Responsible Contracting in Sustainable Procurement
Regulatory compliance
Responsible contracting supports regulatory compliance
Responsible contracting helps companies prepare for and achieve regulatory compliance. It makes it possible for companies to:
- Align with the requirements of the EU Corporate Sustainability Due Diligence Directive (CSDDD) specifically with respect to contracts. Under the CSDDD, contracts must be appropriate and effective as preventive and corrective measures. Traditional contracts fall short of meeting this requirement.
- Improve visibility into their supply chain by encouraging transparency. This supports better data collection used for sustainability reporting, meeting new disclosure requirements and designing more effective preventive and corrective human rights and environmental due diligence (HREDD) measures.
- Improve access to information regarding the risks and occurrence of forced labour in the supply chain, which can be used to meet mandatory HREDD requirements and respond to and potentially defend against trade sanction investigations.
- Improve their ability to demonstrate to authorities that steps have been taken to remedy past harm and prevent future harm, which is necessary for satisfying mandatory HREDD requirements and for modifying or lifting trade bans.
Responsible contracting helps companies prepare for and achieve legal compliance by embedding responsible business conduct standards into commercial agreements and facilitating more effective human rights and environmental due diligence (HREDD). Responsible contracting strengthens risk management practices and supply chain transparency, which can help prevent (and, if needed, remedy) adverse human rights and environmental (HRE) impacts. This can reduce the risk of litigation, regulatory sanctions and other penalties related to forced labour bans and disclosure regulations.
Mandatory HREDD legislation
While the EU Corporate Sustainability Due Diligence Directive (CSDDD) applies primarily to large businesses with a presence in the EU, its impact extends much further because in-scope companies must carry out HREDD across their own operations and subsidiaries and with business partners who are in their “chain of activities.” As such, the Directive’s scope includes not only individual companies but also their broader commercial relationships and supply chains, which are often governed by contracts.
The CSDDD strongly emphasizes the role of contracts in implementing HREDD. The CSDDD identifies contracts as preventive and corrective measures that companies will be expected to employ, where relevant and feasible, to meet their due diligence obligations. For contracts to be aligned with the CSDDD, they need to be appropriate and capable of effectively addressing adverse impacts. That implies designing them in a way that is commensurate with the severity and likelihood of the impact, as well as with the company’s level of involvement in that impact. This means they should be designed to support a context-specific and dynamic process for identifying, preventing and mitigating potential adverse impacts and for correcting and remediating actual adverse impacts.
The CSDDD prohibits risk-shifting contracts that simply transfer due diligence responsibilities to business partners and require perfect compliance.
The CSDDD says, “Contractual assurances should be designed to ensure that responsibilities are shared appropriately by the company and the business partners” (Recitals 46 and 54) and that European Commission guidance on model contractual should “aim to facilitate a clear allocation of tasks between contracting parties and ongoing cooperation, in a way that avoids the transfer of obligations… to a business partner and automatically rendering the contract void in case of a breach” (Recital 66).
Contracts that place obligations only on the supplier and that outlaw imperfection by treating any deviation from perfect performance (e.g., compliance with a code of conduct) as a breach of contract are therefore fundamentally out of sync with the CSDDD.
What the Directive says about:
The Directive clearly states that, as preventive and corrective measures, contracts must reflect the degree to which a company may cause or has jointly caused an impact. This brings companies’ purchasing practices into contractual view. Where relevant to prevent and correct adverse impacts, companies must adjust their purchasing practices to ensure that they do not aggravate the risk of adverse HRE impacts. Contracts that fail to include responsible purchasing practices as a component of HREDD would therefore likely fail to meet the CSDDD’s appropriateness requirements.
Note: The CSDDD says, “Where relevant, companies should… use purchasing policies that contribute to living wages and incomes for their suppliers and that do not encourage potential adverse impacts on human rights or the environment” (Recital 46).
The CSDDD states that a company should only disengage from a business relationship for HREDD-related reasons as a last resort, in cases of severe adverse impacts where preventive or corrective measures are either unrealistic—meaning there is no reasonable expectation of success—or have definitively failed. It further states that, if disengagement is pursued, this should be done responsibly, after considering whether the harm caused by exit would be more severe than the harm that was not (or could not be) prevented or mitigated.** In such a case, the company should consider staying and not disengaging.
Further, if disengagement is pursued, the company is expected to take reasonable measures to minimize the negative consequences of its decision. In light of this responsible exit requirement, traditional contracts that allow immediate termination for (even small) HREDD-related infractions will likely fall short of meeting the CSDDD’s appropriateness requirements because they treat termination as a first resort, not a last resort and because they discourage transparency, which makes it harder to identify, mitigate or remedy HRE problems.
**Note: “Prior to temporarily suspending or terminating a business relationship, the company shall assess whether the adverse impacts from doing so can be reasonably expected to be manifestly more severe than the adverse impact that could not be prevented or adequately mitigated.” CSDDD Article 10(6)(b) and 11(7)(b).
The CSDDD explicitly states that using contracts alone will not fulfil due diligence requirements. This means that companies looking to contract their way out of HREDD obligations will be viewed as non-compliant. Effective HREDD requires contracts to be thoughtfully (re)designed as supportive components of a broader HREDD framework to meet the Directive’s standards.
See RCP’s Policy Brief on What the EU’s Corporate Sustainability Due Diligence Directive Says About Contracts for more detailed analysis.
Forced labour bans
Responsible contracting is also highly relevant to forced labour regulations as it enhances supply chain transparency and HREDD efforts, which should help companies identify, remediate and eradicate forced labour.
U.S. Tariff Act
The U.S. Tariff Act includes bans on the importation of goods produced in whole or in part with forced labour. While the Tariff Act has sometimes been used to combat state-sponsored forced labour, most enforcement actions target the private sector. The Tariff Act allows U.S. Customs and Border Protection (CBP) to issue Withhold Release Orders (WROs) based on evidence of forced labour, barring goods from entry unless the importer proves they were not made with forced labour.
Responsible contracting helps companies identify and eradicate forced labour to avoid exposure under the Tariff Act. It also enables companies facing investigations or concerns related to WROs to access the necessary information and data to demonstrate the absence of forced labour within their supply chains.
Additionally, responsible contracting supports effective human rights remediation, which can help prove that forced labour indicators have been effectively addressed and eliminated. The text of the Tariff Act does not expressly require remediation. In practice, however, CBP has indicated that it will not modify or lift a WRO without it. CBP has generally viewed remediation as the elimination of the forced labour indicator, although it sometimes also includes backward-looking (e.g. compensation) or forward-looking (e.g. preventive policy adoption) remedial measures. Drawing on the U.S. Bureau of International Labor Affairs’ (ILAB) Comply Chain tool, companies are encouraged to set up a robust social compliance system with provisions for immediate corrective action, including timelines for remediation and responsive measures, such as contract termination, for suppliers that fail to participate in remedial efforts.
In July 2020, CBP issued a WRO against Malaysian disposable glove maker. Soon after issuing the WRO, the glove maker retained a UK-based human rights consultancy to assess the presence of the ILO’s forced labour indicators within their operations, propose Corrective Action Plans (CAPs) and monitor the glove maker’s implementation of the CAPs on a quarterly basis from August 2020 to August 2021.1 The WRO was extended to a Finding in March 2021, meaning that CBP found conclusive evidence of forced labour. In April 2021, the human rights consultancy’s reporting showed that the glove maker had made progress in eliminating indicators of systemic forced labour in its direct operations and had repaid recruitment fees in excess of $36.3 million to 12,676 current and eligible former workers. In September 2021, CBP modified the Finding, allowing the glove maker to begin importing disposable gloves.2 The transparency of the glove maker’s remediation process—including the swift implementation of the consultancy’s recommendations, paying the migrant workers directly employed by the glove maker, setting up an independent grievance mechanism and continuous public reporting on corrective actions—was instrumental for remediating the identified forced labour.
Responsible contracts that integrate and operationalize effective human rights due diligence (HRDD) can help companies avoid WROs by supporting the on-going identification, prevention and mitigation of forced labour indicators in the supply chain. They can also help companies modify WRO Findings by expediting the collection of evidence showing that forced labour issues have been identified and resolved through remediation, victims have received remedy and indicators of forced labour have been eliminated.
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The CAPs included making remediation payments to migrant workers who had paid recruitment fees to third-party agents to work at Top Glove. ↩
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Source: https://www.cbp.gov/newsroom/national-media-release/cbp-modifies-forced-labor-finding-top-glove-corporation-bhd ↩
Remediation and resolution in addressing forced labour in Malaysian glove manufacturing.
Uyghur Forced Labour Prevention Act
The Uyghur Forced Labour Prevention Act (UFLPA, 2022) is a specific application of the U.S. Tariff Act that establishes a rebuttable presumption of forced labour for products with a nexus to the Xinjiang region of China and/or from a list of prohibited entities. This presumption arises out of allegations of systemic state-sponsored forced labour against the Uyghurs, Kazakhs and other members of Muslim minority groups in the region. The UFLPA requires importers to conduct effective supply chain mapping, undertake due diligence and deploy supply chain management measures to ensure that they do not import any goods made, in whole or in part, by forced labour. (Source: US CBP Operational Guidance for Importers (2022)) This requirement extends throughout the entire supply chain and includes goods that may be shipped to third countries for processing.
EU Forced Labour Regulation
The EU Forced Labour Regulation (EUFLR, 2024) prohibits companies from importing, exporting or trading products within the EU if forced labour is found at any stage in the extraction, harvesting, production or manufacturing of a product. This includes any forced labour related to working or processing activities in any part of the supply chain. The EUFLR builds on the due diligence framework established by the CSDDD and underscores that the effectiveness of a company’s HRDD process is key for determining whether specific forced labour risks will warrant trade restrictions.
Remediation is another key component of the EU framework for preventing forced labour and companies are encouraged under the EUFLR to undertake remediation proportionate to their involvement. Remediation may include financial or non-financial compensation to the affected individuals, as well as reimbursement for any costs incurred by public authorities for necessary remedial measures. (Source: Recital 36 EUFLR) Note, however, that if forced labour is found during an investigation, an import ban must be imposed regardless of the company’s HRDD efforts and the ban can only be lifted once the company demonstrates that it has eliminated forced labour. Rightsholder-focused remediation is a part of this process.
Responsible contracts support greater transparency and more robust due diligence, including remediation. As such, they can and will play an integral role in achieving compliance with HREDD laws and avoiding trade sanctions.
See RCP’s Policy Brief on forced labour bans for more detailed analysis.
Sustainability reporting
Traditional contracts that outlaw imperfection and threaten termination for any infraction encourage suppliers and business partners to hide HRE problems for fear of losing the contract. As such, traditional contracts undermine supply chain transparency and compliance with sustainability reporting frameworks and standards, including the EU Corporate Sustainability Reporting Directive (CSRD). The CSRD aims to promote supply chain transparency, corporate accountability, sustainable practices and sustainable investments through the adoption of common standards for corporate sustainability disclosures.
Responsible contracting commits the parties to work together to address risks and prevent or remedy actual adverse impacts that arise, rather than immediately jump to termination. This approach encourages transparency and visibility into the supply chain. It also supports more effective prevention and, if needed, remediation of adverse HRE impacts. Responsible contracts are therefore more in line with the expectations set out in the European Sustainability Reporting Standards, which must be adhered to by all companies subject to the CSRD.
Furthermore, responsible contracting supports alignment with new IFRS Sustainability Disclosure Standards by embedding sustainability principles into contractual obligations, improving transparency and accountability and therefore alignment with Sustainability Disclosure Standards that require consistent, reliable disclosure of sustainability-related risks (and opportunities) across value chains.