17 October 2019
The sustainable supply chain
Over the last few years we have seen an increasing number of projects involving sustainability and environmental responsibility considerations. At present there is relatively little by way of hard law requiring companies to take sustainability into account in relation to commercial contracts. There are, however, an increasing number of UK and EU initiatives relating to the circular economy which may give rise to increasing regulation in future. For example, reporting requirements could be introduced and could have a similar impact to Modern Slavery reporting obligations, which have led to obligations being flowed down the supply chain. In addition, market demand is changing and companies are increasingly thinking about their environmental footprint when sourcing, even where they are not legally compelled to do so.
One simple change that we have seen is the inclusion of contractual clauses whereby customers require that a supplier acts sustainably in the performance of its obligations under the contract. As well as looking at sustainable sourcing, this can go further and cover different stages of the product lifecycle. For example, if raw materials or stock remain on termination of a contract, there may be an obligation to dispose of them sustainably. This is a particular issue in the fashion industry where it is relatively common for excess stock to be destroyed as a measure to prevent illegal counterfeiting, but as Burberry discovered in 2018, burning clothing can attract a large amount of negative press.
Some customers go further than this and have more detailed sustainability standards or have adopted third party standards or reporting requirements. There is even now a British Standard (BS8001) which acts as a framework for implementing the principles of the circular economy. It is likely to be increasingly common to see clauses which flow down requirements to comply with such standards through the supply chain.
This is not just a question for new contracts, and some suppliers may face requests to amend their products or services to be more sustainable. If a contract includes a simple obligation to comply with customer policies there may be an attempt to sneak this in through the back door, or in other situations a contract variation request may be made. There are a number of issues to consider when implementing this type of change, for example, if raw material needs to be procured from a more expensive source, do you have the ability to adjust pricing to take account of that? Will this effect lead times for obtaining raw material? Is there any impact on product specifications?
Sustainability can also drive innovation and we are seeing an increasing number of businesses seeking advice in relation to IP protection where they have developed new products in order to reduce reliance on plastics, particularly in relation to packaging. As these products are a likely growth area for the economy it is important to properly protect them in order to maximise return on investment. Typically a number of organisations may be involved in the development of a new product – from a client who asks “is this possible without using plastic” through to one or more suppliers who develop and test the solution. It is important to agree where the ownership of intellectual property rights sits and what rights each party has to the end product at an early stage in order to avoid disputes at a later stage.
If you would like more information on the topic covered above, or would like to discuss how this might affect your business in more detail, please contact any member of our Commercial team whose contact details can be found here.