Law and Responsible Supply Chain Management

Contract and Tort Interplay and Overlap

Vibe Ulfbeck, Alexandra Andhov, Kateřina Mitkidis, Vibe Ulfbeck, Alexandra Andhov, Kateřina Mitkidis

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429866098
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

Corporate Social Responsibility has for long been on the agenda in the business world and recently, it has also become a political agenda in the European Union. Focusing on international supply chains and their control based on studies of law in several European jurisdictions, this book aims to advance the discussion on the application and enforcement of CSR. Drawing parallels to US and Canadian law, the book explores to what extent private law tools can be used as an enforcement device and it ultimately asks if what we are witnessing is the formation of a new area of law, employing the interplay of contract and tort – a law of "production liability", as a corollary of the concept of "product liability".

1 Introduction

Vibe Ulfbeck, Alexandra Andhov and Kateřina Mitkidis

1 The concept of the supply chain and supply chain management

Increasing global interconnectedness, often subsumed under the term “‘globalization”, has led to the fragmentation of production processes. It has become feasible and economically advantageous for companies, bigger or smaller, to outsource some or most of their activities, often to Asian or South American regions.¹ However, often suppliers from these regions outsource parts of the production to further supply chain tiers. Production thus unfolds through intricate supply chains, crossing physical and jurisdictional boundaries of states and continents. Supply chains are the heart and the venous system of companies and societies. They represent a series of business transactions that starts with raw material and ends with the sale of the finished product or service.² During the last two decades, the coordination of these chains has been described with the term “supply chain management”.³ While the concept of supply chain management is not formally defined,⁴ one of the most cited definitions reads,

The management of upstream and downstream relationships with suppliers and customers in order to deliver superior customer value at less cost to the supply chain as a whole.⁵

Supply chains bring many advantages to companies (cost reduction, gaining access to production facilities, streamlining and increasing efficiency), to societies (employment, economic development) and to consumers (lower prices, wider product choices, increased competitiveness among companies).⁶ However, supply chains also bring a series of challenges for the wellbeing of the global population, the quality of the environment, the protection of employees and the ability to reasonably use states’ natural resources and raw materials. For example, it has been shown that supply chain activities contribute to global warming and the depletion of natural, non-renewable resources.⁷ Ultimately, supply chains represent a foundation, but also a hazard, for economic growth and improving the standard of living and, thus, due considerations must be given to its proper regulation and organization for the benefit of all involved parties.

At the inception, supply chain management was concerned with the flow of material.⁸ However, increasingly the understanding of supply chain management has broadened out to consider not only flow of material but also services, finances, information and marketing,⁹ as well as the indirectly connected aspects of production, such as the impact of production processes on the environment and local communities. The indirect – social and environmental – effects have come to the centre of attention especially when suppliers are based in developing economies, in which the rule of law is not as strong or possibly even absent and the governments do not pay necessary attention to protecting labour rights, human rights or the environment. A new concept of sustainable supply chain management has developed.¹⁰

2 The concept of CSR and sustainability

Since Milton Friedman, in 1962 in his Capitalism and Freedom, limited the responsibility of businesses purely to ‘increase company’s profits’,¹¹ the literature on CSR has grown exponentially. With the rise of the economic power of multinational corporations, the search to find a balanced solution for the social, human rights and environmental challenges posed by them has been on the minds of international and regional organizations since the mid-1970s. The period between 1975 and 1980 saw the unveiling of three major individual initiatives relating to the social regulation of multinational corporations. First were the OECD Guidelines in 1976,¹² followed by the 1977 International Labour Organization Tripartite Declaration Concerning Multinational Enterprises and Social Policy (ILO Tripartite Declaration)¹³ and the Draft UN Code of Conduct on Transnational Corporations (Draft UN Code).¹⁴

After this initial and important work, by the 1990s the enthusiasm for human, environmental and labour rights issues had waned. As with any policy considerations, these were changed for some others. However, what remained was the common understanding of the importance of CSR in global business operations. The UNCTC group,¹⁵ despite fierce disagreements leading to the Draft UN Code’s remaining only a draft, was able to agree on what they understood as “CSR”.¹⁶ The concept comprised (1) human rights, (2) environmental and (3) consumer protection obligations.¹⁷ It is important to remember that this was only the 1990s, when the majority of the EU consumer protection regulation was not yet in place.

Currently, the regulatory environment works with various CSR definitions, although one could say that these are close to one another. The EU understands CSR as the responsibility of companies for their impact on society.¹⁸ The concept of CSR is often used in parallel to or even interchangeably with the concept of sustainability. Sustainable development has been introduced as a goal to strive for within international environmental law, later expanding into other areas as well.¹⁹ Currently sustainability is widely understood as defined by the Brundtland Commission in 1987: ‘Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.’²⁰ The principle of sustainable development speaks to all parts of society and it could be argued that it should lead action at all international, states, companies and individual levels.²¹

While neither of the terms – “CSR” or “sustainability” – has a universal legal definition, we may detect a common theme of balancing human rights, environmental, social and economic interests. Nowadays, CSR thus refers to the pursuance of societal goals by corporations, such as social and environmental well-being and respect for human rights as agreed by the UN in 1990, but has increasingly covered other areas such as the fight against corruption or gender equality. It is primarily company-driven, although increasingly more regulation is adopted by states on national and supranational levels to ensure greater social and human rights protection, environmentally sound management and the elimination of corruption practices. These “new” regulations aim to inspire and indirectly steer companies’ responsible behaviour rather than impose specific business conduct with respect to business, social and environmental impacts. An example is one of the most recent acts, the Modern Slavery Act 2015 (MSA), adopted by the British Parliament on March 26, 2015.²² The MSA has been also called “Transparency in Supply Chains”, which suggests the principal aim of this recent legislation is to oblige companies to disclose the steps they have taken in the last financial year to ensure their business and supply chains are free from modern slavery and human trafficking.²³ Hence, what we observe is that new regulations and legislations are adopted in order to target diverse aspects of CSR and to support the sustainability efforts of national governments and international communities.

3 The concept of sustainable supply chains

Combining supply chains and sustainability/CSR amounts to sustainable supply chains. Yet, what does “sustainable supply chain” mean exactly?

Walmart, one of the largest global retailers, sells its goods to nearly 270 million customers, who visit more than ‘11,700 stores under 65 banners in 28 countries and e-commerce websites’, while employing approximately 2.3 million associates worldwide.²⁴ Given the economic position of companies like these, they usually have some kind of control over their supply chains. On this basis one could argue that these companies, which are sometimes called “chain leaders”, should not only enjoy the benefits of complex supply chains, but also be responsible for the behaviour within them to the extent of their control and power.

In line with this, one of the most recent business and human rights initiatives emanating from the UN, the 2011 Guiding Principles (Guiding Principles),²⁵ stipulates that a company’s responsibility with regard to human rights applies not only to the company’s ‘own activities’ but also to those impacts that are ‘directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts.’²⁶ The Commentary to the Guiding Principles clarifies that business relationships include ‘business partners, entities, in its value chain, and any other non-state or state entity directly linked to its business operations, products or services.’²⁷ The Guiding Principles thus clearly foresee that companies’ responsibility to respect human rights goes beyond the bounds of the company itself and its direct subsidiaries.

As a consequence, the proper organization of supply chains is an area of increasing strategic importance for every business, due to the many unforeseeable and potentially unrecognized legal risks and liabilities related to it, including daunting reputational loss and ultimately the loss of customers.²⁸ Hence, multinational corporations as chain leaders, particularly those with well-known brands, have come under increasing public pressure to show that they are responsible, that they care for the workers in their supply chains and consider protection of the environment in all affected countries – in other words, to show that they function as sustainable supply chains. Consequently, companies have started to implement CSR-related provisions and instruments into their supply chain contracts and to develop codes of conduct and other corporate policies as tools for implementing CSR throughout their supply chains. In addition, an increasing number of companies, especially large multinational corporations, have implemented environmental annual reports and sustainability strategies.

4 The aim of this book

The phenomenon of the supply chain has received considerable academic interest in recent years, covering predominantly issues of logistics, logistics management, operations management, transactional cost economics, supply chain economics, product design, marketing, distribution channels and warehousing, to name a few. For the rising interest in the organization of supply chains, researchers from many disciplines with different research approaches and knowledge have found a common interest. This group of various researchers has been joined recently by legal researchers, who have been analyzing legal aspects and legal risks of supply chains.²⁹

The aim of this publication is to contribute to the growing research and literature on supply chains and the law, and to advance the discussion on the operations and enforcement of CSR in international supply chains. However, whereas much research so far has focused on CSR principles as developed at the international and regional level, this publication focuses on private law issues related to sustainable supply chain management. The reason for this is that international law tools and soft law instruments suffer from the weakness that they are not directly binding on companies and not enforceable upon companies by courts of law. Private law, in contrast, offers tools such as contract and tort law that can – in principle – form the basis of enforcement in courts of law. The book explores to what extent these private law tools can be used as an enforcement device with regard to responsible supply chain management. In this respect, it focuses on the liability of both the chain leader and the supplier and it examines both contract law and tort law avenues to liability.

5 Methodology

The book focuses on European private law. The reason for this is that, although supply chain activities often take place in the developing world, the legal systems in these places of the world are, for historical reasons ...