The COVID-19 pandemic has dramatically exposed the pre-existing fragilities and inequities in global garment supply chains. In early 2020, numerous global garment brands and retailers were confronted with a steep and sudden drop in consumer demand, caused by the closure of retail stores as required by governments’ measures to impose “social distancing.” In turn, brands and retailers responded by suspending or cancelling orders with their suppliers worldwide.1 In order to cut costs further and improve cash flow, many brands refused to pay for completed orders (some already shipped) or those in midproduction, or demanded better payment terms or sharp discounts on the agreed contract price in order to accept them.
These actions by some of the industry’s largest brands showed no apparent concern for the impact these decisions would have on their suppliers and the millions of low-wage workers whose labor, for decades, has supported the industry and fueled its profits. Though some brands subsequently agreed to pay for these orders in the face of public criticism over the devastating impact of order cancellations on workers in their supply chains, other brands still refuse to pay.
The resulting costs that suppliers and workers have been forced to bear as a result is significant. Garment manufacturers in Bangladesh alone have estimated that six billion US dollars’ worth of orders have been suspended or cancelled since the pandemic began. 3 This has predictably led to mass unemployment among garment workers (one million in Bangladesh alone as of March and 150,000 in Cambodia as of June 2020),4 and has pushed many manufacturers into or near bankruptcy.5 In some countries, the threat of starvation has driven some unemployed garment workers to the streets in protest6 while others fear that desperate workers will turn to suicide.7 Additionally, some suppliers, which have been forced to downsize as a result of the order cancellations, have used the pandemic as an opportunity to target union members for layoffs in the hope of scaling back up or reopening union-free.
If there were ever a moment for industry to step up and show leadership, this would have been it. Unsurprisingly, many brands chose not to do so, or only after intense public shaming. This comes despite brands’ repeated claims of responsible business conduct, participation in various ethical sourcing initiatives, and the promotion of international labor standards in their corporate policies. Indeed, over the last several decades the global garment industry as a whole has built a system of production that is designed to push down as much economic risk as possible to the bottom of the supply chain (onto the backs of suppliers and their workers) and to pull up nearly all of the economic benefits to the top (and with as little legal accountability as possible). This severely unequal allocation of the industry’s risks and benefits is reflected in, and buttressed by, the contractual relationships brands have imposed on their suppliers as a condition of their orders.
Structural consequences of power asymmetry
Brands have been able to walk away from their suppliers because of the underlying and significant power asymmetry between them and their suppliers. This has allowed brands to structure the business relationship overwhelmingly to their advantage. As has been repeatedly documented, global brands’ purchasing practices, including intense price pressures, demands for rapid turn-around times, last minute order amendments and late payments have incentivized suppliers – which are already on a tight margin – to suppress workers’ rights in order to keep wages as low as possible. 9 This has resulted in factory management suppressing wages through lawful and unlawful means, imposing unreasonable production quotas that require excessive and often illegal overtime, maintaining unsafe and unsanitary working conditions and, of course, crushing union organizing so that workers are unable to improve their conditions through collective action.10 This price squeeze also means that suppliers often simply do not pay into national social protection schemes, including for workplace injuries, unemployment and other contingencies – making them unavailable to workers now when they need them the most. As a result, workers employed in the garment industry often live paycheck to paycheck, if not in debt, with few if any resources of their own to weather an economic collapse.
In addition to pressuring suppliers for lower prices, which are delivered via lower labor costs, brands themselves pay little or no taxes to the governments of exporting countries, because very few brands own factories or employ factory workers themselves. Were it otherwise, this revenue could be used to help support employers and workers in the current crisis. Further, many countries have relied on foreign investors to capitalize and operate garment factories. To attract this investment and enable foreign-owned factories to profitably compete for brands’ orders, countries offer tax incentives, such as export processing zones, which further deprive governments of tax revenues necessary to provide a public safety net for workers. Even now, the emergency income support measures taken by, for example, the government of Cambodia to support factory workers amount to only 40 US dollars per month, with employers expected to contribute an additional 30 US dollars, totaling barely one third of the country’s already low minimum wage.11
Power imbalances and their contractual manifestation
The unequal relationship between brands and their suppliers manifests itself in purchase orders, which are largely contracts of adhesion, i.e. take-it-or-leave-it agreements – a point confirmed by many suppliers. Such contracts maximize the rights and interests of the party offering the contract, who will require that the other party accept the terms without negotiation, even though they are quite disadvantageous to the latter. In the case of the garment industry, brands and retailers draft these standard contracts, which are imposed upon the suppliers. 12 The particulars of individual orders are negotiated within the standard contract framework. Notably, brands commonly use their leverage to require suppliers to assume and finance all risks. This includes forcing factories to borrow in order to operate while awaiting payment (which does not occur until after the clothes sell to the consumer).
It is clear that many brands are cancelling contracts primarily because they can, not because it is justified. Brands know that their suppliers will rarely, if ever, seek to hold them legally accountable, even when the brand is clearly in the wrong.13 Not only do suppliers often lack the means, knowledge and/or resources to bring legal action, additional hurdles are built into the contracts. For example, the contracts reviewed for this paper all require legal action to be filed in the courts of the country where the brand is headquartered, not the supplier’s country where the bulk of the effort to satisfy the terms of the contract is undertaken. Contracts also require the supplier to pay the brand’s attorneys’ fees if it loses. 14 An equally important factor is that suppliers in the garment sector fear permanent retaliation, not only by the brands that they may sue but also by other brands.
This paper examines the contract language regarding the cancellation of orders that some brands have imposed on their suppliers as a basis for refusing to pay for these orders during the COVID-19 pandemic. We explore the law of force majeure and related doctrines and how they apply to the current circumstances. The paper explains how brands’ cancellation of orders violates their due diligence obligations under international instruments governing responsible business practices. In closing, we call for the effective global governance of supply chains and, more specifically, for stronger public and private accountability mechanisms by which workers themselves can secure and enforce responsible supply chain practices from the brands.
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