The Responsible Contracting Project (Sarah Dadush, Daniel Schönfelder, and Michaela Streibelt) published ‘RCP Policy Brief: What the EU Corporate Sustainability Due Diligence Directive Says About Contracts’ (July 2024) which delves into the importance of responsible contracting under the EU CSDDD, and the dos and don’ts of due diligence-aligned contracting.
Human Level’s Take: Contracts, contracts, contracts. Think of these as legal documents that are hard to read and that seek to push risk onto the other side? Think again. The EU CSDDD expects contracts to be effective in their ability to support a company’s human rights and environmental due diligence (HREDD). This means that one-sided risk-shifting contracts will no longer do the job. Enter instead a new era of responsible contracts, an era in which contracts are fair and fit for purpose in today’s world of human rights impacts in company value chains. This includes considering such elements as sharing the responsibility amongst contracting parties for due diligence, enabling on-going cooperation between parties, committing to responsible purchasing practices to enable standards to be met, fairly distributing the costs of HREDD, prioritising the remediation of adverse impacts, and committing to responsible exit. Lawyers - what we were taught at law school no longer works… legally! A major revamp of contracts and accompanying codes is ahead of us, courtesy of the EU CSDDD.
Key points from the report:
- Significance of contracts in the EU CSDDD - while recognising their limitations: The policy brief delves into the importance of contracts for the EU CSDDD. Indeed, the EU CSDDD drafters provide a special role for contracts in carrying out human rights and environmental due diligence (HREDD). Contracts are relevant when it comes to preventive measures (Article 10), as a way to prevent or mitigate adverse impacts. Contracts are also relevant when it comes to corrective measures (Article 11), as a way to bring adverse impacts to an end. The European Commission is set to adopt guidance on model contractual clauses by the end of 2026 (Article 18). In short: “There can be little doubt that the transposition of the CSDDD will further increase the relevance of contracts as tools for implementing HREDD in supply chains, so it’s important to get them right.” At the same time, the policy brief is clear that contracts are not the end all and be all: “they are not a silver bullet.” They are an important component of HREDD “but they are not a proxy for it.” The EU CSDDD recognises this point, by stating the the mere use of contracts cannot - on their own - satisfy the due diligence standards (Recital 66). In other words: “Contracts can and must be (re)designed to strengthen the foundation for effective HREDD, but even the best contracts cannot replace HREDD.”
- Contract must be appropriate: The policy brief reiterates the importance of the concept of “appropriate” in the EU CSDDD. Companies are expected to employ ‘appropriate measures’ to carry out their due diligence (Articles 3, 10, 11), which means that they must be “effective, meaning that they must be designed and evaluated on the basis of their capacity to actually achieve the objectives of HREDD.” This is confirmed by the EU CSDDD’s request that companies monitor the effectiveness of due diligence measures, including contracts (Article 15). Based on Articles 3(l)(o), 10(1) and 11(1), there are three factors in particular that play a role i n determining the appropriateness of due diligence measures (including contracts). First, company involvement (“[t]he closer the company is to the impact, the more involved it is in the impact, the greater the due diligence expectation will be”). Second, severity and likelihood (the greater the salience, the greater the due diligence needs to be). Third, influence.
- The dos and don’ts of due diligence-aligned contracting: The policy brief provides a number of contracting practices that companies should pursue, and should avoid. First, “[d]on’t employ risk-shifting contracts that simply transfer due diligence responsibilities to business partners and require perfect compliance. Instead, use contracts that share the responsibility for due diligence and facilitate on-going cooperation between the parties.” Second, “[d]on’t ignore the role of in-scope companies’ purchasing practices. Instead, include a contractual commitment to responsible purchasing practices from day one.” Third, “[i]nclude cost-sharing commitments in your contracts to ensure that HREDD-related costs are fairly distributed and that business partners, especially SMEs, are not overburdened.” Fourth, “[i]nclude a contractual commitment to remediate (cure, correct) adverse impacts that may arise and prioritise remediation ahead of order cancelation or termination. Include responsible exit commitments in the contract. Do not include immediate or zero-tolerance termination rights.”