We Need An Extraterritorial Law To Hold Companies Responsible For Clean Global Supply Chains.

Six years ago, the deadliest garment industry accident in modern history killed more than 1,100 people and injured 2,500 in an apparel manufacturing facility, Rana Plaza, in Bangladesh. Perhaps the worst part is that the tragedy was entirely preventable, and the result of corrupt practices by the politically well-connected owner. The Rana Plaza building violated codes, with the four upper floors having been constructed illegally without permits. The foundation was substandard, and despite safety warnings that led shop owners and a bank branch on lower floors to immediately close, owners of the garment factories on the upper floors instructed employees to work the next day to keep up with customer demand. The customers that the garment factory was trying to satisfy? Mango, Primark, Walmart, the Dutch retailer C & A, Benetton, and Cato Fashions, among other recognizable global brands. And yet none of the US brands accepted responsibility for the problems in their supply chains that enabled this disaster (unlike non-US brands that contributed millions of dollars into a victim support fund).

Years later, not much has changed. Despite some recent encouraging developments, the current legal regime still does not do enough to hold international companies responsible for health and safety violations by their suppliers, and two-thirds of corporations continue to turn a blind eye to supply chain corruption. Such corruption can lower production costs and increase profits by enabling suppliers to engage in a wide range of insidious practices, including cutting critical corners on labor, health and safety. And when an accident does happen, companies can walk away free of any liability for the practices of their subcontractors, as in Rana Plaza. The beneficiaries of these corrupt practices are not only the owners of the supply factories, but also the multinational purchasers and their consumers in rich countries, who get cheaper goods at the expense of the health and safety of disadvantaged workers in low-cost manufacturing hubs.

This is ethically unacceptable.  And because we cannot expect companies to engage in responsible sourcing on their own volition, the right response is more expansive liability on companies that do not take sufficient steps to ensure clean supply chains. While the ideal solution might be some sort of broad international legal regime, that isn’t going to be feasible anytime soon, meaning that countries like the United States should act unilaterally and create a bill focused on bringing about clean supply chains.

The law I advocate here would have the following features:

  • The key provision of the law would impose vicarious liability on companies that are subject to US jurisdiction (including both domestic concerns and foreign firms that issue securities on US exchanges) for their foreign contractors’ or subcontractors’ violations of the labor, health, or safety standards of the host country. Violation of the law alone, without proof of harm, would suffice to create liability. And liability under the US law would not depend on a court or agency in the host country finding the supplier in violation; the US court could make its own determination (though conviction in a foreign court or citation by a foreign regulator would be taken as presumptive evidence of violation of the host country’s laws). Thus, under the proposed law, if (for example) a US apparel firm contracted with a Bangladeshi garment manufacturer, and the Bangladeshi firm violated Bangladeshi worker safety laws, then the US firm would be liable in US courts, regardless of whether Bangladesh pursued an action against the Bangladeshi supplier.
  • However, liability under the proposed law would be limited in an important way: A company could escape vicarious liability for its contractor or subcontractor’s misconduct if the company could show that it took reasonable measures to ensure compliance with labor, health, and safety laws of the host country. Such checks would include contractual guarantees and regular audits, which are just a few of the many tools at a company’s disposal. US firms would be responsible for carrying out independent audits to ensure their suppliers were actually complying with the law. If a supplier managed to bribe local authorities to incorrectly state safety codes were being met, and this determination was later found to be false, the US firm would still be liable. Although not free, these costs are manageable, and would play a critical role in deterrence.

Even with the “reasonable measures” defense, the proposed law would admittedly impose a substantial new burden on multinational companies (MNCs) to ensure clean supply chains, rather than leaving this issue to the domestic governments of host countries, or to consumer pressure. But requiring companies to monitor and prevent the unlawful or unethical behavior of the firms in their supply chains is not unprecedented. The UK’s Modern Slavery Act, for example, requires companies to report efforts to prevent human trafficking and slavery in every part of the production process. In the United States, the Dodd-Frank Act’s disclosure rules for conflict minerals hold mining and technology companies to similar standards. And laws against foreign bribery, like the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA), can be used to hold a company liable for bribes paid by the company’s agents, including its suppliers and distributors. It isn’t too much of a stretch to say companies should also be liable for ensuring a clean supply chain.

Admittedly, the law I propose here goes beyond the disclosure laws, but such laws by themselves have failed to bring change. Companies need to be held legally accountable for their suppliers’ behavior to stop a race to the bottom. Given the dire consequences from unclean supply chains, there is a strong imperative to act more aggressively, following something like the FCPA model. And as was true in the FCPA context, unilateral US action could spur a race to the top, with other countries setting up their own laws. Moreover, despite the burden on companies in the short term, cleaning up global supply chains will be beneficial to companies in the long run by reducing reputational risks, improving product and service quality, promoting stable and long-term relationships with suppliers, and promoting open competition. But these are not the main reasons for action. The main reason is that, thanks to pervasive corruption in much of the developing world, cutthroat competition for MNC customers will inevitably lead to more disasters like Rana Plaza, unless MNCs make it clear that they won’t buy from suppliers who violate local health or safety laws. And that will only happen if the governments of wealthy countries step in and require companies to clean up their supply chains. 

1 thought on “We Need An Extraterritorial Law To Hold Companies Responsible For Clean Global Supply Chains.

  1. Thank you, Disha, for the post. It triggered quite a few comments, maybe you would like to address some of them:

    1. A general one on extraterritoriality. It seems quite restricted in your proposal (US-based firms or issuing financial instruments in US markets), but is there not an obvious risk of an FCPA-type slippery-slope?
    2. Is it efficient for a US-based judge to judge on foreign substantive law? They would need to know not only the specific law but all the exceptions and how it fits in the foreign legal system. This is very different from the FCPA approach, which is the application of US substantive law to domestic or foreign entities.
    3. Have you thought of the “devoir de vigilance” French law? Is that what you are advocating?
    4. Who would bring the cases to court? If you are arguing that no harm is required, who could bring those claims? Competitors? Civil society? Foreign governments / public entities? Only prosecutors?

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