Establishing Responsible Supply Chains With Model Contract Clauses

The global supply chain is an interconnected web of goods, from raw materials to the finished product. How does a retailer ensure that the garment it hopes to sell was not sewn in unsafe working conditions in Bangladesh, or that the cotton used was not sourced from forced labor in Xinjiang? Model contract clauses (MCCs) are a contractual toolkit to help companies implement responsible sourcing practices.

The MCCs were developed by a working group of lawyers from the American Bar Association’s Business Law Section. They are intended to help companies prevent human rights abuses in their supply chains by operationalizing the best practices in business and human rights law, particularly the U.N. Guiding Principles on Business and Human Rights. The MCCs are a modular framework of contract clauses that can be inserted into supply chain agreements by companies seeking to implement their human rights policies in a manner that best suits their specific circumstances.

A key obligation under the MCCs involves human rights due diligence. This requires that both buyers and suppliers take steps to identify potential risks and address human rights issues, even those discovered in lower tiers of the supply chain. The first step involves mapping the supply chain to determine the specific risks of human rights abuses given the industry, product components, geographic location of operations, and all other relevant production and delivery factors. Once the risks have been assessed, the parties can focus on the key risk areas, in order of severity if required, and work to remediate the issues discovered through the diligence process.

Effective due diligence requires ongoing lines of communication rather than a hands-off delegation of all obligations to one party or a singular audit. The MCCs provide for continuous monitoring by the buyer and reporting obligations of the supplier, acknowledging that lower-tier suppliers become buyers in all complex chains.

The focus on due diligence is especially relevant for companies that are subject to mandatory human rights due diligence regimes, such as the regimes in Germany and France. The European Council has circulated a proposed directive to establish an EU-wide mandatory human rights and environmental due diligence framework.

The MCCs are also relevant for importers that may be subject to enforcement actions by the U.S. government pursuant to laws such as the Uyghur Forced Labor Prevention Act (UFLPA). Importers who have shipments detained pursuant to the UFLPA must either prove that the goods are not subject to the Act or prove that the goods were not produced using forced labor by clear and convincing evidence.

There is no de minimis exception to the UFLPA, which means that if even a small component of a product has a nexus to Xinjiang or a list of prohibited entities, then the goods would be subject to the Act. All products that are subject to the Act carry a rebuttable presumption that they were made using forced labor, and thus prohibited from entry into the United States pursuant to Section 307 of the Tariff Act of 1930.

Importers must accurately map and trace their supply chain to determine internally whether their shipments might be subject to the Act. This requires continuous, accurate information gathering of the type contemplated by the MCCs. If a shipment were the subject of an enforcement action under the UFLPA (or a withhold release order), the MCCs would also help companies obtain evidence in support of their claim that the products were not produced using forced labor. It should be noted that the evidentiary burden to rebut the presumption of forced labor in the UFLPA is very difficult to meet when a product is found to be subject to the Act.

The MCCs set out human rights standards for the parties to follow in Schedules P and Q. Schedule P is the collection of alternative sample standards that the supplier agrees to uphold. The MCCs do not propose specific obligations in Schedule P because obligations are highly dependent on the concerns of the parties and the nature of the industry. However, the MCC does provide resources for companies to prepare their own set of obligations. Schedule Q lists the obligations to which the buyer agrees, such as responsible purchasing practices and responsible termination of the agreement.

The MCC approach is consistent with the U.N. Guiding Principles on Business and Human Rights, which focuses on human rights due diligence and remediation of issues when they are identified. Remediation is not necessarily the supplier’s responsibility only. It also falls upon the buyer to the extent it has contributed to the issue. When a breach of a human rights obligation is discovered, the MCCs focus first on remediation rather than traditional contract damages to be sure the needs of true victims are addressed. Traditional analysis of damages to the non-breaching party that might be appropriate is not omitted, however, and the buyer may immediately terminate the agreement upon the discovery of a zero-tolerance activity.

The MCCs can help companies establish responsible sourcing frameworks that prevent the perpetuation of the worst human rights abuses in supply chains. They are particularly relevant now that governments, investors and consumers are increasingly requiring companies to take effective steps to eliminate these abuses from their supply chains.