Protecting Third Parties in Contracts
58 American Business Law Journal 327 (2021) https://doi.org/10.1111/ablj.12184
61 Pages Posted: 24 Sep 2020 Last revised: 25 Jul 2022
Date Written: September 22, 2020
Corporations routinely impose externalities on a broad range of non-shareholders, as illustrated by several unsuccessful lawsuits against corporations involving forced labor, human trafficking, child labor, and environmental harms in global supply chains. Lack of legal accountability subsequently translates into low legal risk for corporate misconduct, which reduces the likelihood of prevention. Corporate misconduct toward nonshareholders arises from a fundamental inconsistency within contract law regarding the status of third parties: On the one hand, we know that it takes a community to contract. Contracting parties often rely on multiple third parties—not signatories to the contract—to play important roles in facilitating exchange, such as reducing market transaction costs, improving information flows, and decreasing the risk of opportunism.
On the other hand, we deny this community protection from the externalities that contracting parties impose on them. This article examines a corporation’s duties to others in its role as a contracting party. Normatively, this article proposes an alternative view of contracts as an ecosystem with three attendant principles that result from this view: (a) third-party protections from negative externalities, (b) contract design obligations of contracting parties, and (c) recourse to legal remedies for third parties. On a policy level, this article proposes the following duty to contract in order to translate theory into practice: Contracting parties are required to take into account negative externalities to thirdparties when the contracting parties could reasonably foresee that performance of the contract would create a risk of physical harm to these third parties.
Keywords: contracts, supply chains, corporations, ESG, CSR, human rights
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