A group of business and human rights practitioners has released a Zero Draft of the European Model Clauses (EMCs) for responsible contracting. The EMCs are designed to be adapted by companies operating in the European legal context for use in contracts with their value chain partners. They are intended to align with the human rights and environmental due diligence (HREDD) legal requirements set out by the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) and the German Supply Chain Due Diligence Act (LkSG), as well as normative standards like the UN Guiding Principles on Business and Human Rights, OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, and OECD Due Diligence Guidance for Responsible Business Conduct.
The EMCs were developed based on the practical experience of the developers and with the input of stakeholders during a first round of consultation (the Zero Draft is open for a second round of feedback through 2 December 2024 – see information on this here). They are based on the Model Contract Clauses 2.0, which were developed by a working group of the American Bar Association Business Law Section for companies operating in the U.S. legal context.
Human Level’s Take
- The EU CSDDD is clear. Companies are expected to use contracts to prevent negative impacts with their business partners, and this should be done responsibly. Contracts should fairly share responsibilities between the company and its partners. Companies are also expected to support their partner SMEs.
- This is a new approach to contracts for many companies. This is not about risk-shifting through contracts, this is about meaningful risk management.
- The European Model Clauses (EMCs) for responsible contracting provides template provisions that can be used by companies to seek to ensure contracts are responsible - in alignment with the EU CSDDD and other relevant European laws.
- The provisions are grounded on the three-pronged approach of responsible contracts: First, the buyer and supplier jointly commit to conducting human rights and environmental due diligence (HREDD) throughout the contract; second, buyers adopt responsible purchasing practices that support suppliers instead of pressuring them; and third, the priority is fixing human rights issues - with ending the partnership (responsibly) as a last option.
- Lots to chew on as lawyers - and sustainability departments - within companies looking to bring their human rights due diligence approach closer to expectations. The era of the heavy-handed top-down contract with suppliers is drawing to a close!
For Further Reading
- Why responsible contracting matters: Contracts have a role to play in conducting meaningful HREDD along the supply chain. They help set clear expectations on performance related to human rights and the environment, give legal weight to those expectations and provide an avenue to hold suppliers accountable for negative impacts. But the EMCs Working Group cautions that contracts should not be the only means of carrying out HREDD. Instead, they are “one tool in the toolbox” for companies, alongside other management systems to identify, prevent, mitigate and remediate negative impacts to people and planet. The risk for companies of relying too much on contractual provisions? Enforcing a top-down, compliance model of due diligence that can disincentivise suppliers and their sub-suppliers from being transparent about challenges — giving companies false assurance of compliance. This is in part due to imbalances in bargaining power, where more powerful buyers impose one-sided contractual terms on weaker suppliers (especially SMEs), often at odds with human rights and environmental standards.
- Contracts and HREDD in the CSDDD: The EU CSDDD expects companies to use contracts to seek to prevent adverse impacts with their business partners, but also requires them to do so responsibly. For example, it requires that contracts “should be designed to ensure that responsibilities are shared appropriately by the company and the business partners” and expects buyers to “provide targeted and proportionate support for a small and medium-sized enterprise (SME) which is a business partner of the company, where necessary in light of the resources, knowledge and constraints of the SME, including by providing or enabling access to capacity-building, training or upgrading management systems.” It also allows for the possibility of terminating a relationship with a business partner due to non-compliance with a contract, but expects companies to “prioritise engagement with business partners in their chains of activities, instead of terminating the business relationship, as a last resort after attempting to prevent and mitigate adverse potential impacts without success.” (For more detail on how the CSDDD addresses responsible contracting, see the Responsible Contracting Project’s policy brief on the topic).
- Objectives of the EMCs: The EMCs aim to enhance contract effectiveness for HREDD by helping companies shift from a one-sided compliance model to a shared-responsibility approach. This encourages ongoing cooperation between parties to prevent and address adverse human rights and environmental impacts. It also helps companies align with mandatory HREDD standards that emphasise the importance of contracts as preventive and corrective tools, rather than simply shifting due diligence obligations to suppliers.
- Three key shifts away from business-as-usual contracting: The EMCs Working Group highlights three features of the EMCs that help position companies for more meaningful HREDD: (1) A joint commitment by both buyer and supplier to carry out HREDD throughout the term of the contract. (2) A buyer commitment to use responsible purchasing practices that don’t put downward pressure on suppliers, contributing to or inhibiting their ability to address human rights and environmental issues. (3) Prioritisation of remediation for human rights impacts rather than traditional contract remedies, in addition to exiting only as a last resort and using responsible exit practices.
- Five model articles included as part of the EMCs: some text
- Article 1 outlines HREDD expectations for the buyer, suppliers and sub-suppliers and subcontractors. It also includes an expectation that the buyer will maintain an operational-level grievance mechanism in line with the UNGPs effectiveness criteria for grievance mechanisms (UN Guiding Principle 31).
- Article 2 outlines the expectations and respective responsibilities for buyer and supplier to remediate impacts, including development of a corrective action plan and possibility of responsible exit.
- Article 3 outlines what happens in case of default on HREDD obligations, expectation of interim remedies in the case of default, limitations to remediation, indemnification and comparative fault, and guardrails for termination and responsible exit from the agreement.
- Article 4 outlines the ability of the buyer to conduct audits and inspections of the supplier workplace, and establishes who should bear the costs of monitoring. If the supplier is an SME (as defined by the EU), the buyer should bear the costs; otherwise the division of should be decided jointly.
- Article 5 outlines expectations for dialogue-based dispute resolution, in line with UNGP 31, and includes provisions on escalation of grievances and non-retaliation.
