Contracts in a Sustainable Future

Abstract

The purpose of this thesis is to investigate the area of corporate sustainability due diligence and how new EU-regulation attempts to create homogenous obligational rules for Member States in the European Union. The aim of the Directive of the European Parliament and the Council on Corporate Sustainability Due Diligence and the amending Directive (EU) 2019/1937 is to lower the emission of greenhouse gasses to accommodate green objectives in the European Union. The articles of the directive are imposed on leading firms, which operate in the European Union, but also affect the appurtenant supply chain. The focus of the thesis concerns, how the comprehensive EU regulation and appurtenant due diligence obligations affects the contractual relation between a leading firm and a SME (“Small and Medium-sized Enterprise”). More precisely, the thesis investigates how alignment of incentive-compatibility through strategic contracting can happen, as to ensure both parties have interest in meeting and complying with the rules regarding sustainability due diligence. The centre of the CSDD-directive is the leading firm’s monitoring and control of its co-contractors, which results in a challenge of achieving alignment of incentive-compatibility in accordance with strategic contracting. The leading firm and the SME possess different risk profiles, which additionally hinders the alignment of incentive-compatibility. As a response to this matter, the thesis presents proposed solutions, such as the introduction of a contractual provision regarding the leading firm’s use of recourse to a prior party in the supply chain. Furthermore, the thesis introduces contractual adjustment mechanisms on a contractual basis, e.g., an extended obligation to cooperate and mutual obligation to communicate. The contractual adjustment mechanisms will ensure an exchange of knowledge between the contracting parties and contribute to an optimal compliance of the CSDD-directive's obligations. The individual contact and the contractual adjustment mechanisms within will differentiate in accordance with the size and resources of the SME. This is possible through a segmentation tool, as to ensure a fair distribution of risk and reward, hereunder a securement of interdependency. However, it is necessary to point out that the European Union should take further actions regarding the sustainability regulation to build a better foundation for the parties to exercise strategic contracting. Finally, the thesis concludes that the contracting parties should exercise strategic contracting by using proactive contractual provisions to comply with the comprehensive obligations of the CSDD-directive, as to ensure alignment of incentive-compatibility and obtain relational rent.