The European Commission published the long-awaited Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence (the “EU Directive”) on February 23, 2022. It has been suggested that text found in the EU Directive “risks making the law ineffective” by implying that companies can fulfil their obligations by simply adding clauses in their contracts with suppliers and verifying compliance with “suitable industry initiatives or independent third-party verification”. The criticism is that the “contractual assurances” and verification required by Items 2(b) and 4 of Article 7, and Items 3(c) and 5 of Article 8 allow companies to shift their responsibilities on to their suppliers and to knowingly get away with harm by conducting ineffective audits or participating in voluntary industry schemes that have failed in the past.
The argument that companies can find an easy safe harbor within the EU Directive is misguided. Such condemnation places undue emphasis on the first two elements to achieve the negation of civil liability under Article 22 and ignores the third factor. A company must prove not only that (i) it used appropriate contract clauses (under to-be-provided Commission guidance), and (ii) it verified compliance, but must also prove (iii) it was reasonable to expect the action taken, including the verification process, “would be adequate to prevent, mitigate, bring to an end or minimize the extent of the adverse impact.” The last element is unfairly discounted by those that fear delivery of a safe harbor to industry influences. In addition, due account is not given to Article 22’s additional text that insists company efforts (or absence of efforts) to remediate any discovered damage and the extent of pre-harm support and collaboration to address adverse impacts in its value chains (or absence of support and collaboration) is also to be considered in determining liability.
Articles 4 to 11, 25 and 26 of the EU Directive impose due diligence obligations on subject companies and address the duty of care required of their directors in setting up and overseeing due diligence. The EU Directive has numerous “Whereas” clauses expressing a desire to incorporate the UNGPs and OECD Guidelines which require shared responsibility between buyers and suppliers. It should not be read as suggesting companies avoid liability by simply demanding conventional representations and warranties from a first-tier supplier without shared responsibility for thorough retrospective and prospective investigations to identify, prevent and end adverse impact. Any company that believes “contract assurances” without a detailed and regularly reviewed corporate strategy to address human rights, climate change and environmental consequences using contracts as one of multiple tools is destined to be found liable for damages.
Perhaps Article 22 with respect to a company’s potential civil liability could be clearer with respect to this point if it included a reference to Articles 4,5 and 6 in lieu of the existing limited reference to the obligations laid down in Articles 7(Preventing potential adverse impacts) and Article 8 (Bringing actual adverse impacts to an end). But Article 12 (Model contract clauses) of the EU Directive includes a promise that the Commission will provide guidance for model contract clauses and Article 13 (Guidelines) states the Commission, in consultation with Member states, stakeholders, the European Union Agency for Fundamental Rights, the European Environment Agency, and appropriate international bodies may issue guidelines for specific sectors or specific adverse impacts. The to-be-developed model contract clauses should reflect the characteristics and obligations found in Version 2 of the Model Contract Clauses (the “MCCs”) drafted by the American Bar Association Business Law Section’s Working Group found here Center for Human Rights. The MCCs include provisions which require:
● a joint responsibility by buyer and seller to engage in human rights due diligence, in line with the UNGPs and the OECD Guidance;
● a commitment by buyer to engage in responsible purchasing practices that will support supplier’s obligations to avoid adverse human rights impacts; and
● in the event of an adverse impact, a joint commitment that: (a) the parties will prioritize victim-centered human rights remediation above conventional contract remedies (that compensate the non-breaching party, not victims); and (b) each party’s participation in remediation shall be proportionate to each party’s causation of or contribution to the adverse impact.
The EU Directive and the right contract clauses and due diligence guidance can change the way supply chains in global markets have worked for centuries. Finally, a real tool to address modern slavery and the environmental destruction of entire communities.