Tips on creating ethical contracts

20 May, 2010

20 May 2010 | Cynthia Johnson

Buyers are central to ensuring responsible purchasing policies are adhered to throughout the supply chain, Cynthia Johnson says

Any company that has come under public scrutiny or criticism because of poor working conditions or labour practices of an organisation in its supply chain understands the benefits of including strict obligations regarding ethical sourcing and the recognition of human rights in its supply, services and procurement contracts.

Supply chain responsibility is an area of growing concern for businesses, particularly in sectors where manufacturing production and services are outsourced. The fluctuating economic landscape has increased the pressure on companies to operate more efficiently. It is therefore not uncommon to discover a company in the supply chain operating in a country that does not enforce internationally recognised standards and practices regarding acceptable working conditions, human rights or health and safety regulations.

Involvement in a “sweatshop” scandal can have significant consequences on the image and reputation of a company and its brand, regardless of its size or industry sector. Buyers need to be aware of the impact on their business of an association with unethical practices.

Notwithstanding the press coverage on this topic, a significant number of commercial contracts still lack relevant ethical obligations on the supplier. At the very least corporate responsibility and sourcing obligations should be considered in procurement, manufacturing, supply and purchase contracts. The nature of the obligations will vary depending on the circumstances. In certain contracts, for example, it may be important to obtain a warranty and undertaking from the supplier that it will not employ or engage any person under the age of 16, or subject any employee to any verbal or physical abuse or harassment, or pay any employee less than minimum wage.

The following should be considered in any contract for the provision of goods or services:

1. An obligation on the supplier to observe the highest standards of ethical propriety in its business conduct and to comply with specific ethical standards in relation to working and environmental conditions, health and safety and human rights. Such standards could be based on the buyer’s own corporate responsibility policy, or on the International Chamber of Commerce guidance on supply chain responsibility. The applicable standards should be attached as a schedule or included in the body of the contract.

2. A warranty from the supplier guaranteeing it will comply with the relevant ethical standards/corporate responsibility policy.

3. An obligation on the supplier to impose no less onerous obligations regarding compliance with the ethical standards/corporate responsibility policy on any sub contractors/sub-manufacturers as are imposed on the supplier under the agreement.

4. A right of the customer to approve all sub contractors/sub-manufacturers or sub-contract agreements.

5. An efficient system for the customer to monitor compliance. This could be a right to audit the premises and employment records of not only the supplier but also all sub-contractors/sub-manufactures of such, or through the provision of monthly or annual compliance reports.

6. A mechanism for dealing with non-compliance. This could take the form of time-bound improvement measures and a right to terminate the contract on continued or persistent failure to meet agreed standards.

Contract negotiators and procurement teams are central to ensuring responsible purchasing policies are included in the appropriate contracts. Training buyers on corporate responsibility issues will enable them to identify risks in the supply chain and therefore ensure the continuing practice of responsible sourcing.

* Cynthia Johnson is a senior associate at Dundas & Wilson

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