Ethics and sustainability are important contractual factors

With a survey suggesting that contracts worth £7.1 billion have been cancelled in the retail sector over the past 12 months due to failures to meet ethical and sustainable standards set by retailers, it is clear that there is now a much greater focus on environmental, social and corporate governance (“ESG”) with customers, in particular the large scale retailers, wanting to ensure that their brand is not tainted by any issues in their supply chain.

Suppliers are used to having to confirm that they have strict anti-bribery policies in place; and that their business and their own supply chain is free from any suggestion of “modern slavery” with an increasing number of businesses requiring to make annual reports regarding their standards and the way in which they seek to achieve them, as the thresholds for reporting this become ever-lower.

Breach due to failure to comply with such policies is purely a factual matter, but the suggestion that contracts are now being terminated due to beaches of standards on ethics or sustainability turns the focus on much more subjective standards.  Should suppliers accept such terms?

By their very nature, such standards vary from time to time. Indeed it is suggested that the most common reason for cancelling contracts with suppliers was use of unsustainable materials yet in most supply contracts the specification, and therefore the materials, are set by the customer. By accepting an obligation to meet the customer’s ethical and sustainability standards suppliers are, in effect, entering into a contract which can be terminated at any time – or if not terminated, under which no orders may be placed.

It's important to note the survey refers to termination not breach.  So are all these suppliers actually breaching their contracts? More likely it is the case that they were simply not renewed or orders were not placed. But what this does illustrate is the emphasis retailers are now placing on this, recognising that consumer pressure will push them towards selling ethical and sustainable goods.   What historically has been a factor in public tenders is now an important consideration in commercial supply chains and suppliers need to be ready to ensure they can meet these demands.