Five contract provisions to tackle supply chain risk

13 August 2013
In May, more than 50 retail brands signed up to the Accord on Fire and Building Safety in Bangladesh, which seeks to regulate and monitor health and safety standards in the ready-made garment sector for a period of five years. The measure, which was backed by the international trade union IndustriALL and the Bangladeshi government, follows the devastating Rana Plaza factory collapse in April, and yet again highlights the challenges that large multinationals face in managing and policing their supply chains. Supply chain mismanagement has been the subject of considerable media attention in recent years. Aside from the obvious ethical issues involved, labour violations and other improper practices by suppliers can result in significant and long-lasting reputational damage to the brands in question. In response, many companies now prioritise corporate social responsibility as well as price, delivery and quality when procuring suppliers. To address this issue from a contractual perspective, customers should ensure that agreements with their suppliers include certain key provisions.
  1. The supplier must be under a contractual obligation to observe all relevant international and local labour laws, and any specific social responsibility code of conduct adopted by the customer (and to notify the customer of any breach of these standards).
  2. The contract should also prohibit the supplier from subcontracting its obligations under the agreement without the customer's consent.
  3. Crucially, the contract should enable the customer to terminate the arrangement if the supplier violates labour laws (or the customer's code of conduct) or subcontracts its obligations without consent. This could either be through a standard ‘material breach’ termination clause or through the inclusion of a clause that gives the customer a right of termination where the supplier is operating in such a way as to bring the customer into disrepute (irrespective of whether there has been a material breach).
  4. Additionally, the contract should provide the customer with the right to inspect and audit the supplier's premises on both a formal and an ad hoc basis, and to publish the results of its findings.
  5. The contractual protections afforded to the customer should not be seen as a substitute for actively policing what is actually happening ‘on the ground’. Customers should pro-actively monitor and audit suppliers' practices (possibly with the assistance of local NGOs) and put in place policies and training to deal with non-compliance. Multinational groups should also consider joining initiatives such as the Fair Labour Association.
Peter Dickinson is head of the corporate group at Mayer Brown
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