Handbook for lawyers: Chapter 2

In the context of preparations for a commercial transaction, such as a long-term supply agreement, or a distribution or franchise agreement, you may hear two kinds of “due diligence” processes mentioned:

• transactional legal due diligence (or simply, “due diligence”); and
• human rights due diligence (in the sense used in the UN Guiding Principles on Business and Human Rights).

Both kinds of processes involve investigations into human rights risks, and they are often discussed as if they were interchangeable.  However, they have different purposes and aims, even if the methodologies may be similar.  The differences, similarities and links are explained more fully in the Q&A below.

Note: The key difference between transactional legal due diligence and human rights due diligence (in the sense used in the UN Guiding Principles on Business and Human Rights, is that transactional legal due diligence focuses on risks (i.e. legal, financial, commercial and reputational) to the relevant companies, businesses and/or assets, while human rights due diligence is concerned with risks to people (i.e. risks of having an adverse impact on human rights more generally, regardless of whether these represent a material risk to the enterprise itself). However, in practice these different risks can be inter-linked, as the presence of risks of adverse human rights impacts can pose a risk to the company’s bottom line, and the greater the severity of these risks, the greater the likelihood of legal liability and financial loss in practice. See further the discussion on severity and prioritisation towards the end of this section.

• You will need to take local advice with respect to the design and implementation of due diligence investigations into human rights risks. This advice will need to cover questions such as
  • whether human rights due diligence is mandatory in certain circumstances, and, if so, what requirements must be met; and
  • what could be the consequences of a failure to carry out due diligence (or the failure to carry out thorough due diligence into specific human rights risks), for instance under the law of negligence?
  • the legal consequences and risks (if any) associated with the use of specific human rights due diligence methodologies and techniques.

• As noted above, transactional legal due diligence processes will focus on the human rights risks that pose the greatest risks for the financial standing and future performance and prospects of the relevant business activities and the enterprise itself, whereas human rights due diligence, carried out in accordance with the UN Guiding Principles on Business and Human Rightswill focus, at first, on the potential human rights risks that are most severe (in terms of gravity, scope and lack of remediality) .  However, in practice the more severe the risk of adverse human rights impacts, the greater the likelihood and severity of legal, financial, commercial and reputational risk.  In other words, if both are done correctly, the human rights risks identified through human rights due diligence processes (on the one hand) and the human rights risks identified in the course of transactional legal due diligence  (on the other hand) are likely to be similar.  For further useful discussion on the concept of severity see OHCHR, ‘The Corporate Responsibility to Respect Human Rights, an Interpretative Guide’, pp. 83-84.
• For both transactional legal due diligence and human rights due diligence, a human rights risk assessment will include a consideration of the likelihood of the relevant risks materialising.  This is likely to include a consideration of factors such as:
  • sector;
  • operating context;
  • country of operations;
  • capacity of management to address the risk.
    
    However, as the OHCHR Interpretative Guide points out, “a low probability of a severe human rights impact alone cannot justify reducing the priority of efforts to mitigate the risk. Instead, the remediability of the potential impact must be a key factor in determining the legitimacy of delaying such efforts. In sum, in the context of risks to human rights, the severity of actual or potential risks must be the dominant factor.”  OHCHR, ‘The Corporate Responsibility to Respect Human Rights, an Interpretative Guide’, p. 83.
• In practice, the role of lawyers in due diligence investigations into human rights risks will often be to flag areas of specific concern to the relevant department within the client organisation and/or to seek expert opinion and advice on specific issues such as stakeholder concerns and/or the views of civil society.  Lawyers may not necessarily be involved in detailed fact-finding in relation to all of these issues (this may be assigned to appropriately informed and qualified specialists in the salient human rights issues), although lawyers would still take a critical role in analysing the outcomes of these investigations and advising on a practical course of action.

• UN Guiding Principles on Business and Human Rights, esp. Guiding Principles 17-22.
• OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’
• Monash University, OHCHR, UN Global Compact, ‘Human Rights Translated 2.0: A Business Reference Guide’ (2017), copy available here http://www.ohchr.org/Documents/Publications/HRT_2_0_EN.pdf
• Shift & Mazars, UN Guiding Principles Reporting Framework, February 2015 (see especially p. 17)
• United Nations Global Compact, ‘Integrating Concerns for Human Rights into the Mergers & Acquisitions Due Diligence Process': A good practice note endorsed by the UN Global Compact human rights working group on 26^th July 2014
• See further the various tools and resources available via the Business and Human Rights Resources Centre

This section is concerned with the investigation of human rights risks as part of transactional legal due diligence (as distinct from human rights due diligence).  (For a discussion of the similarities and differences between transactional legal due diligence and human rights due diligence see the Due Diligence Q&A above)

As a commercial transactions lawyer, the better your understanding of the potential and actual human rights impacts of the business activities in question, the better equipped you will be to work with your client to develop strategies to address the legal, commercial, financial and reputational risks and ethical challenges that can arise from them.

In the sections below you will find some materials aimed at helping you develop an approach to identifying human rights risks as part of transactional legal due diligence prior to entering into: 

• a long term supply agreement (goods and/or services);
• a distribution agreement; or
• a franchise agreement.

However, it will be up to you (in conjunction with your client, as appropriate given the nature of your lawyer-client relationship) to choose which resources, and which aspects of those resources, are most relevant to your particular transaction and the approach agreed with your client.  In all cases, you will need to take local legal advice.

In practice, you may encounter challenges in obtaining quality information relevant to human rights risks in the course of transactional legal due diligence.  In addition to time and resource constraints, you may be constrained by confidentiality agreements between your client and the proposed business partner (e.g. long term supplier of goods and/or services or franchisee).  In such cases, you will need to discuss carefully with your client, in light of local legal conditions and any contractual arrangements entered into, alternate ways of investigating areas of potential concern (e.g. through trusted proxies).

Heads of Agreement: proposed long-term agreement for supply of goods and/or services; proposed franchise agreement; proposed distribution agreement

Explanatory notes: In order to provide clarification of the nature and scope of the proposed transaction, and the necessary steps towards completion, it may be convenient and advantageous for the negotiating parties to enter into a “heads of terms” for the proposed transaction at an early stage of negotiations. In light of the human rights issues identified thus far,you should consider the following:

Preconditions:

An important pre-condition to completion is likely to be completion of satisfactory “financial, commercial and legal due diligence”. You should consider whether you may need to explicitly mention due diligence in respect of human rights issues here.

Due diligence:

The heads of terms may specify the kinds of documents, information and personnel that the different parties will have access to in the course of the due diligence process. You should ensure that this wording is sufficiently wide to allow the parties to carry out all of the due diligence investigations of human rights risks likely to be necessary in the circumstances (as agreed with your client). You should consider whether the time scales for completion of the various due diligence activities are sufficient and appropriately sequenced to enable identification of, and a proper understanding of, the different sources of human rights risks, particularly if specialist expertise is required.

Ongoing checks and controls:

For longer term arrangements, such as long-term supply arrangements, or franchise or distribution arrangements, the heads of terms may set out, in outline form, the ongoing human rights related checks and controls that will apply and to which entities, if multiple entities are involved. This may provide an opportunity for early discussion and clarification of the ethical standards (including human rights standards) the various parties will operate on, and the manner in which decisions on such matters will be taken or changes implemented.

Due diligence: proposed long-term agreement for supply of goods and/or services; proposed franchise agreement; proposed distribution agreement: supplementary questions on human rights issues: example checklist

Explanatory notes: The example checklist below is designed to supplement a questionnaire designed for a wider due diligence process in the context of a longer term commercial arrangement, such as a long-term supply arrangement, or franchise or distribution arrangement.

Note, however, that:

(i) this example checklist is illustrative only.  It is not exhaustive and will not identify all of the human rights issues that may be relevant to your particular transaction;

(ii) not all of these questions will be relevant in a given context; and those that are relevant will obviously need reviewing and adapting to suit the specific transaction and circumstances;

(iii) to ensure that the due diligence process is comprehensive in relation to human rights issues, you may need to draw on internal and/or independent external human rights expertise, and to consult with potentially affected groups and other relevant stakeholders;

(iv) this example checklist is subject to local legal advice.

Approach of [name of party] to business and human rights generally

• Has the management of [name of party] made a public policy commitment in relation to business and human rights?
• Does [name of party] operate in accordance with a human rights code of conduct?  Where is this documented and how is it conveyed to managers and staff?  Is human rights training part of staff induction and/or training? Does [the partner company/business] report on its performance against the code of conduct?  If so, are these reports externally verified?  If so, is a recognised reporting framework used?
• Does [name of party] report publicly on the human rights risks arising from or linked to its business and how it manages those risks? Is the report externally verified or benchmarked? If so, is a recognised reporting framework used? Is this reporting consistent with applicable law on public reporting and other requirements to disclose human rights risks?
• What has [name of party] identified as its main sources of human rights related risk?  What steps has [the company] taken to assess, address, mitigate and remedy any adverse human rights impacts identified?
• Does [name of party] participate in any self-regulatory or sector-specific initiatives (or is it the subject of the same) relating to business and human rights?  If so, which?  Have any comments been made about [the partner company/business]’s compliance (or non-compliance) with those initiatives?  If so, what?
• Has the [name of party] been the subject of (a) adverse press comment or (b) public demonstrations or consumer boycotts as a result of adverse human rights impacts arising from its [business activities, products or services]?

Licences:

Have licences and permissions (including development and planning permissions) been awarded in accordance with local law? Were any objections raised to the grant of those licences on human rights or governance grounds, either during the application and grant process or subsequently? If so, what was the nature of those objections? How were they resolved? Does this accord with international standards?

Land/buildings/plant/site:

Were any inhabitants relocated in order for any site to developed? Is the site in the vicinity of habitation by groups with the status of indigenous peoples?  Does the location of any plant or operations have the potential to affect negatively access by local inhabitants’ to water or other resources? Could the site or operations cause disruption to local farming or fishing or other sources of livelihood? Does the land have important cultural value to the local community?

Environment:

[Note:  The questions below are intended to be supplementary to more general questions relating to compliance with local environmental law]. Do operations have the potential to negatively affect the local environment, for instance through the introduction of contaminants into the local air, soil or water? Have any complaints been made in relation to the environmental impacts or performance of [name of company]? If so, what was the nature of those complaints?  How were they resolved?

Employees:

[Note:  The questions below are intended to be supplementary to more general questions relating to compliance with local labour law]. Do workers receive training in relation to workplace health and safety? What percentage of the workforce is made up of (a) contract workers and (b) migrant workers? What are the policies of [name of company] in relation to (a) contract workers and (b) migrant workers? What are the policies on (a) freedom of association and (b) collective bargaining? What are the policies on minimum age verification? What policies are in place as regards the involvement of workers under 18 in potentially hazardous work? How are workers recruited? Are sub-contractors used? If so, how are they incentivised, remunerated or monitored? Do workers have possession of and control over their passports and/or other identity documents? What steps does [name of party] take to ensure that workers are properly informed about their labour rights and how they can be enforced? What opportunities are there for workers to raise concerns and grievances about the performance of [name of party] in relation to labour rights?

Supply chain issues:

What steps are taken to ensure that suppliers of [name of party] are compliant with internationally recognised labour standards including international prohibitions on the worst forms of child labour and forced labour? Is compliance with internationally recognised labour standards a standard term of contracts with suppliers? What steps are taken in respect of under-age workers found to be working in the supply chain and other human rights issues more generally?  

Stakeholder engagement and community relations:

Does [name of party] engage with or take advice from civil society organisations, non-governmental organisations or community representatives with respect to the human rights impacts of the site/operations? If so, how? What has [name of party] learned from these processes?

Private security arrangements:

Are private security companies used by [name of party] in connection with [the business]? Are their staff and contractors independent of government influence?  Are they appropriately regulated? Do they accept international voluntary standards applicable to the sector? Do private security personnel receive sufficient training with respect to the use of force? Have any complaints been received in relation to the performance of any private security providers or their employees? If so, what were the nature of those complaints and how were they resolved?

Government actions and relations:

Have actions by government or State agencies in connection with [name of party] and/or [the business] had (or might they have the potential to have) an adverse impact on the human rights of local inhabitants or others? What is the government’s record with respect to (a) human rights protection generally, (b) labour enforcement and (c) treatment of union representatives? What are [name of party]’s policies with respect to engagement with governments and State agencies? What are [name of party]’s policies with respect to supply of goods and services to governments and State agencies?

Further reading

Shift & Mazars, UN Guiding Principles Reporting Framework, February 2015

In this section you will find information and suggestions as to different ways you may be able to address, through contractual means, the human rights related risks you have identified as part of any due diligence processes.These are presented in a generic way, for you to consider alongside your usual standard templates and precedents.

For ease of reference, the resources in this section have been divided by reference to four main types of transaction:

• long-term supply contract (goods);
• long-term supply contract (services);
• distribution agreement;
• franchise agreement

Further notes:

(i) In practice, commercial transactions may not fall neatly in the above categories.  Your transaction may be a “hybrid” arrangement in the sense that it may contain elements of some of all of these. It will be up to you (in conjunction with your client) to choose which resources, and which aspects of those resources, are most relevant to your particular transaction and your client’s needs. Obviously, in each case, these resources must be tailored to the transaction in question, and specifically in light of the human rights risks identified in the course of any due diligence investigations and your client’s instructions and circumstances.

(ii) The checklists and drafting notes below are intended to be illustrative, not exhaustive.  All of the suggestions below are subject to local legal advice.

Representations, warranties and covenants: long-term supply agreement (goods): potential human rights issues to consider

Explanatory notes: As part of a long-term supply agreement, the parties may provide each other with warranties with respect to a range of matters relating to the contracting entities, and their status, performance and, in some limited cases, prospects. A warranty in this context is a statement from one party to an agreement to another, designed to give assurance that certain facts are true, or that certain things will happen. Together with indemnities (see below) they are an important way of allocating risk between the parties.  The inclusion of representations and warranties with respect to human rights risks can be a useful way of eliciting information about human rights risks, and clarifying the nature and scope of human rights risks identified in the course of due diligence investigations. However, they will usually be pared back in the course of a negotiation and, in any event, are no guarantee that losses arising from human rights risks that were undisclosed or which crystallise post-completion will be recoverable by one party from another (e.g. in the event of insolvency, etc). You will need to discuss carefully with your client, in light of the relevant circumstances, the scope of the warranties, their limitations in specific circumstances and the resources that may be needed to ensure that subsequent liabilities arising from adverse human rights impacts can be met.

Representations and warranties (supplier):

In order to help identify and address human rights risks in its supply chain, the purchaser may require certain assurances from the supplier with respect to supplier’s human rights-related performance and practices.  These assurances, which are given in the representation and warranties sections of the agreement, could cover matters including:

• certification of compliance with required management standards and/or quality marks (e.g. for environmental management, workplace health and safety management, etc);
• compliance with voluntary codes of conduct (e.g. codes of conduct aimed at ensuring fair and decent working conditions in the supply chain);
• compliance with applicable regulatory schemes.

If you are acting for the purchaser, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , what human rights-related matters may need to be specifically covered in the warranties to ensure that responsibilities for addressing those risks, and any liabilities that arise in respect of them, are allocated in an appropriate manner. Some human rights risks may be covered by general warranties (e.g. relating to the receipt of certain licences, and/or the number and status of any regulatory complaints or legal claims).  Some human rights risks may be covered in warranties relating to environmental and/or labour standards and performance. However, in some transactions a more tailored approach may be needed.  Areas identified as high risk (because of the scale, scope and/or irremediable character of the adverse human rights impacts) may require a specific set of warranties. Risks that may need to be addressed explicitly in warranties include:

• risks associated with the use of private security providers;
• risks of serious environmental harm;
• risks of serious privacy breaches;
• risks arising from poor supply chain management; and
• risks of “complicity” in government action that could amount to abuses of human rights.

Covenants (supplier):

If acting for the purchaser, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , the kinds of ongoing commitments that would be reasonable and appropriate to seek from the services provider in relation to monitoring, management and mitigation of adverse human rights impacts arising from, or linked to, the long-term supply arrangement. These could include commitments:

• to maintain certain licences;
• to maintain certain certifications and/or management standards and/or quality marks for the duration of the supply agreement;
• to notify the purchaser promptly of any compliance issues or problems in relation to those licences, certifications, standards or quality marks;
• to ensure proper access by the purchaser’s representatives for the purpose of inspections of relevant premises (including ad hoc inspections). (Note: in light of the human rights risks involved, consider whether access may be required to the premises of sub-contractors of supplier as well as the supplier’s own premises);
• to report regularly (and/or to respond promptly to purchaser’s requests for information) regarding the management of specific human right risks (e.g. use of child labour, workplace health and safety etc).  (See further 8.3 “Access to information and reporting” below);
• to secure appropriate representations, warranties and other commitments regarding human rights performance from all suppliers and subcontractors, and to monitor and secure compliance with such provisions;
• to carry out periodic human rights due diligence
• to use reasonable endeavours, in cooperation with the purchaser as needed from time to time, to address the human rights risks which may arise.

Covenants (purchaser)

If you are acting for a supplier of goods, the use of which may pose human rights risks (whether directly or indirectly; see, for example, discussion exercise 2 above) you should discuss carefully with your client the kinds of covenants and undertakings that will be needed from the purchaser in order to minimise these risks.  These could include covenants:

• not to use the goods for certain prohibited purposes (and to take reasonable steps to ensure that the goods are not used for the same prohibited purposes by third parties); or
• not to sell the goods onwards (either directly or in adapted form) to certain classes of third party buyers or clients (e.g. certain State agencies, or companies involved in certain high risk sectors or operational contexts) without prior consent, without compliance with certain pre-agreed precautions, or at all.

Indemnities: long-term supply agreement (goods): potential human rights issues to consider

If you are acting for the purchaser, you should discuss with your client whether it would be appropriate to seek an indemnity from the supplier in respect of any costs or losses incurred by the purchaser as a result of:

• a breach of any of the warranties given by the supplier with respect to its human rights-related performance or policies. (See 5.1 “Representations and Warranties (supplier)” above);
• a breach of any of the covenants given by the supplier with respect to its human rights related performance or policies. (See 5.2 “Covenants (supplier)” above);
• the failure of ongoing obligations the supplier under the contract to abide by minimum human rights standards (e.g. internationally recognised labour rights standards) in the production of the relevant goods (See 8.1 “Ongoing obligations of supplier with respect to compliance with minimum human rights standards”); or
• a breach of human rights-related product specifications  (See 8.2 “Specification of goods”, below).

If the goods in question may themselves pose human rights risks (whether directly or indirectly; see, for example, discussion exercise 2), and you are acting for the supplier, you may wish to discuss with your client (depending on the risks involved) whether it would be appropriate to seek an indemnity from the buyer in respect of any costs or losses incurred by the supplier as a result of any breach of any undertakings made with respect to the subsequent sale or use of goods (see 5.3 “Covenants (purchaser)” above).

Financial liabilities arising from human rights risks:

If you are acting for the purchaser, you should discuss carefully with your client whether there are any human rights risks identified in the course of due diligence for which specific indemnities should be sought from the supplier, in order to allow the purchaser to recoup certain costs that it may incur as a result of the materialisation of such risks during the course of the agreement or subsequently. Depending on nature of the risks involved and the outcome of negotiations, these losses could include not only fines and damages awards (and associated legal costs), but also clean-up costs, costs of fact finding and investigative efforts, costs of technical consultants, costs of remediation programmes, costs of implementation of compliance or prevention orders and/or improvement of systems and controls, costs of training programmes, costs of restoration of cultural property and costs of subsequent stakeholder and community engagement efforts.

Termination: long-term supply agreement (goods): potential human rights issues to consider

You should consider carefully with your client whether there are any events relevant to, or connected with, human rights risks that should trigger the review and/or termination of the long-term supply agreement.  Potential termination events could include:

• a breach of any of the warranties given by the supplier with respect to its human rights related performance or policies. (See 5.1 “Representations and Warranties (supplier)” above);
• a breach of any of the covenants given by the supplier with respect to its human rights related performance or policies. (See 5.2 “Covenants (supplier)” above);
• the failure of ongoing obligations the supplier under the contract to abide by minimum human rights standards (e.g. internationally recognised labour rights standards) in the production of the relevant goods (See 8.1 “Ongoing obligations of supplier with respect to compliance with minimum human rights standards”);
• a breach by a purchaser of its obligations with respect to pricing policies and/or purchasing practice (e.g. under a “purchasing code of conduct”).  (See further 8.4“Purchasing procedures and protocols”, below); and
• a breach of human rights-related product specifications  (See 8.2 “Specification of goods”, below).

Note: You should be aware, however, that termination of a supply agreement can, itself, have adverse human rights impacts (e.g. in the event that it leads to a factory shutdown and/or insolvency of the supplier, resulting in a loss of livelihood for workers and financial support for those who rely on their incomes).  These adverse impacts will need to be taken into account in any decision whether to terminate because of concerns about human rights risks.

Miscellaneous: long-term supply agreement (goods): potential human rights issues to consider

Ongoing obligations of supplier with respect to compliance with minimum human rights standards:

Where there is a risk of adverse human rights impacts arising from the methods of production or working practices of the supplier (or sub-contractors of the supplier), the purchaser is likely to require ongoing commitments from the supplier with respect to the management of those risks. If acting for the purchaser, you will want to discuss with your client the minimum contractual requirements that should apply, in order for your client to be able to identify and manage human rights risks within its supply chain, in light of any domestic legal requirements and the UN Guiding Principles on Business and Human Rights.

Specification of goods:

If there are adverse human rights impacts associated with the production of goods (or components of goods) you should discuss with your client whether it is possible to address or mitigate these risks through contractual provisions relation to product specifications.  For instance, it may be possible for product specifications to exclude:

• certain raw materials; or
• components or products
  • produced using certain methods; or
  • originating from certain sources.

Access to information, rights of audit and reporting:

Whether you are acting for the supplier or the purchaser, you will need to discuss carefully with your client the access to information, rights of audit, and reporting provisions that will be needed as between the parties in light of:

• the types and severity of human rights related risks identified in the course of due diligence processes; and
• the purchaser’s own reporting obligations under;
  • any applicable domestic regimes on the reporting of social, environmental and/or human rights-related risks; and/or
  • any applicable voluntary reporting schemes or intiatives to which it is party.

Purchasing procedures and protocols:

Whether you are acting for a supplier or a buyer, you should be aware that the pricing policies and purchasing practices of a purchaser under a long-term supply agreement can lead to adverse human rights impacts on workers further down the supply chain. Tight pricing policies and very short lead times or frequent changes at short notice can put pressures on suppliers which can result in abuses of the labour rights of the supplier’s employees, casual workers and subcontractors. You should be aware of these risks when drafting and negotiating clauses relating to purchasing protocols and lead times. A full understanding of the risks will be needed for you to draft and negotiate a purchasing regime that allows the commercial needs of the purchaser to be met without infringing on the rights of workers under both applicable domestic law and internationally recognised labour standards. To address these risks, you could consider consulting on and drawing up a purchasing code of conduct, which could then form part of the contractual obligations of the purchaser towards the supplier.

Representations, warranties and covenants: long-term supply agreement (services): potential human rights issues to consider

Explanatory notes: As part of a long-term agreement for the supply of services, the parties may provide each other with warranties with respect to a range of matters relating to the contracting entities, and their status, performance and, in some limited cases, prospects. A warranty in this context is a statement from one party to an agreement to another, designed to give assurance that certain facts are true, or that certain things will happen.  Together with indemnities (see below) they are an important way of allocating risk between the parties. The inclusion of representations and warranties with respect to human rights risks can be a useful way of eliciting information about human rights risks, and clarifying the nature and scope of human rights risks identified in the course of due diligence investigations. However, they will usually be pared back in the course of a negotiation and, in any event, are no guarantee that losses arising from human rights risks that were undisclosed or which crystallise post-completion will be recoverable by one party from another (e.g. in the event of insolvency etc). You will need to discuss carefully with your client, in light of the relevant circumstances, the scope of the warranties, their limitations in specific circumstances and the resources that may be needed to ensure that subsequent liabilities arising from adverse human rights impacts can be met.

Representations and warranties (service provider):

In order to help identify and address human rights risks in its supply chain, the buyer of services (the “customer”) may require certain assurances from the service provider with respect to human rights-related performance and practices. These assurances, which are given in the representation and warranties sections of the agreement, could cover matters including:

• certification of compliance with required management standards and/or quality marks (e.g. for environmental management, workplace health and safety management etc);
• compliance with voluntary codes of conduct (e.g. codes of conduct aimed at ensuring fair and decent working conditions in the supply chain);
• compliance with applicable regulatory schemes.

If you are acting for the customer, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , what human rights-related matters may need to be specifically covered in the warranties to ensure that responsibilities for addressing those risks, and any liabilities that arise in respect of them, are allocated in an appropriate manner. Some human rights risks may be covered by general warranties (e.g. relating to the receipt of certain licences, and/or the number and status of any regulatory complaints or legal claims).  Some human rights risks may be covered in warranties relating to environmental and/or labour standards and performance. However, in some transactions a more tailored approach may be needed. Areas identified as high risk (because of the scale, scope and/or irremediable character of the adverse human rights impacts) may require a specific set of warranties. Risks that may need to be addressed explicitly in warranties include:

• risks associated with the use of private security providers;
• risks of serious environmental harm;
• risks of serious privacy breaches;
• risks arising from poor supply chain management; and
• risks of “complicity” in government action that could amount to abuses of human rights.

Covenants (service provider):

If acting for the customer, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , the kinds of ongoing commitments that would be reasonable and appropriate to seek from the service provider in relation to monitoring, management and mitigation of adverse human rights impacts arising from, or linked to, the services agreement.  These could include commitments:

• to maintain certain licences;
• to maintain certain certifications and/or management standards and/or quality marks for the duration of the supply agreement;
• to notify the customer promptly of any compliance issues or problems in relation to those licences, certifications, standards or quality marks;
• to ensure proper access by the customer’s representatives for the purpose of inspections of relevant premises (including ad hoc inspections). (Note: in light of the human rights risks involved, consider whether access may be required to premises of sub-contractors of service provider as well as the service provider’s own premises);
• to report regularly (and/or to respond promptly to customer’s requests for information) regarding the management of specific human right-related risks.  (See further 12.2 “Access to information and reporting” below);
• to secure appropriate representations, warranties and other commitments regarding human rights performance from all suppliers and subcontractors, and to monitor and secure compliance with such provisions;
• to carry out periodic human rights due diligence
• to use reasonable endeavours, in cooperation with the customer, as needed from time to time, to address human rights risks which may arise.

Covenants (customer)

If you are acting for a service provider in relation to a contract to provide services to a project or undertaking where the outcome of those services (or the project or undertaking) could be applied or used in way that potentially has adverse human rights impacts (see, for example, discussion exercise 2), you should discuss carefully with your client the kinds of covenants and undertakings that will be needed from the customer in order to minimise these risks.  These could include covenants:

• not to use the services outcomes (e.g. products or technology developed under the services agreement) for certain prohibited purposes (and to take reasonable steps to ensure that the services outcomes are not used for the same prohibited purposes by third parties); or
• not to sell the services outcomes (e.g. products or technology developed under the services agreement) onwards (either directly or in adapted form) to certain classes of third party buyers or clients (e.g. certain State agencies, or companies involved in high risk sectors or operational contexts) without prior consent, without compliance with certain pre-agreed precautions, or at all.

Indemnities: long-term supply agreement (services): potential human rights issues to consider

If acting for the customer, you should consider whether it would be appropriate to seek an indemnity from the services provider in respect of any costs or losses incurred by the customer as a result of:

• a breach of any of the warranties given by the services provider with respect to its human rights related performance or policies. (See 9.1 “Representations and Warranties (services provider)” above); or
• a breach of any of the covenants given by the services provider with respect to its human rights related performance or policies. (See 9.2 “Covenants (services provider)” above); or
• a breach of any specific terms relating to compliance with specific human rights related standards or terms in the provision of the services (See 12.1 “Minimum human rights standards applicable to provision of services”, below).

If you are acting for the services provider, you may wish to discuss with your client (depending on the risks involved) whether it would be appropriate to seek an indemnity from the customer in respect of any costs or losses incurred by the services provider as a result of any breach of any undertakings made with respect to the use of services outcomes (see 9.3 “Covenants (customer)” above).

Financial liabilities arising from human rights risks:

If you are acting for the customer, you should discuss carefully with your client whether there are any human rights risks identified in the course of due diligence for which specific indemnities should be sought from the service provider, in order to allow the purchaser to recover certain financial liabilities that it may incur as a result of the materialisation of such risks during the course of the agreement or subsequently. Depending on nature of the risks involved and the outcome of negotiations, these losses could include not only fines and damages awards (and associated legal costs), but also clean-up costs, costs of fact finding and investigative efforts, costs of technical consultants, costs of remediation programmes, costs of implementation of compliance or prevention orders and/or improvement of systems and controls, costs of training programmes, costs of restoration of cultural property and costs of subsequent stakeholder and community engagement efforts.

Termination: long-term supply agreement (services): potential human rights issues to consider

You should consider carefully with your client whether there are any events relevant to, or connected with, human rights risks that should trigger the review and/or termination of the long-term services agreement. Possible termination events could include:

• a breach of any of the warranties given by the services provider with respect to its human rights related performance or policies. (See 9.1 “Representations and Warranties (services provider)” above);
• a breach of any of the covenants given by the services provider with respect to its human rights related performance or policies. (See 9.2 “Covenants (services provider)” above); and
• a breach of any specific terms relating to compliance with specific human rights related standards or terms in the provision of the services (See 12.1 “Minimum human rights standards applicable to provision of services”, below).

Note: You should be aware, however, that termination of a services agreement can, itself, have adverse human rights impacts (e.g. in the event that it leads to workplace shutdowns and/or insolvency of the services provider, resulting in a loss of livelihood for workers and financial support for those who rely on their incomes). These adverse impacts will need to be taken into account in any decision whether to terminate because of concerns about human rights risks.

Miscellaneous: long-term supply agreement (services): potential human rights issues to consider

Minimum human rights standards applicable to provision of services:

Where the services in question pose a risk of adverse human rights impacts (whether directly, see for example discussion exercise 4 above, or indirectly, see for example discussion exercise 2 above), the customer is likely to require ongoing commitments from the service provider with respect to the management of those risks.  If acting for the customer, you will want to discuss with your client the minimum contractual requirements that should apply, in order for your client to be able to identify and manage its own human rights-related risks, in light of any domestic legal requirements and the UN Guiding Principles on Business and Human Rights.

Scope of services:  

If acting for the service provider, you may wish to discuss with your client whether there may be a need for human rights standards to be written into the scope of services.  For example, in the context of a contract for services that carry risks of adverse impacts on human rights (see, for example discussion exercise 4 above), you may wish to discuss with your client, depending on the risks involved, contractual protections to make it clear that requests from the customer that do not conform with certain minimum human right standards will never come within the scope of services (and therefore that the service provider is entitled to refuse to carry out such requests, and that such a refusal will not place the service provider in breach of contract). This clause could provide, if necessary and appropriate, for an ability to seek an independent view as to the reasonableness of such a position if this cannot be agreed.

Access to information, rights of audit, and reporting:

Whether you are acting for the services provider or the customer, you will need to discuss carefully with your client the access to information, rights of audit and reporting provisions that will be needed as between the parties in light of:

• the types and severity of human rights related risks identified in the course of due diligence processes; and
• the customer’s own reporting obligations under;
  • any applicable domestic regimes on the reporting of social, environmental and/or human rights-related risks and/or
  • any applicable voluntary reporting schemes or initiatives to which it is party.

Representations, warranties and covenants: distribution agreement: potential human rights issues to consider

Explanatory notes: As part of a distribution agreement, the parties may provide each other with warranties with respect to a range of matters relating to the contracting entities, and their status, performance and, in some limited cases, prospects. A warranty in this context is a statement from one party to an agreement to another, designed to give assurance that certain facts are true, or that certain things will happen. Together with indemnities (see below) they are an important way of allocating risk between the parties. The inclusion of representations and warranties with respect to human rights risks can be a useful way of eliciting information about human rights risks, and clarifying the nature and scope of human rights risks identified in the course of due diligence investigations. However, they will usually be pared back in the course of a negotiation and, in any event, are no guarantee that losses arising from human rights risks that were undisclosed or which crystallise post-completion will be recoverable by one party from another (e.g. in the event of insolvency etc). You will need to discuss carefully with your client, in light of the relevant circumstances, the scope of the warranties, their limitations in specific circumstances and the resources that may be needed to ensure that subsequent liabilities arising from adverse human rights impacts can be met.

Representations and warranties (distributor):

In order to help identify and address human rights risks in its supply and distribution chains, the company contracting for distribution services (the “company”) may require certain assurances from the distributor with respect to human rights-related performance and practices. These assurances, which are given in the representation and warranties sections of the agreement, could cover matters including:

• certification of compliance with required management standards and/or quality marks (e.g. for environmental management, workplace health and safety management etc);
• compliance with voluntary codes of conduct (e.g. codes of conduct aimed at ensuring fair and decent working conditions in the supply chain);
• compliance with applicable regulatory schemes.

If you are acting for the company contracting for distribution services, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , what human rights-related matters may need to be specifically covered in the warranties to ensure that responsibilities for addressing those risks, and any liabilities that arise in respect of them, are allocated in an appropriate manner. Some human rights risks may be covered by general warranties (e.g. relating to the receipt of certain licences, and/or the number and status of any regulatory complaints or legal claims). Some human rights risks may be covered in warranties relating to environmental and/or labour standards and performance. However, in some transactions a more tailored approach may be needed.  Areas identified as high risk (because of the scale, scope and/or irremediable character of the adverse human rights impacts) may require a specific set of warranties. Risks that may need to be addressed explicitly in warranties include:

• risks associated with the use of private security providers;
• risks of serious environmental harm;
• risks of serious privacy breaches;
• risks arising from poor supply chain management; and
• risks of “complicity” in government action that could amount to abuses of human rights.

Representations and warranties (company):

If you act for the distributor you may, depending on the risks involved, wish to give consideration to possible need for warranties from the company with respect to the human rights conditions in which the relevant goods were produced (e.g. that they were not produced using child labour, or, in the case of wood products, that they conform to forestry management standards), or the qualities of the goods themselves (e.g. in the case of print or film media, that they do not constitute a breach of any person’s rights to privacy).

Covenants (distributor):

If acting for the company, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , the kinds of ongoing commitments that would be reasonable and appropriate to seek from the distributor in relation to on going monitoring, management and mitigation of adverse human rights impacts arising from, or linked to, the distribution agreement.  These could include commitments:

• to maintain certain licences;
• to maintain certain certifications and/or management standards and/or quality marks for the duration of the distribution agreement;
• to abide by the company’s standards and/or guidance with respect to matters such as community and stakeholder relations and/or sales practices (e.g. sales practices in relation to vulnerable people);
• to notify the company promptly of any compliance issues or problems in relation to those licences, certifications, standards, guidance or quality marks;
• to report regularly (and/or to respond promptly to company’s requests for information) regarding the management of specific human right-related risks.  (See further 16.2 “Access to information and reporting” below);
• to carry out periodic human rights due diligence;
• to use reasonable endeavours, in cooperation with the company, as needed from time to time, to address human rights risks which may arise.

Covenants (company)

If acting for the distributor, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , the kinds of ongoing commitments that would be reasonable and appropriate to seek from the company in relation to on going monitoring, management and mitigation of adverse human rights impacts arising from, or linked to, the distribution agreement.  These could include commitments:

• to maintain certain licences;
• to maintain certain certifications and/or management standards and/or quality marks for the duration of the distribution agreement;
• to notify the distributor promptly of any compliance issues or problems in relation to those licences, certifications, standards, guidance or quality marks.

Indemnities: distribution agreement: potential human rights issues to consider

If acting for the company, you should consider and discuss with your client whether it would be appropriate to seek an indemnity from the distributor in respect of any costs or losses incurred by the customer as a result of:

• a breach of any of the warranties given by the distributor with respect to its human rights related performance or policies. (See 13.1 “Representations and Warranties (distributor)” above); or
• a breach of any of the covenants given by the distributor with respect to its human rights related performance or policies. (See 13.2 “Covenants (distributor)” above).

If acting for the distributor, you should consider and discuss with your client whether it would be appropriate to seek an indemnity from the company in respect of any costs or losses incurred by the customer as a result of:

• a breach of any of the warranties given by the company with respect to the human rights conditions in which the relevant goods were produced or the quality of the goods themselves. (See 13.2 “Representations and Warranties (company)” above);
• a breach of any of the covenants given by the company with respect to its human rights related performance or policies. (See 13.4 “Covenants (company)” above).

Financial liabilities arising from human rights risks:

Whether you are acting for the company or the distributor, you should discuss carefully with your client whether there are any human rights risks identified in the course of due diligence for which specific indemnities should be sought from the other party, in order to allow your client to recover certain financial liabilities that it may incur as a result of the materialisation of such risks. Depending on nature of the risks involved and the outcome of negotiations, these losses could include not only fines and damages awards (and associated legal costs), but also clean-up costs, costs of fact finding and investigative efforts, costs of technical consultants, costs of remediation programmes, costs of implementation of compliance or prevention orders and/or improvement of systems and controls, costs of training programmes, costs of restoration of cultural property and costs of subsequent stakeholder and community engagement efforts.

Termination: distribution agreement: potential human rights issues to consider

You should consider carefully with your client whether there are any events relevant to, or connected with, human rights risks that should trigger the review and/or termination of the distribution agreement. Possible termination events could include:

• a breach of any of the warranties given by the distributor with respect to its human rights related performance or policies. (See 13.1 “Representations and Warranties (distributor)” above); or
• a breach of any of the covenants given by the distributor with respect to its human rights related performance or policies. (See 14.2 “Covenants (distributor)” above).

Note: You should be aware, however, that termination of a distribution agreement can, itself, have adverse human rights impacts (e.g. in the event that it leads to insolvency of the distributor, resulting in a loss of livelihood for workers and financial support for those who rely on their incomes). These adverse impacts will need to be taken into account in any decision whether to terminate because of concerns about human rights risks.

Miscellaneous: distribution agreement: potential human rights issues to consider

Scope of distribution obligations:

The distribution agreement should give the distributor the right to suspend distribution obligations in relation to products where the distribution of those products may contravene legal requirements. If acting for the distributor, you may wish to discuss with your client whether there may also be a need for human rights standards to be written into the scope of distribution obligations. For example, in the context of a contract for to distribute products that carry risks of adverse impacts on human rights (either in their manufacture or their subsequent use), you may wish to discuss with your client, depending on the risks involved, contractual protections to make it clear that all products will conform to certain human rights standards (and therefore that a refusal by the distributor to distribute goods that do not conform to the relevant standards will not place the distributor in breach of contract).

Access to information, rights of audit and reporting:

Whether you are acting for the distributor or the company, you will need to discuss carefully with your client the access to information, rights of audit and reporting provisions that will be needed as between the parties in light of:

• the types and severity of human rights related risks identified in the course of due diligence processes; and
• each party’s own reporting obligations under:
  • any applicable domestic regimes on the reporting of social, environmental and/or human rights-related (see below) risks; and/or
  • any applicable voluntary reporting schemes or initiatives to which it is party.

Representations, warranties and covenants: franchise agreement: potential human rights issues to consider

Explanatory notes: As part of a franchise agreement, the parties may provide each other with warranties with respect to a range of matters relating to the contracting entities, and their status, performance and, in some limited cases, prospects.  A warranty in this context is a statement from one party to an agreement to another, designed to give assurance that certain facts are true, or that certain things will happen. Together with indemnities (see below) they are an important way of allocating risk between the parties. The inclusion of representations and warranties with respect to human rights risks can be a useful way of eliciting information about human rights risks, and clarifying the nature and scope of human rights risks identified in the course of due diligence investigations. However, they will usually be pared back in the course of a negotiation and, in any event, are no guarantee that losses arising from human rights risks that were undisclosed or which crystallise post-completion will be recoverable by one party from another (e.g. in the event of insolvency etc). You will need to discuss carefully with your client, in light of the relevant circumstances, the scope of the warranties, their limitations in specific circumstances and the resources that may be needed to ensure that subsequent liabilities arising from adverse human rights impacts can be met.

Representations and warranties (franchisee):

In order to help identify and address human rights risks in its supply and distribution chains, the franchisor may require certain assurances from the franchisee with respect to human rights-related performance and practices. These assurances, which are given in the representation and warranties sections of the agreement, could cover matters including:

• certification of compliance with required management standards and/or quality marks (e.g. for environmental management, workplace health and safety management etc);
• compliance with voluntary codes of conduct (e.g. codes of conduct aimed at ensuring fair and decent working conditions in the supply chain);
• compliance with applicable regulatory schemes.

If you are acting for the franchisor, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , what human rights-related matters may need to be specifically covered in the warranties to ensure that responsibilities for addressing those risks, and any liabilities that arise in respect of them, are allocated in an appropriate manner. Some human rights risks may be covered by general warranties (e.g. relating to the receipt of certain licences, and/or the number and status of any regulatory complaints or legal claims). Some human rights risks may be covered in warranties relating to environmental and/or labour standards and performance. However, in some transactions a more tailored approach may be needed. Areas identified as high risk (because of the scale, scope and/or irremediable character of the adverse human rights impacts) may require a specific set of warranties. Risks that may need to be addressed explicitly in warranties include:

• risks associated with the use of private security providers;
• risks of serious environmental harm;
• risks of serious privacy breaches;
• risks arising from poor supply chain management; and
• risks of “complicity” in government action that could amount to abuses of human rights.

Representations and warranties (franchisor):

If you act for the franchisee you may, depending on the risks involved, wish to give consideration to possible need for representations and warranties from the franchisor with respect to human rights issues or standards connected to the operation of the franchise business, for instance representations and warranties that may be relevant to the assessment of human rights risks arising from the conditions in which any goods (or components of goods) supplied to the franchisee for the purpose of operating the franchise were produced (e.g. in the case of a restaurant franchise, that the supply chain for food and/or packaging products is free from child labour).

Covenants (franchisee):

If acting for the franchisor, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , the kinds of ongoing commitments that would be reasonable and appropriate to seek from the franchisee in relation to monitoring, management and mitigation of adverse human rights impacts arising from, or linked to, the franchised business. These could include commitments:

• to maintain certain licences;
• to maintain certain certifications and/or management standards and/or quality marks for the duration of the supply agreement;
• to notify the franchisor promptly of any compliance issues or problems in relation to those licences, certifications, standards, guidance or quality marks;
• to abide by the franchisor’s standards and/or guidance with respect to matters such as community and stakeholder relations and/or sales practices (e.g. sales practices in relation to vulnerable people) (See further 20.1 “Franchise operating manual: minimum human rights standards applicable to the operation of the franchise”, below);
• to engage in prescribed training programmes with respect to the management of different human rights risks connected with the operation of the franchise business;
• to report regularly (and/or to respond promptly to franchisor’s requests for information) regarding the management of specific human right-related risks.  (See further 20.2 “Access to information and reporting” below) and
• to carry out periodic human rights due diligence;
• to use reasonable endeavours, in cooperation with the franchisor, as needed from time to time, to address human rights risks which may arise.

Indemnities: franchise agreement: potential human rights issues to consider

If acting for the franchisor, you should consider whether it would be appropriate to seek an indemnity from the franchisee in respect of any costs or losses incurred by the franchisee as a result of:

• a breach of any of the warranties given by the franchisee with respect to its human rights related performance or policies. (See 17.1 “Representations and Warranties (franchisee)” above);
• a breach of any of the covenants given by the franchisee with respect to its human rights related performance or policies. (See 13.2 “Covenants (franchisee)” above); or
• a breach of any specific terms relating to compliance with specific human rights related standards or terms in the provision of the services (See 16.1 “Minimum human rights standards applicable to operation of the franchise”, below).

If you are acting for the franchisee, you may wish to discuss with your client (depending on the risks involved) whether it would be appropriate to seek an indemnity from the franchisor in respect of any costs or losses incurred by the franchisee as a result of any breach of any representations or warranties made by the franchisor in relation to any human rights issues or standards connected to the operation of the franchise business(see 17.2 “Representations and warranties (franchisor)” above).

Financial liabilities arising from human rights risks:

Whether you are acting for the franchisor or the franchisee, you should discuss carefully with your client whether there are any human rights risks identified in the course of due diligence for which specific indemnities should be sought from the other party, in order to allow your client to recover certain financial liabilities that it may incur as a result of the materialisation of such risks.  Depending on nature of the risks involved and the outcome of negotiations, these losses could include not only fines and damages awards (and associated legal costs), but also clean-up costs, costs of fact finding and investigative efforts, costs of technical consultants, costs of remediation programmes, costs of implementation of compliance or prevention orders and/or improvement of systems and controls, costs of training programmes, costs of restoration of cultural property and costs of subsequent stakeholder and community engagement efforts.

Termination: franchise agreement: potential human rights issues to consider

You should consider carefully with your client whether there are any events relevant to, or connected with, adverse human rights impacts that should trigger the review and/or termination of the franchise agreement.  Possible termination events could include:

• a breach of any of the warranties given by the franchisee with respect to its human rights related performance or policies. (See 17.1 “Representations and Warranties (franchisee)” above);
• a breach of any of the warranties given by the franchisor with respect to human rights issues or standards connected to the operation of the franchise business. (See 17.2 “Representations and Warranties (franchisor)” above);
• a breach of any of the covenants given by the franchisee with respect to its human rights related performance or policies. (See 18.2 “Covenants (franchisee)” above);
• a breach by the franchisee of  certain human rights risk management provisions of the Franchise Operating Manual (See 20.1 “Franchise operating manual: minimum human rights standards applicable to the operation of the franchise”, below).

Note: You should be aware, however, that termination of a franchise agreement may, itself, have adverse human rights impacts (e.g. in the event that it leads to factory shutdowns and/or the insolvency of the franchisee, resulting in a loss of livelihood for workers and financial support for those who rely on their incomes).  These adverse impacts will need to be taken into account in any decision whether to terminate because of concerns about human rights risks.

Miscellaneous: distribution agreement: potential human rights issues to consider

Franchise operating manual: minimum human rights standards applicable to the operation of the franchise:

Where the operation of the franchise business poses risks of adverse human rights impacts, (see, for example, discussion exercise 3 above) the franchisor is likely to require ongoing commitments from the franchisee with respect to the management of those risks.  If acting for the franchisor, you will want to discuss with your client the minimum contractual requirements that should apply (e.g. by way of explicit requirements in the franchise operating manual), in order for your client to be able to continue to identify and manage its own human rights risks, in light of any domestic legal requirements and the UN Guiding Principles on Business and Human Rights.

Access to information, rights of audit and reporting:

Whether you are acting for the franchisor or the franchisee, you will need to discuss carefully with your client the access to information, rights of audit and reporting provisions that will be needed as between the parties in light of:

• the types and severity of human rights related risks identified in the course of due diligence processes; and
• each party’s own reporting obligations under;
  • any applicable domestic regimes on the reporting of social, environmental and/or human rights-related risks and/or
  • any applicable voluntary reporting schemes or initiatives to which it is party.