What the EU's Corporate Sustainability Due Diligence Directive Says About Contracts

Abstract

This policy brief was prepared by the Responsible Contracting Project to analyze the content of the newly adopted EU Corporate Sustainability Due Diligence Directive (CSDDD) with respect to commercial contracts.  On July 5, 2024, the CSDDD was published in the Official Journal of the European Union. It will enter into force on July 25, 2024 and Member States will have to transpose the Directive into national law by July 26, 2026. Now that the text is finalised, we can analyse its requirements with respect to commercial contracts, which are one of the key tools that companies are expected to employ in meeting their human rights and environmental due diligence (HREDD) obligations.

Although the CSDDD establishes due diligence standards only for large EU businesses and non-EU businesses generating significant revenue in the EU (a corporate seat is not required), it will have major implications well beyond those companies. That is because they will have to implement the due diligence requirements in their own operations, as well as in the operations of their subsidiaries and business partners to the extent the latter are involved in the company’s “chain of activities.” It is therefore helpful to think of the Directive’s scope as covering not just individual companies, but also the companies’ commercial relationships, which are often mediated through contracts.  

Contracts have long been vehicles of choice for companies to implement human rights and environmental (HRE) standards across their supply chains. As privately negotiated instruments, contracts are flexible and allow companies to set tailored, relationship-specific, standards for performance with their business partners. But contracts are also legal instruments, meaning that the commitments and performance standards they contain are binding, even in the absence of local (or other) legislation. This is why contracts can fairly be described as the legal links of global supply chains.  

Understanding their significance, the CSDDD drafters have, in each iteration of the Directive’s text, carved out a special role for contracts in carrying out HREDD. Indeed, contracts feature prominently in Article 10 on preventive measures and Article 11 on corrective measures. There can be little doubt that the transposition of the CSDDD will further increase the relevance of contracts as tools for implementing HREDD in supply chains, so it’s important to get them right. 

This Policy Brief provides some answers to the “how to get the contracts right” question, along with a chart summarising the dos and don’ts of due diligence-aligned contracting. 

Keywords: CSDDD, business and human rights, corporate sustainability due diligence, responsible contracting, european legislation, corporate social responsibility, policy analysis