is gratefully acknowledged. He would also like to thank Katherine Borchert, Philip Killeen, Sophie Lin, and Alexandra Finocchio for excellent research assistance. Susan Maslow is a semi-retired partner at Antheil Maslow & MacMinn, LLP, in Bucks County, Pennsylvania. She is also chair of the Corporate Social Responsibility Subcommittee to Implement the ABA Model Principles on Labor Trafficking and Child Labor. Special thanks are due to Aditi Bagchi, Omri Ben-Shahar, Robert Hillman, Jonathan Lipson, Trang Nguyen, Kish Parella, and Salli Swartz. † Sarah Dadush, Professor of Law at Rutgers Law School, led the Principled Purchasing Project to move the MCCs toward a more balanced allocation of responsibility for the human rights performance of supply contracts between buyers and suppliers. Specifically, the Project team produced MCCs that articulate the buyer’s obligations to behave responsibly in relation to its supplier in order to better protect workers’ human rights; the Project team also produced the Responsible Purchasing Code of Conduct, referred to as Schedule Q throughout the MCCs. The team is made up of Olivia Windham-Stewart, John F. Sherman III, and a team of lawyers acting pro bono publico from Linklaters LLP, and the Project benefited from a generous grant by the Laudes Foundation.
