From Rights to Reality: The Remedy Project’s Response to the Zero Draft of the European Model Clauses
Overview
The Remedy Project welcomes the publication of the Zero Draft of the European Model Clauses (“EMCs”) developed by the European Working Group for Responsible Sustainable Supply Chains (“European Working Group”) in response to European regulatory developments in relation to human rights and environmental due diligence (“HREDD”), including but not limited to the 2011 United Nations Guiding Principles on Business and Human Rights (“UNGPs”), the EU Directive 2024/1760 on corporate sustainability due diligence (“CSDDD”), as well as EU mandatory HREDD legislations (together, “Regulations”). [1] Building on the 2021 Model Contract Clauses to Protect Workers in International Supply Chains, Version 2.0 (“MCCs 2.0”), as developed by the American Bar Association Working Group for US legal context, the EMCs are adapted to the contract law of European jurisdictions.
The European Working Group’s efforts to develop model contractual clauses that seek to implement HREDD requirements under the Regulations are notable. It is a much needed and welcomed acknowledgement that although the Regulations would only have direct application on in-scope EU businesses, effective and meaningful compliance with HREDD obligations would necessitate collaboration among actors across the supply chain, including buyers, suppliers, their sub-suppliers and subcontractors. The EMCs, which are intended to serve as an example of contractual clauses that can be implemented by EU businesses in their supply chain contracts, have the potential of providing effective contractual tools for integrating human rights and environmental standards and relevant HREDD obligations across global value chains.
In this light, the legislative objectives of the Regulations should be the guiding principles for establishing a contractual framework to formalize HREDD obligations in buyer-supplier relationship. For this purpose, we wish to highlight the following key regulatory objectives which, amongst others, should underpin supply chain contracts, as these form the basis of our observations and comments about the EMCs as set out in later parts of this response:
HREDD, at its core, should be a rightsholder-centric process that is focused on building trust, encouraging cooperation and creating partnerships among actors in global value chains. The overall imperative of the Regulations is to drive towards equity across value chains, and achieving resilience, trust and relationship building. Above all, supply chain contracts should aim at fostering a collaborative relationship, as opposed to one that promotes greater inequity through a litigious approach, e.g., damages.
The Regulations follow a proportionate approach by imposing stricter obligations on larger companies with sufficient resources to comply with the HREDD requirements, and require such companies to provide support to their business partners, who are small and midsize enterprises (“SMEs”). Adopting the same approach, contractual obligations in supply chain contracts should be commensurate with the parties’ sizes, resources and capabilities, and support should not only be provided to SMEs, but other enterprises where necessary in light of their circumstances and constraints.
Businesses directly subject to the Regulations, particularly the CSDDD, are expected to bear the costs of compliance, which include transition costs, including expenditure and investments to adapt their own operations and value chains to comply with the HREDD obligations. In the contexts of supply chain contracts, EU buyers should be expected to shoulder greater compliance responsibility in fulfilling HREDD obligations, especially if they involve non-EU contracting parties with considerable lesser resources and capabilities.
As many promises they might hold, HREDD-focused contractual clauses for supply chain contracts must be carefully drafted to be fit for purpose, and sensitive to the business realities and power dynamics that underly buyer-supplier relationship in global and local contexts. Like the European Working Group, The Remedy Project recognises the critical role contracts play, as building blocks that govern and regulate supply chain relationships, thereby shaping HREDD practices across global supply chains. The EMCs’ commitment to improve the current insufficient contracting practices, towards more balanced approaches in supply chains is commendable. However, one should not lose sight of the commercial implications the clauses could have on the local supply chains, and the respective challenges EU and non-EU actors may face when implementing these obligations.
A major stumbling block in implementing the HREDD obligations under the Regulations is the lack of transparency across supply chains, especially for multinational companies with extensive, multi-fold supply chains around the world. Despite regulatory push towards greater visibility, existing corporate risk data collection systems and conventional methodologies prove to be inept in gaining valuable, actionable data for HREDD purposes, especially in relation to lower-tier suppliers and sourcing of raw materials. It does not help for multinational companies to simply cascade obligations down the supply chain through contractual means without providing necessary assistance and support to suppliers. Enhancing supply chain visibility is an organizational challenge that requires a collaborative rather than top-down relationship. Furthermore, some provisions in the EMCs seem to assume visibility down the value chain, whereas compliance with these obligations would require parties to first map and collect data about the lower tiers of the supply chain, and such additional cost is largely borne by the supplier. As currently drafted, the EMCs could run the risk of perpetuating such a cascading compliance model, by shifting the responsibility of due diligence and monitoring to suppliers and imposing disproportionate compliance costs on them. This will be further discussed in the following sections. Instead, more guidance and support should be provided to suppliers to comply with HREDD requirements in a progressive manner.
To move towards more equitable, collaborative relationships and shared responsibility for HREDD obligations, it is critical that the EMCs are grounded in the contexts where they would likely apply. We wish to offer our views based on our understanding of the Regulations, as well as our experience from working with various actors in global value chains, especially observations about local realities and practical challenges under the evolving business and human rights landscape. In particular, we would like to highlight the following areas of improvement for the EMCs to realize its full potential, as will be elaborated in later sections:
Need for shared responsibility and proportionality
More pragmatic approach in view of commercial realities and local contexts
Greater accessibility and clearer obligations with guidance
Fostering collaboration and trust, rather than one-sided policing approach
Upholding regulatory intent and rightsholders-centric approach
1. Need for shared responsibility and proportionality
While affirming a joint commitment by the buyer and supplier to cooperate in implementing HREDD is commendable, the EMCs do not fully acknowledge their unequal resources and capabilities, by holding the supplier to the same standards as the buyer, which in effect places heavier compliance burden and cost on the supplier. Below we highlight some clauses of concern which run the risk of imposing unequal burdens on the parties. Not only do they depart from the shared responsibility approach intended by the Regulations but also lose sight of the power dynamics in buyer-supplier relationships.
Some of these clauses entail inequitable allocation of risks for non-conformance and adverse impacts towards the supplier:
The obligation to remedy actual adverse impacts is unfairly borne by the supplier under Article 2(a), which requires a supplier which has caused or jointly caused an actual Adverse Impact, as defined in the EMCs, to prepare and implement a corrective action plan (“CAP”). While a buyer who jointly caused the actual Adverse Impact is required under Article 2(b) to contribute to remediation by providing assistance and support the preparation and implementation of the CAP, the principal obligation remains on the supplier. The provision does not specify the responsibility of the buyer in the cases where the Adverse Impact may be directly linked to the buyer’s chain of activities. Where the supplier did not cause or jointly cause the actual Adverse Impact, the buyer may develop a CAP, in which case the supplier must cooperate in its implementation. The clause unreasonably shifts the obligation to mitigate on the supplier, when the regulatory duty clearly rests on a buyer who is subject to the CSDDD to neutralise the adverse impact or minimise its extent, and develop and implement a CAP where necessary, under Article 11 of the CSDDD, and provide remediation in accordance with Article 12 of the CSDDD.
Moreover, Article 3.2(c) gives buyer the right to reject Nonconforming Goods as defined in the EMCs, i.e. goods that cannot be released or sold in the European market because of applicable European regulations, which is unduly broad. The cost of disposing of such goods and finding a replacement contract with another supplier is solely borne by the supplier, unless the supplier is an SME or unless both the buyer and supplier jointly caused the actual Adverse Impact at issue. On one hand, it perpetuates unfair contractual practices where rejection of goods is at the buyer’s sole discretion whereas the supplier solely bears the costs as default. On the other hand, the supplier would face a double penalty in such circumstances, as being required not only to bear the compliance cost for mitigation, but also for implementing a CAP pursuant to Article 2(a). This approach ignores the case where purchasing practices and pricing may be part of the underlying cause of the adverse impacts at the supplier level. To hold the supplier solely responsible for the breach misses the chance to tackle the root cause of the problem.
Certain mirroring HREDD obligations imposed on the parties could subject the supplier to disproportionate compliance costs:
It is a mandatory obligation under Article 1.1(b) for both parties to engage stakeholders at each step of the HREDD process and document the stakeholder consultation process and outcomes “to enable Buyer to comply with the relevant reporting requirements under applicable law”. Given the one-sided purpose to enable buyer’s compliance with applicable laws, the process would likely be dictated by the buyer’s needs and demands. The provision nonetheless imposes mirroring obligations on both parties. This places unequal onus on the supplier to carry out stakeholder engagement. Rather than cascading regulatory obligations to the supplier, the buyer is better placed to lead stakeholder engagement, its overall strategy and process, having regard to requirements under the Regulations, whereas the supplier should cooperate and support the engagement as required. Support and engagement of the supplier should be financially secured in the cost of business between the parties.
Similarly, the obligation to prepare and provide reports on the implementation of the HREDD process and such HREDD-related information as requested by the other party under Article 1.1(d) could be onerous for smaller suppliers. In view of the potentially broad scope of HREDD-related information, and in absence of definition under the EMCs, meeting such obligations would be challenging and disproportionate for suppliers that face resource and capability constraints. Furthermore, under Article 1.1(d)(iii), while the supplier could provide an alternative equivalent document to fulfil the buyer’s request, such document must satisfy the buyer’s minimum standards, and as the buyer reasonably considers so. This subjects the supplier to an additional compliance burden compounded by the uncertainty under the buyer’s wide discretionary power, without a corresponding obligation on the buyer to outline and communicate equivalent parameters and minimum standards in advance.
The abovementioned provisions can be contrasted with buyer-favourable drafting in Article 1.3(b) which requires the buyer to provide reasonable assistance to the supplier for meeting HREDD obligations. Buyer’s assistance is qualified “to the extent that doing so is economically feasible and appropriate in light of the HREDD-related risks at issue”. Against this, there is a lack of corresponding qualification for HREDD obligations imposed on the supplier under the EMCs. There is a need to reexamine and revise these provisions to rebalance the allocation of risk and responsibility having regard to each party’s size, resources and capability, to achieve a more equitable supplier-buyer relationship.
2. More pragmatic approach in view of commercial realities and local contexts
As many EU business have operations and business relationships that span across continents, it must be recognized that local labour and human rights standards in non-EU jurisdictions where most suppliers are based, can vary significantly from international standards. Where local protections and standards are much lower, replicating due diligence and disclosure obligations from the Regulations in supply chain contracts would likely give rise to tension, and even resistance. In many cases, the buyer would not have the kind of leverage to get the supplier’s agreement to these provisions, especially if it is a small-spend ad-hoc supplier, or if it is one of a few providing a unique service. While the goal is to align HREDD standards across supply chains, the EMCs provisions should pay heed to the local contexts and actual implications on the supply chain in implementing these requirements.
Article 1.2(b) requires the supplier to only subcontract if it has conducted satisfactory HREDD on the subcontractor, and further, to require the subcontractor to conduct its own HREDD on lower-tier suppliers if appropriate. This assumes visibility down the value chain, while imposing the onus on the supplier to track the lower tiers of the supply chain, in addition to requiring the supplier to conduct HREDD with each of its subcontractors if it were to continue their relationships. It further reproduces the cascading effect where lower-tier suppliers are held to the same HREDD standards as the buyer. This places tremendous pressure on lower-tier suppliers, perpetuating their precarious positions in the increasing competitive global supply chain environments. Instead of requiring suppliers and lower-tier suppliers to comply with the loosely defined and wide-ranging HREDD obligations in the EMCs, it is suggested that the EMCs incorporate a defined list of requirements which are proportionate to their sizes, resources and capabilities (see paragraph 3 below).
Article 3.5(b) further provides that in the event of termination, the terminating party shall evaluate whether termination would either help to prevent additional Adverse Impacts or aggravate such Impacts, and that the buyer may not terminate if it would aggravate Adverse Impacts. With respect, it is restrictive to only consider Adverse Impacts already caused. A broader view should be adopted to take into account other potential Adverse Impacts of the termination, e.g., impacts on dismissed workers and trickling effects on local communities.
There could be other obstacles for suppliers in complying with the EMCs, for example when there are competing legal and regulatory demands. Suppliers are required to disclose various HREDD-related information under Article 1.1(d), subject to limited grounds for refusal, i.e. disclosure of trade secrets or other protected intellectual property. This should be expanded to include local data protection law requirements and practices.
3. Greater accessibility and clearer obligations with guidance
As opposed to its current formal, legalistic language which would be inaccessible for non-English speaking suppliers, the EMCs should use plain language, define obligations and requirements more clearly, and provide guidance notes where appropriate.
For example, the definitions of Adverse Human Rights Impacts and HREDD as currently drafted simply refer to the CSDDD, which would not be accessible to non-EU suppliers who are not familiar with EU regulations without providing them any guidance. Similarly, the operative clause Article 1.1(a) obliges buyer and supplier to establish an HREDD process “in accordance with standards set out in the OECD Guidance”. Non-EU suppliers should not be expected to read through all the relevant regulations and distil the applicable requirements without the requisite support to improve accessibility.
It would be constructive for the EMCs to incorporate a defined list of human rights standards and HREDD requirements based on the Regulations that are proportionate to the size, resources and capability of the supplier in question, and/or any human rights policy and supplier code of conduct developed by the buyer. This is a similar approach adopted in the MCCs 2.0, which include a Schedule P for the buyer to attach its own human rights policy that the supplier is required to comply with when carrying out due diligence, and a Schedule Q/Buyer Code that sets out responsible purchasing conduct in detail. Also, any attachments that form part of the EMCs should be written in such language and style that the supplier can easily access.
To enable meaningful compliance, standards and benchmarks should also be specified and form part of the supplier contract for greater accessibility, clarity and certainty. Some other rather vague and broad provisions that would benefit from clarification and guidance notes include:
Article 1.1(d)(ii): Parties are required to provide reports on the implementation of their HREDD process(es), which “shall be forward-looking and backward-looking”.
Article 1.3(a): Buyer shall “engage in responsible purchasing practices and only impose fair, reasonable and non-discriminatory obligations”
Article 1.3(g): Buyer shall establish “clear and transparent benchmarks to assess HREDD performance”.
4. Fostering collaboration and trust, rather than one-sided policing approach
The EMCs should be underpinned by a more equitable approach that fosters trust between buyers and suppliers, in place of contractual practices that aim at policing and retribution, such as onerous, one-sided contractual damages and indemnification. To avoid resulting in litigious, antagonistic relationships, below are some EMCs clauses which can be recalibrated to bring more balance to the allocation of risk and liability, and are aimed at less policing and more collaboration:
Article 3.2: Despite a seemingly neutral right to interim remedies exercisable by the non-defaulting party, the stipulated remedies and measures, such as demanding the supplier to terminate a contract with the sub-supplier/subcontractor (Article 3.2(b)(ii)) and suspending payments (Article 3.2(b)(iii)) are only exercisable by the buyer.
Article 3.4: The indemnification clause, seemingly neutral and exercisable by either party, really only indemnifies buyer as it covers such losses, costs and damages “associated with Nonconforming Goods”, when only the buyer has the right to reject Nonconforming Goods under Article 3.2(c).
Article 4: It gives the buyer a unilateral right to audit and inspect the supplier who must cooperate and can only refuse monitoring by providing equivalent information to the buyer’s satisfaction pursuant to Article 1.1(d), or if it is already participating in an effective mechanism.
5. Upholding regulatory intent and rightsholders-centric approach
Some of the provisions and definitions in the EMCs also fall short of the intent of the Regulations and should be revised or clarified to capture the full breadth and substance of the HREDD requirements. We suggest the next EMCs draft to expand the scope of the definitions of:
Severe Adverse Impact: to cover both potential and actual adverse impact, in line with the definition of “severe adverse impact” under CSDDD Article 3(l), so that parties are required to notify each other of both actual and potential severe adverse impact under Article 1.1(d)(i); and
Stakeholder(s): to be in line with the definition of “stakeholders” under CSDDD Article 3(n) which include “individuals, groupings, communities or entities whose rights or interests are or could be affected by the products, services and operations of the company, its subsidiaries and its business partners”. The current definition in the EMCs is limited to “the individuals or groups potentially or actually affected by an Adverse Impact”, but should cover products, services and operations of the parties to the agreement.
Following a rightsholder-centric approach, we also suggest that elaboration and guidance should be provided under Article 2, Remediating Actual Adverse Impacts and Corrective Action, especially on how rightsholders could be engaged in the process to ensure the outcomes and remedies provided are in line with the UNGPs. As currently drafted, the CAP is to be prepared in consultation with adversely affected Stakeholders. Further guidance should be provided to ensure that there is effective and meaningful engagement with rightsholders whose interests and views are properly considered, including that:
ongoing engagement with rightsholders should take place not only in developing the CAP, but also during the implementation of the CAP, and post-remedy monitoring and evaluation;
remedy should be rightsholder-driven, and rightsholders should be consulted about the type of remedy in the decision-making process, and their inputs should be properly considered;
rightsholder should receive information including the timeframe of the remedial measures, , updates about the process, the outcomes and reasons for the outcomes, as well as channels for follow-up or appeal of the outcomes; and
there should be continuous learning through post-remedy monitoring, especially commitment that findings and recommendations of CAP should feed back into the parties’ HREDD system.
Conclusion
The building of contractual frameworks and tools, which go hand in hand with HREDD regulatory development, should be an ongoing project for all actors in the value chain, as business and human rights landscape evolves. The efforts to achieve supply chain transparency and a better understanding of risk across the value chain is critical, but it must never be at the expense of an equitable approach. There needs to be heightened sensitivity to the local contexts, and measures that create synergies and build trust among actors in the value chain through collaboration and partnerships. With these, the EMCs can be an impactful tool with far-reaching effects on global value chain and bring about meaningful changes in the implementation of HREDD obligations.
On the path to securing rights under the Regulations, there is no escape from the hard realities of the operational complications and power dynamics in value chains, and the real cost of compliance which must be equitably distributed. The key to addressing systemic issues such as enhancing supply chain transparency, and gaps between the EU HREDD standards and the local human rights standards, lies in a genuine commitment to shared responsibility and a rightsholder-centric process. By proactively addressing these challenges, contractual tools like the EMCs can play a transformative role in encouraging EU businesses to shoulder greater responsibilities in supporting and working with their suppliers, and implement the HREDD obligations across value chains in a progressive, pragmatic and equitable manner.