Editor’s note: Mercedes is a recent graduate of the LL.B. dual-degree programme English and German Law, which is taught jointly by University College London (UCL) and the University of Cologne. She will sit the German state exam in early 2022. In September 2020 she joined the Asser Institute as a research intern for the Doing Business Right project.

The Covid-19 pandemic is straining global supply chains and exposes the inequality that underlies them. As many countries entered lockdowns, the economy was brought to a rapid halt. This caused demand for apparel goods to plummet. Global apparel brands, in turn, have begun to disengage from business relationships with their suppliers. Lead firms cancelled or even breached their contracts with suppliers (often relying on force majeure or hardship), suspended, amended or postponed orders already made. This practice had a devastating effect on suppliers.

This situation again shows that the contractual structure of global supply chains is tilted towards (often) European or North American lead firms. In this blog, I will first outline the power imbalance embedded in global supply chain contracts. Secondly, I will outline how order cancellations impact suppliers and their workers. In Part II, I will go through four approaches to mitigate the distress of suppliers and their workers and to allow the parties to reach solutions which take into account their seemingly antagonistic interests.

Power imbalance in the garment supply chain: Key economic drivers

Global value and supply chains suffer from a power imbalance, tilted in favour of apparel brands and retailers. Power is defined as the ability of an actor to influence another to act in the manner that they would not have otherwise.[1] This brand power has two main sources: first, the significance of design and marketing activities in terms of value addition and second, the dependence of suppliers on buyers (buyer-driven supply chain contracts).

The most valuable activities in the apparel GVC are not related to manufacturing,[2] but are found in the design, branding, and marketing of the products. These activities are generally carried out by so-called lead firms – retailers, brand marketers, and brand manufacturers.[3] They usually benefit from their size, huge sales and thus significant market power.

Additionally, suppliers are dependent on a limited number of buyers. An ILO report shows that 24% of all suppliers depend on their main buyer, who takes half of the production. In the case of 54% of all suppliers, the main buyer takes 35% of the garment production.  Furthermore, 52% of suppliers in the garment industry accepted orders below cost, 81% of which reported to do so in order to secure future orders. In particular, 52% of the suppliers based in Bangladesh reported having been pressured by buyers to do so. Thus, suppliers are generally highly dependent on their buyers and have very little bargaining power. It seems the economic structure of the garment sector is tilted in favor of the buyer.

The fashion industry is built on short-term adversarial trading relationships, characterized by multiple sourcing, price orientation and competitive bidding.[4] According to Raworth and Kidder, buyers exert three kinds of pressure on suppliers: First, time and speed (faster delivery, shorter lead times), second, flexibility (quick changes in order size and rapid switches between product designs), and third, costs and risks (lower price, higher quality).

For example, according to the ILO, only 17% of suppliers in the Bangladeshi garment sector considered to have enough lead time. Such ‘predatory purchase practices’[5] allow buyers to act opportunistically and make agreements that favor their interests and force suppliers into unfair contractual arrangements. Suppliers respond by squeezing workers’ wages and production targets.

Power imbalance in the garment supply chain: Contractual translation

This economic power imbalance is translated contractually. Suppliers are confronted with take-it-or-leave-it agreements. In practice, lead firms draft contract clauses and provide them to the suppliers. Suppliers are pushed to assume all financial risk – as evident from the situation suppliers find themselves in after the outbreak of Covid-19. Moreover, buyers do not only impose strict deadlines, but also include penalty clauses in their contracts if suppliers fail to meet those deadlines. According to the ILO, 35% of suppliers in the textile industry face such penalties. Buyers also benefit from one-sided cancellation clauses, to which they increasingly took recourse during the pandemic.

For example, Kohl’s Inc.’s contract with their suppliers contains the following clause which secures such a discretionary right to withdraw their order in a wide range of situation:

„We may cancel our Purchase Order in whole or in part without your authorization and at Kohl’s sole and absolute discretion in the event of any of the following, each of which it is agreed will substantially impair the value of the whole Purchase Order to us: ... (g) in the event of acts of God (including, but not limited to, natural disasters, fire, flood, earthquake and disease outbreaks), lock-out, strike, war, civil commotion or disturbances, acts of public enemies, government restrictions, riots, insurrections, sabotage, blockage, embargo, or other causes beyond our reasonable control ... Cancellation by Kohl’s for any of the foregoing reasons shall constitute “for cause” and shall not subject us to any liability, cost, or charge whatsoever. In the event of such cancellation, or any cancellation for cause, Kohl’s may take possession of the Merchandise and any materials and equipment being used by you and may cause the Merchandise to be completed in such manner as Kohl’s shall determine and you shall reimburse Kohl’s for the cost of completion.“

These clauses allow buyers to disengage from their contractual relationships at their discretion. This is often the case even where orders had already been made and shipped. Buyers are generally under no obligation to adhere to a time limit or reimburse the costs of orders already completed or shipped.

Typically, the brands’ bargaining power also allows the renegotiation of payment terms. As highlighted in a report of the ECCHR, in the midst of the covid-19 pandemic both Marks and Spencer and PHV Corp amended payment terms to extend the payment period. While Asda and Debenhams each demanded 40 to 90% discounts as condition to accept the goods they had ordered.

Where supply chain contracts did not include such unilateral cancellation clauses, suppliers try to invoke force majeure to get out of their contractual obligations. Force majeure, a concept derived from Roman law, relieves a party from its contractual obligations if an unforeseen event renders performance impossible. The concept of force majeure has to be distinguished from ‘hardship’, which allows a party to walk away from its contractual obligations if the circumstances surrounding the performance of the contract changed in such a way as to render performance of the contract significantly more burdensome.[6] Both concepts constitute a good faith exception to the cornerstone of contract law, the principle of pacta sunt servanda.

The interpretation of force majeure clauses and the question if COVID-19 constitutes a force majeure event is governed by the law applicable to the contract. All private law regimes have different concepts to deal with changed circumstances; all with different nuances. To some extent at least it is nevertheless possible to discern some commonalities between the different approaches to force majeure. Today, some even speak of an internationally accepted concept of force majeure,[7] requiring a party to prove that (1) an external event; (2) which was unavoidable; (3) and unforeseeable; (4) caused the obligor’s non-performance.

Much (see for example here, here and here) has been written on whether COVID-19 does indeed constitute a force majeure event. This will depend on the drafting of the agreement, and the contractual obligation in question. One can readily accept that COVID-19 (or to be more precise: its side-effects) renders the performance of a contractual obligation impossible if we are concerned with a manufacturer whose employees are all in lockdown and must therefore abstain from work. Global apparel brands, however, ‘only’ need to pay money. It is much less obvious to assume that it is impossible to fulfil a payment obligation. The fact that some countries issued – or consider issuing – force majeure certificates does not change this. Such a force majeure certificate only serves as supporting evidence before a court or tribunal.[8] The court will still take other factors, including the wording of the contract, into account.

If force majeure is of limited help to them, companies will instead turn to hardship. Due to the covid-19 lockdowns brands are prevented from selling their apparel and would have to store the excess clothing. The contract becomes commercially impracticable – but not impossible to perform. As argued by the ECCHR, it is difficult to see how companies will be able to claim that the measures governments took in response to the pandemic constitute events that render their payment obligation significantly more burdensome. Indeed, the risk that they might not be able to sell their products seems to be an economic risk generally borne by companies engaging in a cyclical economy.

However, even where force majeure clauses were triggered falsely, suppliers will often lack the resources to bring a claim. Moreover, contracts often include clauses stipulating that the supplier bear buyer’s legal costs if their claim fails and obliging  suppliers to sue the buyer in the country in which the buyer is domiciled, not where the contract is performed.

Covid-related cancellation of garment contracts: Effects on suppliers and workers

According to the International Labour Organisation, looking at Bangladesh alone, the cancellation of contracts in the garment industry caused a loss of $USD 6 billion since the beginning of the pandemic. Half of Bangladeshi garment suppliers had the majority of their contracts cancelled; around 1,136 factories and 2.26 million workers are said to be affected. In Bangladesh, the garment industry, which amounts for 80% of all exports, employs 4.5 million workers. As of April 2020, more than one million garment workers were fired or furloughed, often without pay. Consequently, 80% of Bangladeshi families suffered from income loss. Cambodia, Indonesia, India, Myanmar, Sri Lanka and Vietnam have been similarly affected.

Furthermore, according to Clean Clothes Campaign, over 60% of the poor and low-income population who suffered income losses because of Covid did not receive any support from the public and private sectors and 30% of garment workers report that their children had gone without food. Most factories operate on very thin profit margins and lack access to loans; the pandemic pushed many producers into or near to bankruptcy. Having to lay off workers, employers are left with no room to provide their employees with severance packages. Workers’ wages are often squeezed to produce garments as cheaply as possible, thus depriving them of the possibility to plan for unforeseen events. Finally, home states with prevalent supplier industry often lack capital or access to capital to set up rescue schemes for corporate nationals and citizens. And when these states do set up support schemes, they often lack effective enforcement mechanisms, leaving those affected in financial distress. Workers, who before had struggled to make ends meet, now cannot pay for mere necessities: housing, food, schooling. As a survey from India revealed, migrant workers are at particular risk. They often fall outside the coverage of support schemes and lack support networks.

Where contractual clauses are favourable to brands with disproportionate bargaining power, they might be allowed to walk away from their contractual obligations. This is because under the dominant interpretation of the principle of party autonomy, the courts tend to respect the “autonomous” will of the parties when agreeing to contractual terms, no matter how onerous (or unfair) they appear to be. Yet, contrary to this abstract ideal of party autonomy, the parties to supply chain contracts are rarely of comparable strength. Instead, buyers tend to set the terms of the contracts unilaterally; no real negotiation occurs. Benefits and burden of the contracts are not distributed in a fair manner. In other words, global supply chain contracts are by design favouring European or North American brands. Thanks to them they can externalize unexpected costs, such as the fall in sales caused by the Covid-19 pandemic to their contractual partners in the Global South. Yet, in light of the unequal resources of the different parties to the apparel supply chain, it would seem reasonable to shift a considerable share of the economic losses triggered by the pandemic onto the strongest links in the chain: the brands. In Part II, I will discuss four potential solutions to achieve such a rebalancing.

[1] Hingley, M.K. (2005), "Power imbalanced relationships: cases from UK fresh food supply", International Journal of Retail & Distribution Management, Vol. 33 No. 8, pp. 551-569.

[2] Gereffi, Gary. (2018). Global Value Chains and Development: Redefining the Contours of 21st Century Capitalism.

[3] Ibid.

[4] Perry, P. and Towers, N. (2013), "Conceptual framework development: CSR implementation in fashion supply chains", International Journal of Physical Distribution & Logistics Management, Vol. 43 No. 5/6, pp. 478-501

[5] Anner, M. (2019), Predatory purchasing practices in global apparel supply chains and the employment relations squeeze in the Indian garment export industry. International Labour Review, 158: 705-727. https://doi.org/10.1111/ilr.12149.

[6] Frustration (UK), impracticality (US), imprévision (FR), Wegfall der Geschäftsgrundläge (GER)

[7] This is because most international contracts contain force majeure clauses. Furtermore, the force majeure doctrine was recognized as ‘a general principle of law’ by the Iran-US Claims Tribunal. Lastly, both the CISG (Article 79) and the UPICC contain provisions on force majeure; the IBA and ICC provide model force majeure clauses. Berger, Klaus Peter and Behn, Daniel, Force Majeure and Hardship in the Age of Corona: A Historical and Comparative Study, 6 McGill Journal of Dispute Resolution (2019/2020) 79.

[8] Berger, Klaus Peter and Behn, Daniel, Force Majeure and Hardship in the Age of Corona: A Historical and Comparative Study (April 20, 2020). 6 McGill Journal of Dispute Resolution (2019/2020) Number 4, pages 79-130,

Editor's Note: Catherine Dunmore is an experienced international lawyer who practised international arbitration for multinational law firms in London and Paris. She recently received her LL.M. from the University of Toronto and her main fields of interest include international criminal law and human rights. Since October 2017, she is part of the team of the Doing Business Right project at the Asser Institute.

Introduction

The Court of Appeal in London recently handed down its judgment in Dominic Liswaniso Lungowe and Ors. v Vedanta Resources Plc and Konkola Copper Mines Plc [2017] EWCA Civ 1528 (Lungowe v Vedanta) addressing issues of jurisdiction and parent company liability. The judgment runs contrary to the historical legal doctrine that English domiciled parent companies are protected from liability for their foreign subsidiaries’ actions. This decision clarifies the duty of care standard a parent company owes when operating via a subsidiary and opens the gates to other English domiciled companies and their subsidiaries being held accountable for any human rights abuses.

Facts

In 2015, a claim was brought by 1,826 villagers from the Chingola region of Zambia against the London Stock Exchange listed metals and mining company Vedanta Resources Plc (Vedanta), which has a global asset base of almost US$40 billion. Vedanta’s subsidiary Konkola Copper Mines Plc (KCM), a Zambian public limited company which is the largest integrated copper producer in the country, was licenced to extract from the Nchanga copper mine near Chingola. The villagers claimed personal injury, damage to property and loss of income, amenity and enjoyment of land, due to alleged pollution and environmental damage caused by discharges from the Nchanga mine for over a decade. The claimants used Vedanta to anchor their claims in the English courts and received permission to serve KCM out of the jurisdiction. Both Vedanta and KCM applied for declarations that the Court had no jurisdiction to try the claims, or alternatively, that it should not exercise such jurisdiction. These challenges were dismissed at first instance by Mr Justice Coulson, and Vedanta and KCM appealed against his order.

Judgment

The Court of Appeal unanimously dismissed the appeals and confirmed jurisdiction against Vedanta and KCM. Led by Lord Justice Simon, the Court concluded that “there are no proper grounds for re-opening the Judge's decision. The appellants have not persuaded me that the Judge misdirected himself on the law, nor that he failed to take into account what mattered or that he took into account what did not matter. How the various matters weighed with him, either individually or together, was for him to decide, provided that he did not arrive at a conclusion that was plainly wrong. In my view, he did not reach a view that was wrong; he reached a conclusion that was in accordance with the law”.

In its determination of jurisdiction, the Court notably considered the following issues:

1. Whether the claimants' claim against KCM has a real prospect of success;

2. If so, whether there is a real issue between the claimants and Vedanta;

3. Whether it is reasonable for the court to try that issue;

4. Whether KCM is a necessary and proper party to the claim against Vedanta; and

5. Whether England is the proper place in which to bring that claim.

Of particular jurisprudential significance for future cases involving companies’ alleged human rights violations were the Court’s deliberations on issue two relating to parent companies and the duty of care.

Parent company liability and the duty of care

The Court of Appeal’s judgment sought to clarify the duty of care owed by a parent company through its subsidiary’s operations. The judges reviewed the benchmark cases for the imposition of such a duty of care and affirmed the following propositions:

1. “The starting point is the three-part test of foreseeability, proximity and reasonableness”, as enounced in Caparo Industries Plc v Dickman. The fact alone that Vedanta is KCM’s holding company would not make it arguable that Vedanta owed a duty of care, and additional circumstances were required to ground a properly arguable claim.

2. “A duty may be owed by a parent company to the employee of a subsidiary, or a party directly affected by the operations of that subsidiary, in certain circumstances”.

3. “Those circumstances may arise where the parent company (a) has taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim, or (b) controls the operations which give rise to the claim”.

4. “Chandler v Cape Plc and Thompson v The Renwick Group Plc describe some of the circumstances in which the three-part test may, or may not, be satisfied so as to impose on a parent company responsibility for the health and safety of a subsidiary's employee”. If both parent company and subsidiary have similar knowledge and expertise and they jointly take decisions about mine safety, which the subsidiary implements, both companies may owe a duty of care to those affected by those decisions.

5. “The evidence sufficient to establish the duty may not be available at the early stages of the case”, and may be better judged after the pleadings in the case.

In its deliberations, the Court of Appeal considered certain factors as relevant to the existence of a duty of care between Vedanta and the villagers, namely:

• A Vedanta report which stressed that oversight of all its subsidiaries rests with the Board of Vedanta itself and expressly refers to problems with discharges into water at the mine in Zambia.

• A Management and Shareholders Agreement which contractually obliged Vedanta to provide KCM with, among others, geographical and mining services and employee training as well as to procure feasibility studies in accordance with “acceptable mining, metal treatment and environmental practices conducted in Southern Africa”.

• Vedanta's provision of environmental and technical information and Health Safety and Environmental training, as well as its public statements on its commitment to addressing environmental risks and technical shortcomings in KCM's mining infrastructure.

• Evidence from a former KCM employee about the extent of Vedanta's control of KCM’s operational affairs.

Following the above principles relating to the duty of care and in light of the evidence displayed by the claimants, it was concluded that Mr Justice Coulson was entitled to reach his conclusions. Whilst the claim against Vedanta may or may not succeed at trial, it could not be dismissed as not properly arguable. In other words, the Court accepted “that there is a serious question to be tried which should not be disposed of summarily, notwithstanding the question goes to the court's jurisdiction”.

The Court affirmed the long-established principle that a parent company does not automatically owe a duty of care to someone affected by its subsidiary’s actions. Yet, as Lord Justice Simon observed, the defendant's assertion that “there had been no reported case in which a parent company had been held to owe a duty of care to a person affected by the operation of a subsidiary” does not at all “render such a claim unarguable”.

Rather, the claimant must prove that such a duty of care arises; more particularly that the parent company has taken direct responsibility for material health and safety policies or controls its subsidiary’s operations. It follows that the more integration and supervision that can be demonstrated between a parent company and subsidiary, the greater the chance of a duty of care being found, and accordingly the parent company being accountable for any human rights abuses. Moreover, the Court’s hesitancy to conclude at an early stage in proceedings that no duty of care exists, and consequently that there is no real issue to be tried, will likely allow more cases to be determined during the hearing rather than at an interlocutory stage.

Lungowe v Vedanta’s duty of care in light of France’s new duty of vigilance law

Earlier in 2017, the French National Assembly adopted the loi relative au devoir de vigilance des sociétés mères et des entreprises donneuses d'ordre which established a new duty of care for large multinational companies operating in France. The law imposes an obligation of vigilance on companies incorporated or registered in France during two consecutive fiscal years that have either at least 5,000 employees themselves and through French subsidiaries, or have at least 10,000 employees themselves and through subsidiaries located in France or abroad.

The law requires such a parent company to establish and implement a publically available vigilance plan relating to its activities and those of its subsidiaries. The plan includes due diligence measures to identify risks and to prevent serious violations of human rights and fundamental freedoms, health and safety and the environment, resulting from the activities of the company and its subsidiaries, as well as the relevant activities of its subcontractors and suppliers under their commercial relationship. The law lists five such due diligence measures:

1. A risk mapping that identifies, analyses and ranks risks

2. Procedures for regular evaluation of subsidiaries, subcontractors or suppliers with whom an established commercial relationship is maintained

3. Adapted actions to mitigate risks or prevent serious harm

4. An alert mechanism and the collection of reports relating to the existence or realisation of risks, drawn up in consultation with the representative trade union organisations

5. A monitoring mechanism to follow-up on the plan’s implementation and evaluating its effectiveness.

Any company put on formal notice to comply with these vigilance obligations can face penalties if they fail to do so within three months.

    The French law is widely viewed as a major step forward, although by no means a panacea, to improving corporate respect for human rights and the environment. Although only applicable to an estimated 100-150 large companies, in passing the law the French National Assembly acknowledged the need for corporations to be held accountable for their worldwide activities, rather than hiding behind the corporate veil. The new French law requirements are markedly different from those found in the Modern Slavery Act 2015 of the United Kingdom and the California Transparency in Supply Chains Act of 2010, which only require companies to report on any efforts to identify certain forms of human rights related risk. In comparison, companies caught by the French law are actually required to implement a vigilance plan.

However, under the French law the legal emphasis is on a company evidencing it has done everything in its power to establish and implement this vigilance plan, rather than focusing on guaranteeing results in terms of human rights compliance. French corporations can therefore effectively reduce their duty of care liability by creating and executing a plan with accompanying due diligence measures. In contrast, following the jurisprudence of Lungowe v Vedanta, a parent company’s liability may actually increase if it takes responsibility for such material health and safety policies. Accordingly, in order to reduce its liability and the imposition of a duty of care, a parent company might seek to demonstrate a very low level of integration and supervision between itself and its subsidiaries.

This leads to the unsatisfactory position that parent companies in both nations might be able to avoid liability for the actual damage arising from their subsidiaries’ human rights violations. A parent company in France might avoid accountability for its subsidiary’s actions through demonstrating vigilant control and surveillance, whilst a parent company in England might similarly benefit from demonstrating distance and separation. In either case, there remains a legal lacuna whereby parent companies may evade responsibility for grave rights breaches.

Conclusions

Whilst the English courts retain a significant discretion when exercising their judgement in jurisdictional challenges, the judgment in Lungowe v Vedanta may lead to an increase in claims before the courts for alleged human rights abuses by foreign subsidiaries of English domiciled parent companies. The decision might prompt vulnerable English corporations to reassess their compliance with the United Nation’s Guiding Principles on Business and Human Rights, and to demonstrate both their own and their subsidiaries’ respect for and adherence to human rights standards throughout their training, policies and operations. Yet, the significant converse risk is run that parent companies will distance themselves from their subsidiaries’ actions. Ensuring that the responsibility for compliance with human rights obligations remains with a subsidiary may reduce the likelihood of a duty of care being found at a parent company level for any extraterritorial human rights abuses. Ultimately, only time will tell whether Lungowe v Vedanta prompts English domiciled companies to account for, or instead avoid, their subsidiaries’ human rights abuses.