What happens when a supplier breaches a responsible production commitment

Responsible Supply Agreements

Purpose-driven companies that engage in international commerce often take steps to ensure that their commercial counterparts are contributing to the equitable & sustainable development of their community.

An importer might request that certain ethical production obligations be included in a supply agreement.

Another method for ensuring an ethical international supply relationship is requesting that the supplier commit to obligations contained in an ethical supplier handbook.

These ethical obligations generally involve issues such as ethical workforce treatment or sustainable manufacturing practices.

These are particularly important if an importer does not have confidence in the regulations and/or enforcement of labor/environmental standards in the country where its goods are to be manufactured.

Recoverable Damages

Two key motivations for these types of ethical arrangements are to: (I) ensure that a supplier behaves ethically; and (II) allow for the importer to seek legal remedies for damages it sustained due to the unethical behavior.

The primary remedy that an importer can seek when a supplier is violating its ethical obligations is to simply cease their business relationship. One would hope that the fear of losing business would be sufficient to accomplish motivation (I). But if this is not the case, motivation (II) becomes crucial.

In the event that the importer wishes to seek redress for damages it has sustained, careful consideration must be given as to how exactly these damages should be quantified.

Say for example an importer is made aware that a supply partner is breaching its obligation to pay its workers an ethical wage. Assuming this obligation is clearly set out in an agreement – and that this obligation has clearly been breached – how would we quantify the importer’s damages?

One difficulty arises because it is quite possible that the importer was not financially harmed by these practices because you could presume that the low wages paid by the supplier did not increase the price that the importer paid.

Perhaps there could be an argument that there was an implied obligation that the supplier would pass on a portion of the purchase price paid by the importer to its workers - thus the supplier was unjustly enriched by the amount which it failed to pass on. Although it is likely that the quantifiable damages associated with this approach might not be particularly large under most circumstances.

The importer might also claim damages based on some form of reputational harm sustained by virtue of its involvement with an unethical supplier. However, reputational damages can be quite difficult to quantify. And more importantly, this likely assumes that the unethical practices were made public in the first place..

What if, for example, the unethical practices were discovered during an internal audit of the supplier and the public was not made aware of these practice. In this case, the importer would have suffered virtually no reputational damages. Although there may still damages because the importer may have made representations to the public concerning its ethical supply practices, which might require clarification following the discovery of the unethical supplier practices.

Given the uncertainty of quantifying these types of damages, the importer may consider including a type of liquidated damages provision which explicitly sets out the recoverable damages for such a breach. However, there are several jurisdictions which require a liquidated damages clause to be referable to the damages which may be sustained. So this again brings us back to the difficulty in quantifying the damages faced by the importer.

As is the case with most legal disputes, the recoverable damages will depend largely on the facts involved in the specific situation. As such, when a purpose-driven company is considering seeking legal redress for supplier misconduct, it should work with counsel that has a deep commitment to working on these important & fascinating issues.

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.