Proactive contract theory in the context of corporate sustainability due diligence

Abstract

The article discusses how proactive contract theory could be used to translate the ambitious objectives of the European Commission's current draft proposal on corporate sustainability due diligence into actual business practices in complex value chains and networks. Proactive contract theory regards contracts as legal, economic, managerial and social artefacts that should be designed to prevent undesirable results and promote favourable outcomes. Moreover, the theory highlights the need for multiprofessional collaboration and user-centricity in contract design. Based on these principles, we introduce four ways to promote corporate sustainability due diligence in supply contracts via proactive contracting: turning from one-sided safeguarding towards shared responsibility and collaboration, incentivizing responsible and sustainable business practices via promotive contract clauses, engaging end users in the contract design process and preventing disputes.

Introduction

Global value chains are incredibly complex in their infrastructure and legal structure. In the governance of these complex chains, lead firms play a major role. A lead firm is an actor most centrally engaged in the governance of a product or service. They typically own intellectual property rights; they design and market products, and they make decisions over how production is organized in the value chain. Lead firms govern value chains for multiple reasons, which relate to market regulations, value-chain-wide cost management, and research and development (Salminen and Rajavuori, 2019: 8).

As the focus on sustainable business has increased in recent years, reputational and other risks have made it necessary for lead firms to exert control over their value chain in relation to labour violations and environmental harms committed by sub-suppliers. On the other hand, increasing government rules and regulatory intervention have also made lead firms responsible for certain activity in the upstream segment of the chain (Sobel-Read et al., 2018: 7). However, network-wide sustainability due diligence (hereinafter ‘SDD’) programmes have by and large remained limited due to their complexity – with a few exceptions, such as the Bangladesh Accord (see Bangladesh Accord, 2013). In this regard, companies encounter many difficulties in identifying and mitigating risks relating to value chains’ human rights and environmental impacts (CSDDD Proposal, 2022, Explanatory Memorandum: 1).

Contracts play a key role in managing SDD in complex value chains. However, the focus in contemporary supply chain contracting has been on protecting the buyer from liability issues by requiring suppliers to comply with buyers’ codes of conduct without ensuring that this is done in practice. As an example, although the codes include SDD measures, they often include very few collaborative elements aimed at ascertaining that suppliers can actually follow these policies. Moreover, monitoring is often inadequate, and transparency is also limited.

Without collaboration, assistance and shared responsibilities to work on common sustainability goals to solve problematic issues in countries dogged by weak observance of human rights, full compliance with codes of conduct may become challenging and even lead to perverse outcomes. For example, under certain circumstances buyers may indirectly obtain compensation for suppliers’ social breaches in developing countries but neither party is under an obligation to provide remediation to victims (Jevremovic, 2022: 406). Moreover, suppliers may be forced to cover up such issues in order to retain their western clients. Safeguarding contracting practices escalate this confrontation by focusing on identifying the breaching party, honing favourable dispute resolution clauses, and seeking damages for poor sustainability performance. This has also been executed at the cost of poor human rights remediation.

Recently, the European Union (hereinafter ‘EU’) has taken an active role in regulating corporate sustainability. For example, after the escalation of supply chain disruption caused by the coronavirus disease 2019 pandemic in 2020, the European Parliament passed a resolution in March 2021 seeking corporate human rights due diligence legislation. Consequently, the European Commission issued its Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (European Commission, 2022, 2019/1937 COM/2022/71) in 2022 (hereinafter the ‘CSDDD Proposal’). The CSDDD Proposal is just one example of the EU's ongoing regulatory work on corporate responsibility (hereinafter ‘CR’). The regulation of CR is a step in the right direction: It is apparent that voluntary CR standards and existing contractual practices are ethically unsustainable. The CSDDD Proposal relies heavily on contract and contractual practices. However, it also lacks clarity as to its key operational tools/concepts, such as the requirement for contractual assurances.

This article examines how proactive contract theory can be utilized to translate the ambitious objectives of the current draft proposal on SDD by the European Commission into actual business practices in complex value chains and networks. We focus specifically on the ways in which proactive contracting could address issues relating to contractual cascading (using factual control or other leverage) of SDD, shared responsibility and remediation.

The structure of the article is as follows. First, it introduces proactive contract theory along with some of its basic tenets. Second, it discusses the relevant parts of the CSDDD Proposal. Third, it suggests four ways to promote sustainability in supply contracts via proactive contracting: turning from one-sided safeguarding towards shared responsibility and collaboration, incentivizing responsible and sustainable business practices via promotive contract clauses, engaging end users in the contract design process and preventing disputes. Finally, we present our concluding remarks.

Proactive contract theory

Proactive contract theory has its roots in the proactive contracting approach introduced by Helena Haapio in 1998 (Haapio, 1998). Soon after that other Nordic academics and practitioners joined the movement and started to advance the development of its theory and practical application. Application of the proactive approach eventually widened to cover proactive law (see, e.g., Berger-Walliser and Østergaard, 2012), and the approach has even been endorsed by the European Economic and Social Committee (EESC) in relation to developing better regulation in the EU (EESC, 2009).

Today, proactive contract theory builds on several research fields, disciplines, and theories (for further discussion, see Hurmerinta-Haanpää and Nuottila, forthcoming). It is a genuinely multidisciplinary research stream that, depending on the research questions at issue, applies various theoretical and methodological approaches to the study of contracts and contracting in practice (Nystén-Haarala, 2017). There are, however, some basic tenets that underlie proactive contract theory and are relevant in the context of this article.

Contracts are legal, economic, managerial and social artefacts that have many functions

For proactive contracting scholars, contracts are not mere legal, but also economic, managerial and social artefacts that can be used to plan, manage and coordinate business, relationships and collaboration (see, e.g., Berger-Walliser et al., 2011; Kujala et al., 2015; Nuottila and Nystén-Haarala, 2019; Nuottila et al., 2016; Pohjonen and Visuri, 2008). Moreover, contracts are tools for creating, allocating and protecting the value and realizing benefits, minimizing and managing risks, preventing problems and controlling and resolving disputes (Haapio and Haavisto, 2005, translation by Haapio, 2013: 29).

According to one conceptualization that draws on the proactive contracting approach, contracts are tools by which to (a) communicate the deal and the relationship for the contracting parties, (b) safeguard the rights of one or both contracting parties, (c) coordinate tasks and responsibilities, (d) manage internal information flow and a workforce of a contracting party, (e) adapt the business relationship over time, (f) create, sustain and develop collaboration; and (g) guide and direct companies towards more sustainable business practices (see also Hurmerinta-Haanpää, 2021). ¹

Contract's collaboration and policy functions have become particularly relevant in recent years because contracts are used to even greater extent to set relational or prosocial values for the business relationship (Dadush, 2022; Frydlinger et al., 2016) and to support policy goals, such as the United Nations’ sustainable development goals. ²

Prevention and promotion dimensions

Proactive contract theory regards contracts and contracting as having both preventive and promotive dimensions that are grounded in the psychological theory of regulatory focus. ³ While the preventive dimension aims at preventing problems before they occur, the promotive dimension seeks to detect and realize opportunities to enable business success (see, e.g., Haapio, 1998, 2013: 38–39). In relation to contract planning and framing, research suggests that preventive and promotive contract clauses have distinct effects on performance and the business relationship (see, e.g., Mayer and Weber, 2009: 12–13; Rich et al., 2022; Weber and Bauman, 2019; Weber and Mayer, 2011: 58–61; Weber et al., 2011: 196–198). As discussed in detail below, we take the view that responsible supply contracts should include not only preventive but also promotive terms in order to incentivize responsible and sustainable business practices and support the creation and development of trust and collaboration in the value chain.

Multiprofessional, user-centered contract design

In proactive contract theory, contract is understood as a process (Nystén-Haarala, 1998) that evolves during the business relationship. Consequently, the theory is interested in the entire lifecycle of a contract, from planning to implementation. Scholars regard contract planning as a multiprofessional endeavour because the contract itself consists of distinct parts: the legal part, the technical part, the financial part and the implementation part (Haapio, 2006a: 159, 2013: 37). Indeed, research suggests that different professionals have different contracting capabilities: Managers and engineers may be more suitable than lawyers to drafting clauses on roles and responsibilities, communication and contingency planning, while lawyers may be better suited to drafting specific intellectual property rights clauses and dispute resolution clauses (Argyres and Mayer, 2007). Moreover, different user groups have varying information needs (see, e.g., Haapio, 2006b, 2013; Kujala et al., 2015; Nuottila et al., 2016; Nystén-Haarala et al., 2010; Siedel and Haapio, 2010) that need to be taken into account in the contracting process.

In order to take the various user groups into account in the contracting process, proactive contract theory suggests applying information design principles, such as user-centricity, and design-based methods – for example, experimentation, prototyping and user-testing – to contracting and contract documents (see, e.g., Berger-Walliser et al., 2017: 356; Finnegan, 2021; Haapio, 2013; Passera, 2017; Passera and Haapio, 2013: 40–43). Moreover, researchers urge organizations to use various contract design patterns that refer to ‘reusable models of a solution to a commonly occurring problem’ (Haapio and Hagan, 2016: 381) to enhance user comprehension. Examples of such patterns include visuals, explainers, layering and tone of voice. ⁴ Some of the patterns, such as visuals, seem especially suitable for vulnerable stakeholders in the upstream value chain (see, e.g., Baasch Andersen and de Rooy, 2022).

In our view, proactive contract theory has a lot to offer when it comes to contracting for corporate sustainability. First, in order to translate corporate sustainability jargon into actual business practices, supply contracts need to be designed in collaboration with at least first tier suppliers. Second, in addition to collaboration during the contract design process, the contract itself needs to create space and procedures for collaboration during the contract's life cycle as it is clear that these kinds of contracts need to adapt to changed circumstances and lessons learned during the business relationship. We also take the view that responsible supply contracts would benefit from promotive contract framing and a pattern approach. The ‘Avenues for enabling SDD via proactive contracting’ section offers specific suggestions on how to promote corporate sustainability in supply contracts via proactive contracting. These suggestions are linked to the requirements set forth in the draft EU directive introduced below.

The EU Commission proposal and its implications for sustainability contracting

Alongside with other corporate sustainability-related legislation, such as the Corporate Sustainability Reporting Directive (2021/0104(COD)) and the EU Taxonomy for sustainable activities ((EU) 2020/852), the CSDDD Proposal is the most recent regulatory attempt to give shape to the due diligence requirements put forward in the United Nations Guiding Principles on Business and Human Rights (hereinafter ‘UNGPs’). The CSDDD Proposal introduces an EU-wide requirement for companies (a minimum of 500 employees and EUR 150 million annual net turnover) to conduct SDD. It aims to ensure that companies under the scope of the Directive contribute to sustainable development and the sustainability transition of economies and societies through a six-step due diligence process, which is based on the OECD Due Diligence Guidance for Responsible Business Conduct (similar to the UNGPs): (a) integrating due diligence into policies and management systems, (b) identifying and assessing adverse human rights and environmental impacts, (c) preventing, ceasing or minimizing actual and potential adverse human rights, and environmental impacts, (d) assessing the effectiveness of measures, (e) communicating, and (f) providing remediation (OECD, 2018).

The scope of the companies covered under Article 2 of the CSDDD Proposal appears to be very limited, leaving the Directive's direct application solely to very large companies. This is problematic, because SMEs comprise 99% of the companies based in the EU (CSDDD Proposal, 2022: 14). The Proposal is built on the assumption that companies are resourceful enough to conduct SDD. However, this form of sustainability regulation is new to many companies. The scope of the Directive's application may be wider than it first appears, however, as the CSDDD Proposal suggests that companies should enforce SDD measures through their factual control or other leverage (‘contractual cascading’ (CSDDD Proposal 2022: 13)), which indirectly obliges smaller companies to consider SDD measures further in value chains.

The CSDDD Proposal places a lot of weight on contractual control by large companies in its scope but through contracts with other business entities, such as small and medium-sized enterprises (hereinafter ‘SMEs’), the large companies expand the Directive's application further in value chains. In a similar vein, several points in the proposal mention that a company should establish contractual assurances in order to facilitate companies’ SDD responsibilities. The CSDDD Proposal's Articles 7 and 8 require that companies should ‘seek contractual assurances from a direct partner with whom it has an established business relationship that it will ensure compliance with the code of conduct and, as necessary, a preventive/corrective action plan, including by seeking corresponding contractual assurances from its partners to the extent that they are part of the value chain’ (CSDDD Proposal, 2022: 56). By seeking to obtain contractual assurances from its direct partners with whom they have established business relationships, ⁵ a company ensures that these direct partners comply with the code of conduct or the prevention action plan (CSDDD Proposal, 2022: 37).

The CSDDD proposal is unclear about how the (power) imbalance between contractual cascading and contractual assurances should be arranged. It advises that lead firms should support their business partners (SMEs) to comply with due diligence measures if measures ‘jeopardize the viability of the SMEs’. Moreover, this needs to be done in ‘fair, reasonable, non-discriminatory and proportionate’ manner (CSDDD Proposal, 2022: recital 47). However, we find that the measures to achieve this are contested: The imbalance in companies’ resources must be taken into account as due diligence measures need to go beyond administrative ‘tick the box’ exercises regarding reporting and social auditing (Somo, 2022: 31). Although the CSDDD Proposal does not consider contracting practices themselves – i.e., how measures are shared and how accountability for them is addressed – in November 2022, the European Parliament's Committee on Legal Affairs elaborated on this issue in its draft report by highlighting that ‘often contractual terms are unilaterally imposed on a supplier by a buyer, and any breach thereof is likely to result in unilateral action by the buyer, such as termination or disengagement’. The Committee acknowledged that ‘such unilateral action is not appropriate in the context of due diligence and would probably itself result in adverse impacts’ (JURI 2022/0051(COD)). This could mean that contracting practices of this kind used in today's business will increasingly be contested.

Companies need to respect human rights by avoiding causing or contributing to adverse human rights impacts (CSDDD Proposal, 2022: 28; UNGPs, 2011: 14). The (pro)active role in contracting should be highlighted, because conducting SDD requires taking adequate measures for harm prevention, mitigation and, where appropriate, remediation (UNGPs, 2011: 13). Unlike prevention and mitigation, remediation only takes place if the damage is directly linked to a company's act (or omission). If the company has not caused or contributed to adverse impacts, it may nonetheless take a role in providing for remediation (UNGPs, 2011: 24–25). We argue, however, that companies’ traditional contractual practices play a significant role whenever companies prioritize actions to address actual or potential adverse human rights impacts that are particularly severe in nature or where the delayed response would make them irremediable (UNGPs, 2011: 26). In our opinion, this emphasizes that companies should take a more active (or proactive) role in supply chain contracting, instead of managing supply chain risks passively.

Alternative avenues to access remedies are of high importance and relevance because practical and legal hurdles to civil liability as a part of the CSDDD Proposal may remain unsolved. ⁶ When considering providing effective remediation to legitimize legislation in the eyes of stakeholders, contractual clauses could be utilized to facilitate effective corrective SDD measures and remediation. At the time of writing, the Proposal seems to emphasize remedies in Articles 9 (complaints procedure) and 22 (civil liability). However, these are mechanisms aimed at solving disputes that have already become wider conflicts – and accordingly, in a proactive contracting perspective, seek to address harm that could have been avoided.

We also find the idea of outsourcing verification processes as contained in the CSDDD proposal to be insufficient. The Proposal suggests that a company may use suitable industry initiatives or independent third-party verification as appropriate measures to verify compliance (CSDDD Proposal, 2022: 55, 57). Besides using these, we suggest that companies could do some of these exercises in cooperation with SMEs through proactive contracting. The Commission also takes the view that companies should make investments aimed at the prevention of adverse impacts and targeted and proportionate support for SMEs. This is necessary, as SMEs, whether they are based in Europe or in developing countries, often tend to lack financial resources, expertise, and leverage, due to their smaller size. Otherwise, the administrative and financial burden of setting up and implementing SDD measures can be relatively high for SMEs (CSDDD Proposal, 2022: 14).

To provide support to companies, the Commission may issue guidelines (including for specific sectors or specific adverse impacts) in consultation with Member States, relevant EU institutions and stakeholders later (CSDDD Proposal, 2022: 59). Besides guidelines, the Commission will provide companies with model contractual clauses for contractual cascading in value chains (CSDDD Proposal, 2022: 59). However, the CSDDD Proposal sheds little light on how contractual practices affect companies’ sustainability objectives and has nothing to say on whether the usual way of using codes of conduct as declaratory instruments could be transformed into sustainability contracting. Although the CSDDD Proposal acknowledges that SDD should be at the heart of conducting business, it does not interfere with established traditional safeguarding contractual practices. Next, we focus on four ways to promote corporate sustainability in supply contracts via proactive contracting.

Avenues for enabling SDD via proactive contracting

From one-sided safeguarding towards shared responsibility and collaboration

Although the objectives of the CSDDD proposal focus on tackling adverse impacts on the rights of workers in global value chains (CSDDD Proposal, 2022: 1), the Proposal does not contemplate how contracting practices may be utilized to facilitate SDD outcomes in very complex legal and political environments. Contractual cascading arguably plays an important role in the methods available to lead firms to expand due diligence responsibilities further in global value chains but leaves many open questions on how this should be done in practice. As many current practices have resulted in ‘tick-the-box’ exercises, we highlight that contracting itself should be made more suitable for SDD processes.

Many purchase contracts still focus on safeguarding the rights of the party that has greater bargaining power. These purchasing practices are partly outdated and do not work in today's business environment, which is characterized by the interdependence of organizations (Frydlinger et al., 2016: 13). On the contrary, research shows that overly one-sided contracts have multiple negative implications for the business relationship. First, they may hinder the creation and development of aspects of relational governance, such as trust and flexibility, and encourage conflict. Studies suggest that excessive use of safeguarding clauses can encourage each party to vigilantly follow the contract to the letter and focus excessively on the possibility that the other party may be deviating from it in some way. This, in turn, creates a spiral of suspicion, pressure and retaliation, encouraging opportunism and undermining collaboration and joint problem-solving (see, e.g., Frydlinger et al., 2016; Ghoshal and Moran, 1996; Moeller et al., 2006; Schilke and Lumineau, 2018). Second, both actual performance and each party's assessment of that performance may decline if the contract includes overly restrictive specifications and controls (Cova and Salle, 2000; Matthyssens and Van de Bulte, 1994; Moeller et al., 2006; Poppo and Zhou, 2014). Third, in the context of human rights contracting, studies have indicated that despite their good intentions, these kinds of contracts can contribute to human rights harms by exploiting the weaker party without sufficient consideration for the social implications (Dadush, 2022: 159).

The need for fairer and better-balanced contracting practices is well recognized in research (see, e.g., Hurmerinta-Haanpää, 2021; Jevremovic, 2022: 407). Moreover, there are promising examples of voluntary initiatives on corporate sustainability, such as the American Bar Association's Model Contractual Clauses 2.0., which recognize the power asymmetry between buyers and suppliers and include clauses to rebalance or share responsibility (Snyder et al., 2021). Indeed, studies suggest that shared responsibility between buyers and suppliers encourages buyers to create communicative and collaborative relationships with their suppliers, while simultaneously incentivizing them to police their supply chains more effectively (Jevremovic, 2022: 407).

Shared responsibility requires collaboration between the contracting parties, which should be supported by well-designed contracts that include both principles that guide collaboration and processes to sustain and develop collaboration. As Frydlinger et al. (2016) propose in relation to highly collaborative business relationships and Dadush (2022) suggests in relation to human rights contracting, companies’ purchase contracts should set relational or prosocial values for the business relationship. These values include mutual respect, cooperation, reciprocity, trust and loyalty. Moreover, programmes for assessing and developing collaboration should also be included in the contracts.

In the context of sustainability contracting, direct collaboration between the contracting parties does not always suffice. Instead, collaboration is needed with suppliers upstream in the value chain. Indeed, if companies were to start increasing collaboration with partners further up the supply chains to tackle SDD challenges, applying the principles of proactive contracting in the contracting process could help make the contracts more balanced and user-centric. This would, in turn, encourage trust and help with a view to avoiding the handling of sensitive issues leading to conflict. These issues are discussed in greater detail later in this section.

Incentivizing responsible and sustainable business practices via promotive contract clauses

As discussed above, today's purchasing practices and contracts are often one-sided and have negative consequences for both the business relationship and sustainability goals. Although the CSDDD proposal addresses these issues in part by, for example, requiring the lead firm to provide support for suppliers in order to comply with the sustainability codes of conduct and to cascade the SDD requirements along the value chain, it clearly focuses on prevention by requiring contractual assurances and preventive/corrective action plans.

While preventive approaches may be well justified in relation to action plans and remedial measures, we argue that in relation to purchase contracts the focus should be not only on preventing negative outcomes but also on promoting desirable outcomes. As suggested by previous research, preventive contract-framing that highlights obligations and penalties for non-compliance is a better fit for mission-critical exchanges where the continuation of the relationship is of lesser importance, while promotive contract-framing supports more exploratory, collaborative, and long-term relationships (Mayer and Weber, 2009: 12–13; Weber and Mayer, 2011: 58–61; Weber et al., 2011: 196–198). Importantly, promotion-framed contracts seem to be better suited in respect of exchanges where the supplier suspects in advance that it may not be able to meet the performance expectations in play during the exchange (Weber and Mayer, 2011: 65) and in respect of exchanges involving large geographical distances, or when the quality of the delivery is hard to measure (Weber et al., 2011). There is also evidence that promotively framed contracts give rise to greater trust than preventively framed contracts (Weber and Bauman, 2019).

Effective sustainability work requires time and deliberate effort from the contracting parties and the entire value chain, which may extend to the other side of the world. Moreover, sustainability work is often hard to describe in precise and measurable terms. Therefore, even though we do not suggest that the entire purchase contract be framed promotively, a purchase contract that includes promotively framed sustainability clauses may have more positive impacts on the exchange and the exchange relationship than a contract that one-sidedly highlights the supplier's responsibilities and the penalties that will be imposed in the event of non-compliance. For example, the parties could be encouraged to do more ambitious sustainability work under a contract that allows a party/both parties to unilaterally renew on condition that it performs well in regard to its corporate sustainability obligations (see Weber et al., 2011: 183), as opposed to a preventively framed contract clause that gives a party a right to terminate the contract if the other party does not fulfil the sustainability requirements. Provisions that establish pricing schemes that include bonus systems that materialize if the parties exceed the goals or requirements set for their sustainability work offer another example of a promotively framed sustainability clause.

However, designing promotive contract clauses is not always easy, as one drafter may be better at designing promotive contract clauses than another. Indeed, research suggests that negotiators’ regulatory focus differs by occupation. ⁷ For example, lawyers are presumed to frame contracts preventively because of their university education and working life expectations and thus they may not be well suited to designing promotive contract terms (see, e.g., Mayer and Weber, 2009: 14–16). This highlights the need for cross-professional collaboration in the contract design process. Moreover, in order to be effective, the promotive clauses need to be designed so that the supplier can understand them and turn them into operational practices in its value chain. This requires the involvement of the real users of the contracts in the contract design process, as discussed in detail next.

Engaging end users in the contract design process

User-centricity lies at the heart of proactive contract theory. This means that the needs of the real users of the contract are taken into account (Berger-Walliser et al., 2017). For example, if the contract clauses concerning SDD or codes of conduct are drafted in legalese that only experts understand, it is no wonder that the clauses and good intentions behind them do not translate into actual business practices. Therefore, purchase contracts and codes of conduct need to be designed in collaboration with at least first-tier suppliers. Ideally, the contract design process should also engage other stakeholders, such as those whose wellbeing depends on the contract but who are not directly party to the contract (Dadush, 2022: 158). This could mean, for example, industry-wide initiatives on corporate sustainability contracting, where different interest groups could represent buyers, suppliers and suppliers’ employees. Encouraging examples of such initiatives already exist (see, e.g., Home – STTI (sustainabletermsoftradeinitiative.com; although they do not necessarily apply the principles of proactive contracting or contract design in their development processes.

We suggest that to enable better user comprehension, corporate sustainability contracts and codes of conduct need to be co-designed and tested with users. The design process should be informed by insights from information design research, meaning that the facts concerning literacy proficiencies of people, memory, information processing and overload, and understanding, are taken into account in the contract design process (Waller, 2022). Moreover, contract design patterns, such as layering, summarizing, visualizing and focusing on tone of voice may help parties and stakeholders to understand their duties and rights and act accordingly (see, e.g., Waller, 2022; WorldCC Contract Design Pattern Library|Home).

Using these tools to aid user comprehension would empower the more vulnerable parties (and other stakeholders) and possibly change the power dynamics in a fairer, more sustainable and responsible direction. A co-designed contracting process and a contract that includes clauses on regular processes by which to evaluate and develop collaboration in relation to corporate SDD would allow the parties to learn from each other and from past experiences and adjust the contract and the corporate SDD processes when necessary.

Preventing disputes

In our view, proactive contract theory provides a much-needed framework for SDD planning and contractual cascading, also in the context of remediation.

Effective dispute prevention and resolution have gained little attention in sustainability contracting due to an overemphasis on judicial remediation through court proceedings. Article 22 in the CSDDD Proposal, on civil liability, undoubtedly reflects a significant human right. However, obtaining remediation via civil liability mechanisms in complex value chains is still a major challenge owing, for instance, to the absence of a sufficiently well-defined distinction between contributing to and being directly linked to an adverse human rights impact vis-à-vis consequences as to the determination of legal liability (Bueno and Bright, 2020: 29). Therefore, a multi-faceted approach that considers dispute prevention as an integral part of access to remedy is needed.

Proactive contract design offers a way to shift the focus from legal disputes and civil liability to the root causes of such disputes. The latter can often be found in misaligned or frustrated expectations or miscommunication. Therefore, the contracting process should include the actual users of the contract and make use of design methods, such as simplification and visualization, to achieve and maintain a shared understanding and to make the parties’ expectations visible so that they can be aligned and managed (Hietanen-Kunwald and Haapio, 2021: 16). Furthermore, the contract (or the code of conduct) itself should be designed to support user comprehension and be tested. Companies within the scope of the CSDDD Proposal have sufficient resources to carry out such design processes.

While a contract design process that engages the contracting parties and relevant stakeholders in the process enables users to discuss their needs and identify and address possible problems from their point of view, a proactive approach in addressing realized problems and conflicts is also needed. Here, programmes that guide the process to evaluate and develop collaboration and learn from past experiences offer a means of identifying problems and discussing their underlying root causes. Once these problems and root causes have been identified and discussed, the companies involved may prepare and implement a remediation plan that encompasses the provision of capacity-building, technical or financial assistance (Snyder et al., 2021: 141). Moreover, the processes and contract clauses can be adjusted to prevent future conflicts on the same issues (Hietanen-Kunwald and Haapio, 2021: 16). This approach is in line with the UNGPs, suggesting that access to remedies should be supplemented by the remedial functions of collaborative initiatives (UNGPs, 2011: 28). According to the UNGPs, the mechanisms should be based on engagement and dialogue with relevant stakeholder groups focusing on addressing and resolving grievances that refer to ‘injustice evoking an individual's or a group's sense of entitlement’ (UNGPs, 2011: 29, 34).

Although the focus of proactive contract design is on preventing disputes, we take the view that civil liability remediation clauses should be included, in the spirit of Article 22 of the CSDDD Proposal. Indeed, the common flaw in existing initiatives has been that they typically lack remedial mechanisms (MSI Integrity, 2020: 6, 179). There are, however, some positive examples, in which contractual clauses are used to guarantee compliance and enforcement (Salminen, 2018). Several model contractual clause projects that seek to develop sustainable contracting for better social outcomes are currently ongoing, including Contractual Clauses Project by the American Bar Association (see American Bar Association, 2022, and Climate Clauses by the Chancery Lane Project (see Chancery Lane Project, 2023). In dealing with suppliers in long supply chains, the proactive contracting approach may help business partners to simultaneously prevent and control disputes while encouraging cooperation and teamwork to improve performance (Groton and Haapio, 2007: 5–6).

Ultimately, we suggest that instead of focusing on winning in court, contracts should concentrate on win-win scenarios by seeking to enable the parties to achieve favourable outcomes for SDD. As for remediation, proactive contracting encourages the contracting parties and other stakeholders to design contracts that reflect the true intentions and needs of its users. Therefore, in view of the neglected state of the UNGPs remedy pillar, companies implementing the proposed Directive should consider dispute prevention as a means of facilitating (access to) remedies. ⁸

Conclusions

After decades of unreasonable expectations, according to which suppliers would take care of negative externalities in value chains themselves, lead firms need to start developing new ways of contracting that incorporate responsible SDD processes into contracts. Proactive contract theory introduces a rather novel approach to more sustainable contracting, aiming to operationalize SDD in supply chains. We may ask whether current contractual practices, which are based on adversarial, risk-based motives, will even be suitable under the new Directive proposed by the European Commission. Given that contracting should rely on shared responsibility, collaboration and trust, unilateral responsibility for upholding human rights and environmental standards on suppliers hardly works anymore.

This article has identified some of the key problems in the CSDDD Proposal in terms of translating its ambitious aspirations into actual business practices. Generally, the proposal fails to specify concrete ways in which companies within the scope of the proposed Directive should deal with SDD requirements. This is further problematized by limited stakeholder engagement requirements, lack of shared responsibility regarding SDD measures in contractual cascading, and the danger of contractual assurances becoming another administrative ‘tick the box’ in the form of reporting and social auditing.

We contend that applying the principles underlying proactive contract theory can help organizations translate abstract corporate SDD obligations into sustainable business practices in value chains. First, we propose that today's adversarial, safeguarding contracts should be replaced with collaborative contracts that highlight shared responsibility, a concept introduced by Dadush (2022). Second, we propose the incentivization of responsible and sustainable business practices via promotive contract clauses. Third, we argue that drafting sustainability contracts should not be done solely by and for lawyers or CR experts. Instead, they should be designed by and for their users, utilizing insights from information design studies to guarantee that users can understand the information contained in the contract that is relevant to them and gain access to it easily. This brings us to our fourth and last proposal, which relates to the prevention of disputes by proactive contract design. In essence, we argue that while civil liability remediation clauses in the spirit of Article 22 of the CSDDD Proposal are needed in guaranteeing access to remedies by victims of CSDDD violations, the focus should be on problem prevention and mitigation. In the future, we hope to study our proposals in practice with companies of different sizes and from different industries. Also, we hope that our suggestions are critically assessed and developed by other scholars and practitioners.