Contractual Considerations
Contracts and contractual agreements are key to ensure supply chain resilience in respect of supplier onboarding, ongoing contractual protections, governance and continuous improvement.
Furthermore, contracts with suppliers need to address the ESG and sustainability reporting requirements in Europe.
Key areas of focus when building contractual resilience
1. Supplier diversification
By operating a varied supplier panel from several jurisdictions, organisations can seek alternative supply in the event of a climate change issue. Organisations should seek to hold tender processes and undertake appropriate due diligence to onboard multiple suppliers that can mitigate potential climate issues. Organisations should also ensure that contracts with suppliers do not commit the organisation to purchase from the supplier exclusively, whether that be in respect of a particular crop or jurisdiction.
2. Forecasting
Accurate forecasts help customers anticipate demand, plan inventory, and manage resources efficiently, reducing the risk of disruptions. A contractual commitment from suppliers to meet forecasted requirements will provide organisations with a clear understanding of expected supply, and ensure appropriate protections in the event of short supply. Organisations should also be wary of minimum volume/purchase commitments, to avoid becoming tied into any one supplier.
3. Due diligence
When onboarding a supplier, organisations should undertake appropriate due diligence to ensure that the supplier has conducted a risk assessment and can react if a climate change event affects supply. Any contract should contain appropriate protections for:
- Business continuity and disaster recovery (BCDR) – for instance, requiring the development of a BCDR plan that risk assesses potential climate change events that could affect ongoing supply, with appropriate mitigations and procedures for ongoing supply during any incident. Any such BCDR plan should be approved by the customer, and should be regularly tested during the contract lifecycle, with appropriate governance in place for the escalation of any incidents.
- Force majeure – this must be appropriately defined, and should exclude climate related events that are reasonably foreseeable or likely, or which could be appropriately managed by the BCDR plan. Similarly, a force majeure clause should include commitments for a supplier to mitigate the event, as well as the option for the organisation to procure alternative supply during the force majeure period (without any commitment to continue paying for affected services).
4. Transformation and continuous improvement
Organisations are increasingly choosing to include specific contractual commitments on suppliers to meet particular ESG strategies. This could take the form of transformation programmes (e.g. steps/actions to be taken to achieve certain ESG milestones), continuous improvement commitments, or direct commitments to ensure that suppliers are keeping up to date with the latest developments and technologies for gold-standard supply chain resilience, such as artificial intelligence (AI)-enabled tools for predictive forecasting analytics and real-time monitoring of supply chain conditions. When including these commitments, organisations will also need to adopt ongoing horizon scanning and governance to ensure compliance with new regulations, such as the EU Artificial Intelligence Act.
5. Reporting requirements
Recent legislation, such as the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CS3D) in the EU will, require significant changes to contractual measures to ensure compliance with, and to enhance, supply chain management. To ensure that organisations comply with their reporting requirements, supplier contracts must include clauses for comprehensive data sharing and transparency in respect of environmental and social practices. Regular audits are required to verify compliance with these standards, fostering a more accountable and resilient supply chain in the face of climate challenges.
6. Governance and training
Contracts should include a multi-level governance process, including regular contact between organisations and their suppliers, and appropriate escalation in the event of any incidents. Contracts may also stipulate requirements for suppliers to carry out regular training of personnel on ESG issues affecting the supply chain, and to conduct regular reporting on live incidents.
Further contractual opportunities
Structuring your contracts within the context of an overall sourcing strategy will help to align manufacturing operations with emerging legal and regulatory risks, and can ensure leverage is used effectively. The same approach should be applied to banking, tax insurance and general commercial contractual terms, seeking convergence with your sustainability approach and goals.
Banking specific agreements
- Sustainability clauses: Require adherence to environmental standards and regular reporting on climate risk management focussing on your ESG goals and legislative obligations, such as Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CS3D)
- Green financing: Promote green bonds and sustainability-linked loans with favourable terms for environmentally friendly projects that meet ESG policy goals
- Risk assessment: Include clauses for periodic reviews and adjustments based on climate-related risks
Tax provisions
- Tax incentives: Leverage tax credits for investments in climate-resilient infrastructure and renewable energy
- Carbon tax provisions: Encourage reduction in greenhouse gas emissions through carbon tax clauses
- Transfer pricing: Account for climate change mitigation costs in transfer pricing policies
General commercial supply contracts
Risk management
Force majeure clauses: Include climate-related events like extreme weather but think about exclusions for foreseeable events and include obligations to mitigate including providing you with priority of supply
- Contingency planning: Require suppliers to have plans for climate-related disruptions in their BCBR plans
Sustainability requirements
- Environmental standards: Mandate adherence to specific environmental standards
- Regular audits: Include provisions for regular environmental audits
Flexibility and adaptation
- Flexible terms: Allow for adjustments based on changing climate conditions
- Adaptive sourcing: Encourage diversification of supply sources
Insurance and liability
- Insurance coverage: Require adequate insurance for climate-related risks
- Liability clauses: Clearly define responsibilities related to climate risks
- Regulatory compliance: Ensure contracts comply, locally and internationally, with environmental, AI, and other regulations — including adherence to reporting standards and participation in carbon markets, where applicable
Insurance contracts
- Climate risk coverage: Develop contracts covering climate-related risks, detailing perils, claims conditions, and damage assessment
- Premium adjustments: Allow for premium adjustments based on changes in climate risk
- Loss prevention: Require policyholders to implement measures to mitigate climate risks
Simon Wright
M&A Partner, International Food and Beverage sub-sector lead - DLA Piper UK LLP
M: +44 (0) 7713 079 183
Ryan Harrison
Partner, International Head of Commercial Contracts - DLA Piper UK LLP
M: +44 (0) 7501 271 665