Due diligence in the chain of activities: a contractual perspective

Corporate Sustainability Due Diligence

In our seventh post on Directive (EU) 2024/1760 regarding corporate sustainability due diligence ("CS3D"), we reflect on how this directive affects the business relationships of companies bound by the CS3D with their business partners. From a contract law perspective, the CS3D entails the novation of these contractual relationships and, potentially, the need to suspend or terminate them.

We make this reflection after the European Commission’s (EC) Competitiveness Compass was published on January 29, which will steer the EC's work during this mandate and which can influence the measure and extent the CS3D’s impacts the chains of activities.  

Access previous publications in this series here:

• Post | The CS3D in perspective
• Post | Who does the CS3D affect?
• Post | Legal interests protected by the CS3D
• Post | Risk-based approach
• Post | The Shell case and its potential implications for corporate due diligence
• Post | Obligations to end adverse impacts and to provide remediation beyond financial compensation

The CS3D and contractual relationships with business partners

Complying with the obligations under the corporate sustainability due diligence framework inevitably requires companies to review their contractual relationships (written and verbal) with their business partners:

• To identify and assess adverse impacts, companies must request information from their business partners (articles 8.2 and 8.4 CS3D).
• Both to prevent potential adverse effects and to eliminate the existing ones, the CS3D includes seeking contractual assurances from business partners to ensure compliance with companies’ codes of conduct,  prevention action plans and corrective action plans, as well as adapting purchasing practices and providing support for small and medium-sized enterprises (articles 10.2, 10.5, 11.2 and 11.6).    

The CS3D includes rules for delimiting the effects of these changes on the contractual relationships with the players in the chain of activities —see Post | Who does the CS3D affect?—.

Ultimately, the CS3D promotes transparency and cooperation between the players in the chain of activities, which in some cases—if not in all—will entail changing the contractual relationship between companies and their business partners.

The CS3D is aware that the ability to implement the mentioned measures will depend on the influence companies have over their business partners. Influence over a business partner is understood as the “(...) ability to persuade the business partner to prevent adverse impacts […] and, on the other hand, the degree of influence or leverage that the company could reasonably exercise, for example through cooperation with the business partner in question or engagement with another company which is the direct business partner of the business partner associated with the adverse impact” (recital 45).

Given the size of companies bound by the CS3D, we could conclude that they would usually have this influence over the business partners in their value chain. However, although this could be true in many cases, it would not always be that way.

Contract novation

From the perspective of contractual law, amending or novating a contract requires the consent of the two parties in the relationship.

To ensure, favor or promote a secure legal environment in the process for adapting contracts under the CS3D, it is important to consider the following two essential elements:

• The transposition of the CS3D into Spanish law (and into that of the EU’s other Member States) should provide the companies with the mechanisms needed to adapt their business relationships to the new legal requirements or, at least, clearly establish the integration of existing contracts with the new obligations under the CS3D. This is the only way to ensure that contractual remedies (which can reach the most extreme point -resolution-) operate with the desired legal certainty.
• Adapting the contracts with commercial partners should not be restricted to including an abstract and unilateral commitment of the business partner to apply a standard of conduct aligned with corporate sustainability due diligence. It will also be necessary to establish appropriate mechanisms that promote compliance, such as:
• a clear assignment and distribution of responsibilities between the parties;
• a system for accessing information, including information arising from the use of complaint and reporting mechanisms;
• engagement, collaboration, support and training mechanisms; and
• an efficient dispute resolution system with the rights holders and, if applicable, between contracting parties, including rights of recourse between them.

The European Commission, in consultation with the Member States and relevant stakeholders, must issue -at the latest in January 2027- orientating guidelines on contractual clauses (access the last draft of the working group here).  

Solutions if novation not possible

Considering that not all companies in the value chain will be bound by the CS3D, it is possible that not all business partners will give their consent to the novation.

If business partners are reluctant to amend contracts to introduce the new obligations and contractual assurances, it will be necessary to be aware of the content of each contract and of the mechanisms —at least for now and until the regulation is transposed— established by our legal system (or the legal system applicable to the contract). 

Below we highlight legal concepts that can be used as a lever to persuade business partners to amend their business relationships to adapt them to the new legal reality imposed by the CS3D.

• Invoking the rebus sic stantibus clause that the contract may contain, although meeting the requirements for applying this doctrine can be complex.
• Suspending compliance with the obligations, a concept expressly mentioned under the CS3D and, although it is not reflected in our Civil Code, it is not unusual to find it in our contracts practice, e.g., article 71 United Nations Convention on Contracts for the International Sale of Goods or the exceptio non rite adimpleti contractus.
• Contractual resolution due to a default on obligations or impossibility of contractual performance. Since both of these remedies lead to termination of the contractual relationship, they must be last resorts.

It will be necessary to be aware of the circumstances in each particular case, as none of the legal concepts mentioned is free from difficulties; all of them have requirements defined in the regulations and in case law that may make it more difficult to fit them to the case in question. In any case, all of these are tools that, in the end, will be useful to motivate a real change in the value chain.

Concluding thoughts

• The adaptation of the business relationships in the chain of activities to the requirements of the due diligence standard indicates the need for a transposition of the CS3D that facilitates contract law tools sufficiently in advance, to provide legal certainty to the companies bound by the CS3D and to those in their chain of activities.
• Pending the content of the transposed regulations and also the completion of the work of the EC in the framework announced in its Competitiveness Compass, it is recommendable to maintain a reasonable, fair and proportionate position in the face of an unavoidable scenario of change in the relationship with the business partners (also by those companies not bound by the CS3D, but that are part of the chain of activities of those that are bound).
• This scenario necessarily means aiming for an agreed solution, oriented towards adapting the contractual content of each business relationship in a balanced and efficient manner, to ensure chains of activities that are aligned with the sustainability and responsibility standard under the CS3D.
• All the actions and efforts made by companies in this direction will be considered when assessing their diligence in preventing and mitigating adverse impacts, which is fundamental considering that the CS3D imposes the obligation of means.
• In any case, we must pay attention to possible changes arising from the European Commission meeting at the end of February, to check whether the plans for competitiveness will affect the current regulation of the impact of the CS3D on the relationships with the business partners of companies bound by the CS3D. 

Watch this space for more updates.