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.
My previous blog post depicted
how economic asymmetry of power translates into imbalanced contractual
relationships. At the moment, supply chain contracts ensure that value is
extracted while precarity is outsourced. In other words, supply chains can be
described as ‘global
poverty chains’. In this blog post, I will present and assess four potential
way to alleviate this asymmetry and to better protect the right of the poorest
garment workers in the context of the Covid-19 the pandemic.
Solution 1: Voluntary commitments
The first option is a well-travelled one, brands
could voluntarily decide not to use their unilateral contractual powers. This
approach was adopted by the UK Government in May 2020, when it urged British
companies to sit still and employ ‘fair and reasonable’ business behaviour. In
s. 14 of the Government’s
Guidance paper it says:
“Responsible and fair behaviour is strongly encouraged in performing and
enforcing contracts where there has been a material impact from Covid-19. This
includes being reasonable and proportionate in responding to performance issues
and enforcing contracts (including dealing with any disputes), acting in a
spirit of co-operation and aiming to achieve practical, just and equitable
contractual outcomes having regard to the impact on the other party (or
parties), the availability of financial resources, the protection of public
health and the national interest. […] In particular, responsible and fair
behaviour is strongly encouraged in relation to the following: […] (c) making,
and responding to, force majeure, frustration, change in law, relief event,
delay event, compensation event and excusing cause claims; […]”
Many brands, such as Adidas, H&M, Nike, PVH,
Inditex and the VF Corporation promised to
honour their contractual obligations and to refrain from modifying the payment terms.
H&M stands out, as it took action to mitigate the
workers’ plight and promised to accept delivery of already produced garments,
to pay for goods in production, and to do so in accordance with previously negotiated
payment terms – without taking discounts, and without prolonging payment date. It
is not only goodwill that incentivizes brands to act like this. By deciding not
to interfere with the contract, brands strengthen their business relationship
and ensure the financial stability of a trustworthy business partner. Moreover,
brands buttress their reputation and count on the fact that consumers will reward
them for supporting their suppliers during times of hardship.
However, there are also many examples showing
that these considerations might often not outweigh the economic interest the
brand has in terminating the contract. Brands such as Kohl’s Inc. and C&A
still decided (see here and here) to trigger force majeure clauses.
This is even more problematic considering the
fact that C&A is a member of the UK-based Ethical
Trading Initiative and the German Textilbündnis. Thus, by triggering force majeure clauses
without prior consultation, the company seem to contravene
the guidelines issued by these stakeholders
initiatives. Months into the pandemic, the Workers’
Rights Consortium and Penn
State Center for Global Workers' Rights exposed such behaviour. C&A responded by
promising to honour their obligations – but only with a delay of one year. It
is only after
immense public pressure in the form of the “#PayUp”-campaign that C&A gave in and decided to pay
their suppliers in full and on time.
Other companies, such as Kohl’s, Urban
Outfitters, The Children’s Place and many
others are still refusing
to honour their pre-pandemic obligations. As the new wave of lockdowns rises,
Hema, a Dutch company effectively cancelled all orders on 11 January. For goods already
delivered to Hema, it promised to pay – but only with a delay of 30 days. In this context, as in others, voluntary
demand-based incentive models have shown to be of limited
impact.[1]
For example, Urban Outfitters stated:
“Unfortunately, like any business, we are doing our best to navigate
these unprecedented circumstances. With our stores closed, we simply don’t have
the capacity to accommodate all the stock on order.”
The financial health of a business remains more
often than not the only concern of any corporate decision-maker. Yet, because
European governments provide
millions of euros worth of support to
their businesses, European companies are not at particular risk. Thus, NGOs
were quick to criticise Kohl’s Inc.’s decision to pay their
shareholders an USD 109 million dividend in April.
Solution 2: State initiatives
(Foreign) state initiatives, through the
releasing of specific development funding, might help to improve the workers’ welfare.
Germany and the UK, for example, have set up an US-$ 6.5
million fund in collaboration with the Ethiopian
government. The money is
intended to support Ethiopian businesses and workers, which suffered as a
result of large-scale order cancellation. Relying on such initiatives seems
problematic for a number of reasons. In times were most European economies are facing
difficulties, and the European Union struggles to raise enough fund to support
the local economy, helping far away business partners is not a political
priority. Hence, such foreign aid remains relatively limited in scope and insufficient
to cover the cost of the pandemic. US-$6.5 million is merely a drop in the
bucket bearing in mind the extent to which Ethipoian factories are
affected and that the
US-American Children’s Palace cancelled
millions of dollars worth of clothing
orders alone.
Furthermore, by relying on the support of
foreign governments, the external costs of doing business are being socialized.
The brands are effectively shifting their economic risk to the German or
British taxpayers instead of the Ethiopian workers, while shielding their
profits and shareholders.
Solution 3: Due diligence instruments
Human rights due diligence regulation could also
provide an avenue to prevent parties from unilaterally exercising contractual
rights. The UNGPs and OECD guidelines both stipulate that companies must
consult with stakeholders and take into account human rights impacts when
exercising their contractual rights. Even though they are not legally binding,
these guidelines have been internationally
acknowledged and endorsed by states and international organisations. Many companies adopted
principles similar or with reference to these guidelines in their internal
codes of conduct. As long as they are
not legally binding, however, brands can simply choose to ignore
these standards.
Compliance on the business side is far behind
what the UNGPs and OECD guidelines envisage. This is why recently, European-wide
debate on binding due diligence instruments broke out. France has already
adopted the loi
de vigilance in 2017. Switzerland has just voted
against adopting a binding
due diligence law. The debate in Germany is still ongoing. In parallel, the European
Commission has also begun the process of drafting EU-wide mandatory due
diligence legislation. If mandatory human rights due diligence instruments are
adopted at the EU level, this will have a number of consequences for
businesses. For example, companies will have to take into account adverse human
rights impacts of their decisions before abruptly terminating a contract.
Businesses will be pushed to engage with
relevant stakeholders – and
held accountable if they fail to do so. This could lead to a situation in which
the interests of the supplier, the workers and the apparel brand are better balanced.
Solution 4: Towards a relational interpretation
of force majeure
Finally, courts could move towards a
‘relational’ interpretation of contractual obligations and force majeure.
Orthodox contract law, with party autonomy at its heart, could be
re-interpreted in light of the political economy in which global supply chain contracts
are embedded. The emphasis on contractual autonomy, especially when it enables
such one-sided clauses, is fuelling the economic domination of brands from the
Global North in the apparel sector to the detriment of the companies (and workers)
of the Global South that produce their clothes. It does not, however, account
for the real power relationships and responsibilities
in global supply chains.[2]
The consequence would be to move away from a blind
deference to force majeure clauses and unilateral cancelling powers.
Instead, the parties to the contract should be constrained to bear
a fair share of the losses caused
by the pandemic, based on their resources and with the objective of mitigating
the human rights risks triggered by the cancellation of orders.
In order to achieve such a ‘relational’
interpretation of contractual obligations, party autonomy would have to be interpreted
in a way that reflects the imbalance of economic power between the parties to
supply chain contracts. While it is true in principle that these cases concern
B2B transactions, in practice contracts between global brands and suppliers in the
Global South are much more similar to other contractual situations in which the
power imbalance calls for special treatment of one of the parties (such as in
labour or consumer contracts).
Effectively, the courts could apply a
proportionality analysis: Does the economic interest of the apparel brand
outweigh the consequences which triggering a force majeure clause could have?
Such a ‘proportionality’ analysis is not alien
to the interpretation of force majeure clauses. According to Berger
and Behn, where events are so
exceptional and extraneous to the contract that, absent a specific risk
assumption in the contract, neither party shall bear the full risk emanating
from such crisis; instead, the risk should be shared by the parties. Berger
and Behn argue that while
under “normal circumstances”, a strict application of force majeure reflects
the parties’ autonomy, this notion of self-determination loses its
justification in the context of a global pandemic.
Such a re-interpretation of force majeure
clauses would serve to ensure that the rights of thousands of garment workers
in Bangladesh or elsewhere are duly considered in the economic decision-making
of brands. This would go some way to publicizing supply chain contracts by
disconnecting them from a simple economic calculus to embed them in their
diverse social contexts.[3]
Accordingly, a relational, co-operative approach to supply chain contracts would
better reflects the collective impact of the pandemic on all interests
involved.
Conclusion
The large-scale cancellation of orders has had a
devastating effect on suppliers and their workers. Instead of bearing a fair
share of the cost of the pandemic, brands managed to shift most of the economic
risk to the bottom of the supply chain by invoking discretionary clauses
enshrined in unilaterally negotiated contracts.
While some companies have voluntarily committed
to supporting their suppliers by refraining from exercising their contractual
rights. Many others did not – despite public outcry and government guidance. Thus,
voluntary commitments seem insufficient, be it in the form of internal codes of
conduct, or in the form of internationally approved non-binding guidelines. Two
other options would be available to shift risks onto the brands inside garment
supply chains. On the one hand, mandatory human rights due diligence, with the
threat of civil liability in case of failure to comply, would force companies
to show greater care for the negative impacts of their decisions on their
business partners (and their workers). On the other hand, courts could decide to
interpret contract law in such a way that would reflect the imbalance of power
between parties in supply chain contracts. Thus, moving away from pure party
autonomy to a ‘relational’ interpretation of contractual clauses. Consequently,
a business would not be allowed to exercise a contractual right at all cost for
the weaker party to the supply chain contract.