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.

[1] Locke, Richard and Amengual, Matthew and Mangla, Akshay, Virtue Out of Necessity?: Compliance, Commitment and the Improvement of Labor Conditions in Global Supply Chains (October 3, 2008). MIT Sloan Research Paper No. 4719-08, Available at SSRN: https://ssrn.com/abstract=1286142 or http://dx.doi.org/10.2139/ssrn.1286142.

[2] Cf. A. Claire Cutler and Thomas Dietz, The Politics of Private Transnational Governance by Contract: Introduction and Analytical Framework, in: A. Claire Cutler & Thomas Dietz (eds.), ‘The politics of private transnational governance by contract’, p. 80.

[3] A. Claire Cutler and Thomas Dietz, The Politics of Private Transnational Governance by Contract: Introduction and Analytical Framework, in: A. Claire Cutler & Thomas Dietz (eds.), ‘The politics of private transnational governance by contract’, p. 5.