Using Contractual Frameworks to Comply with US Forced Labor Regulations

9 Min Read By: Patrick Miller

Contractual frameworks such as the Model Contract Clauses to Protect Workers in International Supply Chains (“MCCs”) drafted by an American Bar Association Business Law Section working group, as well as those provided in the Responsible Contracting Project’s toolkit, are key tools to use in a company’s responsible procurement strategy to address US forced labor enforcement, such as potential detentions of imports pursuant to Withhold Release Orders (“WROs”) under the amended Tariff Act or the Uyghur Forced Labor Prevention Act (“UFLPA”).

The MCCs are a set of template contract clauses that focus on buyer and supplier pre-contract human rights and environmental due diligence (“HREDD”) as part of the procurement process and ongoing joint responsibility for supply chain due diligence. They emphasize finding and fixing any issues—disclosure and remediation—and thus can provide a realistic framework for responsible sourcing. The MCCs were designed to be modular and to allow companies to operationalize their responsible procurement plans.

Members of the ABA Working Group to Draft Model Contract Clauses to Protect Human Rights in International Supply Chains and the Responsible Contracting Project have spoken with US government officials, including representatives from US Customs and Border Protection and the Bureau of International Labor Affairs, regarding their frameworks. These officials have noted their hope that companies implement effective worker-driven, prevention-based models to reduce the necessity for enforcement measures. To do this, companies will need effective tools to identify and prevent labor rights issues in their supply chains. These officials agree that well-crafted contractual clauses may be a helpful tool for companies in this regard—though of course, not a silver bullet.

The number of technology tools assisting companies to learn about their supply chains and inform their responsible procurement decisions continues to grow; the MCCs are a legal tool that creates a framework to operationalize these other tools. The MCCs set out a pragmatic, operational framework of obligations facilitating HREDD and remediation.

This article first addresses why the MCC framework is an effective approach to address human rights issues and labor rights abuses in supply chains. It then discusses how the MCCs address specific areas of concern for regulators.

The MCCs are more effective than unilateral representations and warranties.

The MCCs aim to address known problems arising from the predominant contractual approach in transnational commercial contracts, which consists of impractical, unenforceable representations and warranties. The traditional representation and warranty framework places all responsibility for compliance on the suppliers, who often do not have the resources to comply. This approach has proven ineffective, as it often devolves into a tick-box exercise.

The MCC approach is to establish a framework that facilitates the parties’ cooperation on tasks such as engagement with affected stakeholders;[1] obtaining accurate data collection and prompt disclosure; and agreeing upon realistic goals at every tier within the supply chain. By contrast, the traditional reps and warranties approach does not allow for much cooperation—and it presumes a static situation of perfection that is nearly impossible for suppliers to achieve without changes in buyer purchasing behaviors.

In the past, importers may have been comfortable simply shifting liability up the supply chain. But importers must now pivot towards a framework that is more effective given the increased enforcement activity from regulators.

The MCCs set out duties for buyers and suppliers to undertake continuing HREDD against the constant threat of adverse human rights impacts. Suppliers must provide appropriate, timely information with proper stakeholder engagement, and buyers should provide commercially reasonable assistance that actually addresses some of the key drivers of human rights issues, such as overly aggressive pricing terms. In addition to provisions that are designed to prevent human rights abuses such as forced and child labor and to encourage the identification and disclosure of actual and potential human rights issues, the MCCs provide a framework for the parties to develop a corrective action plan when issues are revealed.

Rather than focusing on “irresponsible exits” that simply terminate relationships with suppliers when issues are uncovered—a so-called cut and run strategy—the MCCs emphasize the duties of buyers and suppliers towards remediation and efforts to make victims whole.

The MCCs incorporate the UN Guiding Principles on Business and Human Rights (“UNGPs”) and Organisation for Economic Co-operation and Development (“OECD”) requirements for an operational-level grievance mechanism (“OLGM”). They also provide for a set of buyer obligations around issues such as pricing and termination, which acknowledges the key role that buyers have in the incidence of human rights abuses.

The process of establishing appropriate contracts using frameworks such as the MCCs must generate sufficient buy-in from a variety of stakeholders in order to be effective. This must include both stakeholders within an organization (e.g., purchasing, legal, sustainability teams) and external stakeholders (e.g., workers, workers’ organizations, upstream suppliers).

The MCCs address specific concerns of US regulators.

Proactive engagement with suppliers (Information Sharing)

US regulators’ goal is to prevent human rights abuses and facilitate lawful trade while combating illicit trade. While the government will continue to detain violative imports and take the necessary enforcement action, the overarching goal is to decrease the incidence of human rights abuses. Presumably, importers also do not want to contribute to human rights abuses.

The best way to accomplish this is for companies to proactively engage suppliers to integrate anti-forced and child labor as a priority within their business objectives. This is a prevention-based model, rather than an enforcement-based one.

Avoidance of human rights risks requires a shared HREDD approach to identifying vulnerabilities which is found in the MCCs, rather than a framework of unilateral representations and warranties as the former provides more confidence in the data that you are collecting.

Companies need robust and reliable data to determine whether their supply chains have a nexus to forced or child labor. If there is a nexus to forced labor, companies may wish to end this relationship[2] In both cases, enforceable contractual commitments such as those found in the MCCs will provide useful support.

The MCCs contractually impose proper routine auditing procedures and routine reporting out of the OLGM to uncover issues and contain the scope, severity, and scale of discovered problems, particularly through stakeholder feedback. The MCCs also include an option to contractually require the input of workers and/or workers’ organizations into the structure of and feedback solicited for audit reports.

In addition, the MCCs provide for a remediation framework that doesn’t overly disincentivize revealing issues to your counterparty, as it has been argued such disincentives have resulted in implausible reports of zero issues from ostensibly well-functioning OLGMs. Observers have commented that if the OLGM reporting indicates there are no problems, there is likely a problem with the OLGM. Strengthening such channels of communication is crucial to actually address human rights abuses.

Comprehensive knowledge of supply chain (Mapping)

Companies with complex supply chains first need to undertake comprehensive mapping exercises through several tiers of suppliers to understand where their goods are made and to onboard and screen suppliers. This is a key initial step towards establishing a prevention-based framework.

Cascading down the supply chain is essential to developing a proper map. This is why the MCCs include a clause regarding obligations for a supplier’s upstream suppliers.

Only after identifying risk areas can companies decide to restructure supply arrangements or terminate relationships with problematic suppliers. But we must stress that the goal isn’t irresponsible exit, and this is actually addressed in MCCs.

The MCCs allow termination of an existing relationship if there is a sufficient Schedule P (Human Rights and Environmental Impacts) or Schedule Q (Responsible Purchasing Buyer Code) breach, but they give the supplier a right to cure provided there is no zero-tolerance violation. However, for the most part, a better scenario, one considered to more effectively address human rights abuses, would involve remediating harms when they are discovered. In fact, where the buyer causes or contributes to such harm, the UNGPs and the MCCs impose a duty of remediation on the buyer.

Accurate data collection for UFLPA Applicability Reviews (Tracing):

When submitting documentation for an applicability review (where regulators must decide whether to apply the UFLPA’s rebuttable presumption of forced labor), a company must prove its merchandise is free of inputs from the Xinjiang Uyghur Autonomous Region or companies on the UFLPA Entity List.

This requires proper supply chain mapping—as noted above. More importantly, it requires providing reliable, compelling evidence to show that the products in the detained shipment were produced according to the supply chain map. This requires tracing shipments throughout this map.

To be confident this information is reliable/compelling: (i) it should be provided by entities up and downstream in the supply chain that have a contractually enforceable obligation to do so; and (ii) it should also be provided in accordance with a standard system—rather than an ad hoc compilation of documents with relatively low degree of reliability.

If there’s a standard system where documents are regularly provided, a regulator can investigate a specific shipment in the context of the overall supply arrangement. In contrast, if an importer urgently asks a supplier to haphazardly compile a slew of documents that it has never even considered before, there is a high risk of fatal reliability/authenticity issues.

Addressing issues that are uncovered (Remediation):

Perhaps the most important potential impact of incorporating the MCCs into an organization’s contracts is how the framework facilitates effective remediation.

As noted above, proper HREDD and OLGMs will almost invariably uncover issues given the state of global supply chain practices. Therefore, it’s critical to have a system in place to remediate issues when they are discovered.

Remediation is particularly essential if the importer has a strategic supplier that is (or may be) subject to a WRO. Many human rights advocacy groups have noted that the focus on remediation supports an approach that addresses the harm suffered by stakeholders, rather than an irresponsible exit approach that often results from focusing on termination.

Evidence of regular, ongoing, shared due diligence and reporting mechanisms addressing forced and child labor can help address the concerns that may have led to a WRO. For example, US Customs and Border Protection (“CBP”) modified the WRO it issued against imports of synthetic disposable gloves manufactured by YTY Industry Holdings after finding that it properly remediated the activities that led to the WRO’s issuance. More recently, in August 2024, CBP modified the Yu Long No. 2 WRO concerning imported seafood products.

CBP will only modify a WRO if the entity’s manufacturing is free of all forced labor indicators, not just what CBP identified prior to issuing the WRO. This means remediation must be comprehensive and effective.

Proper remediation requires shared accountability, enforceability, and stakeholder participation—all of which are provided for in the MCCs.


  1. It has been observed that corrective/remedial measures where affected stakeholders (such as workers, worker organizations, and affected communities) are directly engaged are preferable to measures that do not include such engagement.

  2. It should be noted that international best practice, as reflected in the MCCs, is to end the relationship as a last resort provided you are not in violation of any other regulations.

 

By: Patrick Miller

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