"Supplier Code of Conduct": CSR Clauses in General Terms and Conditions and General Agreements

General terms and conditions and general agreements increasingly contain clauses obligating a contractual party to respect human rights, prevent child labour, to act against corruption, and generally act "decently". The legal scope of such clauses remains disputable. Do they constitute a mere appeal or are they a binding contractual obligation?

The background of such clauses is a UN initiative which is described as "Corporate and Social Responsibility" (“CSR”) of companies. The idea is that companies are not only responsible for an acceptable profit, but also for respecting human rights and environmental laws within their company and worldwide. These regulations require that companies should intervene to prevent negative effects on human rights which must always be respected. In the meantime, the European Union has also taken up this approach and speaks of "the responsibility of companies for their effects on society". In addition, the UN has developed "guiding principles" for the economy and human rights. In the meantime, there is also an ISO 26000 standard which aims in the same direction, resulting in large companies’ obligation to practice social responsibility pursuant to the CSR principles in their business activities along the entire "value creation chain" ("Supplier Code of Conduct").

Such clauses could be dismissed as an appeal. They clearly have political overtones and create the impression that companies wish to use them to improve their image. However, legal analysis indicates that caution should be exercised here. After all, these clauses are contractual conditions and therefore have their own perils. Most importantly: If such CSR regulations are incorporated into an existing supply relationship, they are initially binding. If they are not complied with in an individual case, the legal consequences generally result from applicable laws. These may provide for compensation or cancellation or even both. It is therefore in the best interest of the supplier to limit the commercial effects of such a sanction by an independent agreement. However, there is another factor: Purchasers often require in these CSR conditions that the supplier should "guarantee" strict compliance in particular with these clauses. In German law, a warning phrase should be added to such clauses. Said "guarantee" may be interpreted as liability for compensation for damages, detached from culpability. However, such an interpretation is contrary to German liability law, which is based on the culpability principle. Accordingly, the culpable party can relieve itself of claims for compensation of damages resulting from a violation of duties if it can prove that it did not act negligently, but exercised the due care required in the market (BGH [Federal Court of Justice] NJW 2006, 47).

More seriously, however, the CSR principles generally also obligate the supplier to transfer compliance with human rights to the entire supply chain as a binding contractual duty. The intent is that the supplier should "guarantee" strict compliance with the CSR principles not only by himself but also by all preceding sub-suppliers. The legal pitfall of such a clause is the following: If a supplier is unable to obligate his contractual partner as the sub-supplier to comply with the CSR principles even though he has made sufficient efforts to do so, then this "shortcoming" will not relieve him of liability. According to the CSR specifications, the obligation to swear the entire supply chain to strict compliance with the CSR principles must be fulfilled unconditionally. Moreover, according to the requirements of the CSR principles in practice, if a subsequent sub-supplier violates these principles for whatever reasons and, for instance, does not actively prevent child labour (India, Bangladesh etc.) on his preceding product, this will result in the separate liability of the end supplier. The sub-supplier is therefore classified as a vicarious agent (Erfüllungsgehilfe), a view which does not comply with German law. The culpable party is liable for a violation of duties by its agent regardless of his own culpability.

How can this situation be resolved? Experience has shown that it is difficult to defend oneself against the validity of the CSR principles. The purchaser is usually the stronger market party, and political counter-arguments against these CSR principles are both difficult to assert and unlikely to be sufficiently convincing. Therefore, such agreements must generally be accepted. If German law applies, there is usually a possibility to contest or declare invalid certain clauses pursuant to the laws governing general terms and conditions, depending on how they are drafted (also see Spießhofer/Graf von Westphalen, Betriebs-Berater [Company Consultant] 2015, 75 et seqq.). However, since the CSR principles are basically contractual laws which have the "blessing" of the UN, the difficult question remains whether German law can truly assert itself. At present the answer is most likely to be "yes". However, the longer the CSR principles assert themselves in contractual practice in favour of compliance with human rights, the more difficult it will be to argue that, according to German law, they are too heavy a burden for suppliers.