How to Ensure International Suppliers are behaving ethically

I’ve worked with small startups that were focused on promoting ethical supply chain principles but did not know how they could ensure their overseas partners were behaving accordingly.

This issue is not entirely novel in the international business context, as many companies have had to devise systems for confirming that their overseas counterparts adhere to specific guidelines with respect to issues such as quality controls procedures.

We can borrow from this experience and apply it to the ethical sourcing context.

Supplier Visit

Most people involved in sourcing products from abroad highly recommend performing a supplier visit early in the relationship.

Supplier visits allow you to have much more access to how your counterpart undertakes its manufacturing activities and allows you to compare various suppliers at the same time.

They are also important opportunities to build a human connection with your counterparts overseas which can provide the basis for a strong, trusting business relationship.

Commercial disputes often arise because of an incongruity between various parties’ expectations and abilities. Many of these misunderstandings could be avoided by undertaking the proper diligence and relationship-building at an early stage.

While site visits are incredibly valuable, often small importers don’t have the expertise to properly inspect a supplier for issues relating to quality control or ethical production. For this reason it is advisable to also consider hiring a third party inspection service to perform a detailed social audit.

Social Audit

There are several firms in Asia who specialize in testing quality control issues that also have the capability to perform social audits, such as Sofeast.

When performing a social audit, often a facility tour is undertaken by the quality inspector and the supplier is asked to provide a series of documents which are then reviewed by the inspection company. For example, the supplier would be asked to provide timesheets and sample pay slips to ensure that it pays its employees in accordance with the relevant wage regulations.

A Social audit might also involve interviews with employees to corroborate the documentation provided.

There are however some downsides to these audits in that employees may feel pressured to provide dishonest answers. Additionally, there is scope for a particularly unscrupulous supplier to provide fraudulent documentation. It should be remembered that a supplier who is knowingly violating wage or environmental regulations would be easily capable of also falsifying documents to suit its needs.

Although site visits and social audits can be very useful, it’s also important to ensure that the documents outlining the parties’ commercial obligations also make clear the parties’ expectations as they relate to ethical production.

Ethical Production Agreements

The purpose of preparing production agreements with your supplier is to make clear both parties’ expectations and obligations. They can also provide a mechanism for enforcing those obligations, if so required.

You can ask a lawyer to prepare a stand-alone ethical production agreement - or you can ask that they include a section covering ethical production in your broader production agreement.

At a minimum, your ethical agreement should confirm that your supplier is not violating any international or local regulations related to forced labor or child labor. You could also require that they confirm their compliance with all relevant labor laws, eg related to minimum wages or maximum hours.

You might also include language relating to worker safety and/or environmental standards.

Ideally, you would also want sub-contractors of your products to sign similar agreements. Although at the early stages of your relationship, you may only be working with your direct supplier. In this case, you could, at a minimum, request that they confirm they are not aware of any violations of the ethical obligations taking place at sub-contractors involved in the manufacture of your products.

If you wanted to enforce the terms of the agreement, it is usually preferable to include an arbitration clause which allows for both parties to utilize arbitration to resolve contractual disputes rather than having to go to court in a foreign jurisdiction.

It can be difficult to determine the damages associated with a violation of the ethical production obligations. For this reason, it may be be preferable to include a liquidated damages clause which stipulates the penalty for breaching the ethical obligations. Although it should be noted that most countries have specific requirements related to liquidated damages which must be taken into account, eg the US or China. For this reason you should consult a lawyer with international experience who can tailor your agreement to suit your needs.

Our firm prides itself on devising creative, 21st century solutions for social enterprise companies, particularly those conducting international business. We’d be happy to speak with you further to discuss your needs.

Disclaimer: The information in this article is provided for informational purposes only. You should consult with an attorney before you rely on this information. This information should not be seen as legal advice and does not create an attorney-client relationship. This article is meant to be a general discussion and may not include all relevant information regarding the issues covered.