Laws set by contracts between businesses

27 September 2012

Increasingly important governance decisions are being made by private actors such as corporations. What is notable about this trend is that the governance mechanism that is used is contractual.

Increasingly important governance decisions are being made by private actors operating across borders, including corporations, industry associations, and non-governmental organisations. Private transnational standard-setters in a diversity of areas, including food safety and other aspects of production, labour relations, human rights, environmental protection, trade and investment practices, and dispute resolution are proliferating. In some cases, transnational private standards and codes of conduct complement existing legislation promulgated by states and IGOs, while in others they are developed to address governance gaps resulting from the absence of legislation.

Within this development a noticeable trend can be observed: increasingly the governance mechanism used is contractual. In many instances, these standards are incorporated into (bi-lateral) contracts by reference, thus giving them more authority than would be the case if they remained voluntary industry norms. This type of transnational private regulation of matters with public policy implications raises legitimacy concerns about the sorts of private interests that are being served. At the same time, there appear to be real efficiencies in drawing on private sources of governance.

For example, production organised through networks of contracts along a supply chain create many openings for advancing extra-contractual or social obligations concerning safety, human or labour rights, and environmental protection. Because multinational corporations are increasingly put under pressure to comply with such norms and because due diligence standards require them to pay due regard to the conduct of suppliers and sub-contractors, such extra-contractual or social obligations are increasingly incorporated in contracts. This might be seen as a positive development. While the organisation of production through supply chains can assist small and emerging companies in developing countries to gain access to the production process, the contractual incorporation of such obligations may enhance the overall conditions under which the production takes place.

However, in the area of dispute resolution, the particular arbitration institution and rules that are incorporated into a contract can have a dramatic effect on determining who wins and who loses in a contractual dispute. If such clauses are proposed by one contractual party without an option for amendment by the other prospective party – save of not entering into the contract and thus loosing income - this raises concerns about the legitimacy of this type of governance. Accordingly, the appropriate design, implementation, and enforcement of contractual arrangements have great significance for the learning and advancement opportunities for contractual parties that go well beyond the conventional outcomes associated with contract law.

These conclusions were reached by an international group of lawyers, political scientists, and political economists at the at the Workshop on the Legitimacy of Private Transnational Governance by Contracts, jointly sponsored by HiiL, the University of Victoria, and the European University Institute (EUI) at the University of Victoria, Victoria, BC, Canada on September 6- 7, 2012.

This was the second of two Workshops held by Dr. A. Claire Cutler, holder of the Morris Tabaksblat Visiting Chair on Private Actors and Globalisation, and Professor Fabrizio Cafaggi, Director of the HiiL Project on Private Transnational Regulation: Constitutional Foundations and Governance Design. The first Workshop was held at the EUI , Department of Law, Fiesole, Italy in April 16- 17, 2012. The Workshops will lead to an edited volume on the legitimacy, quality, effectiveness and enforcement of transnational governance by contract to be published in 2013.