Corporate LawInternational Business

Contract Law and CSR

By Kaisla Yli-Juuti, Aliant Finland. The use of private contract law in international supply chains has become more common as the number of corporations working across borders has increased. Incorporating Corporate Social Responsibility (CSR) and sustainability obligations into supply chain contracts is one way of making them legally binding and enforceable, thereby motivating suppliers to behave sustainably and ethically. To gain the most out of CSR and sustainability contractual provisions, the contracting parties must word them in a specific way and must intend them to be legally binding. A major drawback limiting the effectiveness of contract law in enforcing CSR and sustainability obligations is the standing of the third parties and the challenges they face in directly enforcing these clauses. 

During the internship program at Aliant Finland, Kaisla Ylijuuti observed the role and effectiveness of Contract Law in enforcing Corporate Social Responsibility and sustainability contractual clauses.

Due to globalization, companies and markets are more integrated than ever. The international regulation of multinational businesses poses many challenges. Because of the territoriality principle of international law, home states of multinational companies do not have the legal capacity to control the behavior of corporations abroad, and the host state in which the company is operating has the legislative power but usually lacks motivation.  So corporations’ conduct is ineffectively regulated, leading to a regulatory gap in which businesses function.  As a result of said factors companies are using global supply chains to provide products to consumers. In global supply chains multiple entities from different jurisdictions interact with one another by transferring goods or services. The chain is coordinated by bilateral business agreements. Supply chain contracts control the sale and delivery of goods.

CSR is generally defined as a self-regulation strategy that businesses undertake to show the public that they are willing to take responsibility for the consequences their activities might cause the environment and society. This can be done by drafting corporate CSR statements, using and referring to a code of conduct, getting involved in voluntary CSR initiatives and educating employees on the importance of CSR. Said methods are usually voluntary and non-binding, and do not grant businesses enough power to change the behavior of those involved in the supply chain.

Like CSR, the term “sustainability” does not have a common, unified definition. In one view, sustainability is part of CSR, while others think that the two concepts are separate from one another. The two are closely connected as activities that reduce existing and future environmental problems and contribute to positive economic development, and the protection of social rights help achieve sustainable development.

Regarding formulation of CSR and sustainability contractual clauses, it is notable that a contract is an agreement which is intended to lead to a binding legal relationship. Due to the principle of freedom of contract, the contracting parties can freely decide the content of the contract. Therefore, the contract is binding to and concerns only the parties. Once soft-law CSR and sustainability obligations are included in a contract, they automatically become legally binding to the parties but not others.

The way CSR and sustainability clauses are drafted in the contracts between buyers and suppliers affects whether or not they are binding and enforceable. One method is to incorporate the clause directly into the main contract or as an express term in the terms and conditions of the contract. An example of this first method is the following statement that was included in the terms and conditions of a particular company: “the supplier does not employ, engage or otherwise use any child labour …does not use forced labour in any form”

Another principle of contract law is that a contract is enforceable only if the content of a clause is clear and specific enough. Unspecific and unclear obligations in most cases will not be considered as having binding effect. Specific provisions within the contract might also be excluded from having legal effect if they are imprecise or vague. This is important when considering CSR and sustainability clauses which are often worded vaguely, as referred to above.

The use of private contract law in international supply chains has become more common as the number of corporations working across borders has increased. Incorporating CSR and sustainability obligations into supply chain contracts is one way of making them legally binding and enforceable, thereby motivating suppliers to behave sustainably and ethically. To gain the most out of CSR and sustainability contractual provisions, the contracting parties must word them in a specific way and must intend them to be legally binding. A major drawback limiting the effectiveness of contract law in enforcing CSR and sustainability obligations is the standing of the third parties and the challenges they face in directly enforcing these clauses.