Supply chains, contractual governance and certification regimes

Abstract

Contractual governance of the food supply chain is on the rise. In this paper we focus on a particular set of instruments for transnational governance of food supply chains: transnational contracts and agreements. Looking at transnational contracts as instruments for implementation of transnational private regulation, we compare different mechanisms for the enforcement of safety and sustainability standards in global food supply chains. We conclude that the regime of contractual remedies follows different logics from the ones of regulatory and certification regime. (1) The former aims at redressing the victim of the breach inducing compliance through a re-active approach; whereas the latter pro-actively tries to restore compliance with regulatory process in order to pursue regulatory objectives. (2) The former focuses mainly on products, the latter on process. (3) The former concentrates on individual transactions while the latter focuses on the interdependence of contractual relationships along the chain and creates collective governance mechanisms. This paper suggests that the combination of the two sets of remedies may reinforce coordination and cooperation along the chain, therefore improving the level of quality, safety or sustainability of certified production. A higher level of awareness about the impact of standards and certification on the contract rules on remedies can have other positive consequences: it may improve contract drafting, leading the parties to coordinate different remedial systems when addressing the consequences of the breach and the ones of certification remedies; it may help courts to better define the scope and preconditions of contractual remedies and their effects on transnational regulation; it may guide law makers and standard setting institutions, when providing principles, rules or guidance concerning the consequences of the breach within contracts and along the chain, particularly in the food sector. From this perspective, the current work conducted by Unidroit and Fao for the production of a Legal Guide on contract farming could represent an important opportunity to define the links between multiple remedial regimes in food chains.

1 Contractual practices and supply chains: changing unit of analysis

In this paper we focus on a particular set of instruments for transnational governance: transnational contracts and agreements. These are generally standard contracts combined with guidelines issued by the chain leader defining rules with which participants have to comply. We consider contracts in broad terms as including agreements that do not necessarily qualify as enforceable contracts within the traditional toolkit of private laws.¹ Secondly, we consider global supply chains rather than individual transactions as the web of contracts along and around the chain that governs production and distribution processes. Here we want to capture interconnectedness via contracts among the different yet interdependent nodes of the chain. This is particularly important when considering the role of regulatory provisions and those of certification since regulatory compliance along the chain requires a higher degree of coordination than commercial exchanges within the chains.² Thirdly and more importantly, we consider not only the contractual documents but also the practices developed within the value chain, which may specify but sometimes even contradict the texts. Contracts concluded by enterprises operating in different business and institutional environments are embedded into functional and territorial contexts, reflected in contractual practices rather than texts.³ The weight of regulatory practices does not necessarily imply a dominance of the informal over the formal; rather it forces the re-consideration of the boundaries between the two.⁴

Transnational commercial contracts, especially within supply chains, have come to perform multiple functions. In addition to the conventional exchange-facilitating function, they are increasingly deployed as instruments for implementation of transnational regulation.⁵ The inclusion of regulatory provisions concerning safety, environmental and social standards is becoming increasingly popular in supply chains,⁶ where strong leadership is exercised either by retailers or by big multinational producers.⁷ Sales or distributorship contracts contain clauses with provisions making explicit references to regulatory regimes included in codes of conduct, guidelines, framework agreements, memoranda of understanding, making them binding via contract (Cafaggi 2013b). Incorporation of regulatory standards may or may not be associated with explicit references to certification contracts that impose additional obligations and remedies in case of non performance. When no explicit reference to the certification contract is made in the supply contract, the correlation between obligations and the remedial interaction is governed by the functional links between the contracts. In some cases the use of standards affects the very core of the exchange contracts (e.g. influencing price determination or remedies against breach, such as termination) or fosters the evolution of supply contracts towards more collaborative patterns and lengthy relations.⁸ Moreover, the source of the regulatory regime, whether internal or external to the chain, private or public, may determine the enforcement choice and the coordination of multiple co-existing remedial systems.⁹

There is a reciprocal influence between standard setting and supply chain structure. Regulation, both public and private, does affect technologies of coordination in supply chain¹⁰; correspondingly, the socio-economic determinants of the supply chain structure, just highlighted, influence the choice between alternative regulatory strategies and the choice of instruments. The application of common regulatory standards along the chain influences the architecture of the chain and the contractual practices. The exchange dimension, which, in the conventional account determines the form of the chain, thence becomes only one factor and sometimes not the most important or the determinant.

1.1 Coordination via contracts in global value chains

Global production systems are organised around global supply value chains (GVCs). Within GVCs important variations concern (a) the structure of the contractual relationships among the different participants and the information flows, (b) the allocation of contractual and market power, and (c) the criteria for the allocation of compliance costs, for remuneration and the distribution of revenues (Gereffi et al. 2005). The drivers of these differences among GVCs are related to numerous factors among which worth mentioning are: (1) the degree of market concentration at the different level of the chains, (2) the size of the firms involved, (3) the technological features of the commodity and its production process, and (4) the regulatory requirements to be met, including health and safety, environmental and social standards. Although many of the considerations developed in this paper may have general application, the analysis herein proposed will have special regard to the agri-food sector. Building on the distinction between modular, relational and captive linkages, we claim that contractual instruments, including practices, constitute particular forms of coordination along the chain that respond to different communication systems.¹¹ The relationship between contractual practices and information is debated. There is agreement on the fact that tacit knowledge and, more broadly, not easily codifiable information, imposes the use of relational contracting as mode of coordination.¹² Much more contested is the view that codified information can result into modular or captive linkages and thence into different forms of standardised contracts characterised by higher level of completeness than relational contracts. The importance of the structure of the contractual relationship requires further elaboration on information, length and the role of intermediaries.

(1) GVCs coordinate firms in various ways depending on how information flows, its mode and degree of codification, and its relationship with transaction specific investments (Gereffi et al. 2005; Sacchetti and Sugden 2003). Information production is related to the competences and capabilities of the participating enterprises. Asymmetric distribution of information translates into different capability sets, which in turn impinge on the choice of inter-firm coordination. A high level of asymmetric information tends to translate into forms of hierarchical and codified transmission. A lower level of asymmetry may translate into sharing and joint production. Incentives towards information sharing are also related to trust which affects the choice of instruments. There is some evidence that a high level of trust, linked with duration of the relationship, is correlated to informal instruments (Macaulay 1985; Deakin et al. 1997, 2003). From our perspective, this would translate into the increasing importance of practices in relation to the contractual text (Pilbeam et al. 2012).

(2) The length of the chains and their shape are often associated with the type of commodity which determines, together with the market structure, the number of suppliers involved and degree of modularity. The role of networks in enabling better innovation systems and fostering more sustainable development strategies, especially in the agri-food sector, is widely recognised (World Bank 2012). From this perspective collaborative inter-firm relations would allow at lower costs forms of knowledge transfer, technical assistance, professional qualification, particularly in favour of small-holders (World Bank 2012).¹³

(3) The length and the structure of the chain are also influenced by the number and roles of intermediaries and this affects the distribution of value across participants. The increasing role of certification is extending governance to third parties whilst reducing the direct relationship between participants to the chain in relation to monitoring and, to a limited extent, sanctioning (ITC 2011a).

These differences exist not only across but also within sectors. For example, in the agri-food sector variations among commodities translate into very different forms of supply chains in terms of length, density and trans-nationality (Raynolds 2009; Ponte 2009; Cafaggi and Iamiceli 2010). Recently the emergence of values based supply chains (VBSC) has been documented (Stevenson and Pirog 2008). These chains are characterised by several attributes concerning the relationships among enterprises and with the final consumer. Trust, transparency, equitable allocation of costs and profits, sustainability feature prominently in these chains when private regulatory codes are included. They starkly depart from the conventional GVCs led by retailers or final producers where hierarchy rather than collaboration is the dominant characteristic. In the former there is a correlation between the increased regulatory burden and the allocation of costs with formal commitment of the chain leader to increase prices in order to finance development.¹⁴ In the latter the additional regulatory obligations become a cost for the suppliers that have to squeeze its margins to meet them.

Despite the differences between the two models both resulting from the inclusion of regulatory provisions, some general patterns can be identified. Standardised commodities tend to be produced in longer chains where there are many trading intermediaries, primarily trying to reduce search costs. Not-standardised commodities, for example specialty food or high premium products, tend, instead, to be produced within shorter chains where there are fewer intermediaries, which produce added value beyond reducing search costs (Cafaggi 2012a; Cafaggi and Iamiceli 2010).¹⁵

There is an important gap between the current legal framework and the development of trans-boundary supply chains. Legal systems are mostly organised around individual contracts whose regimes are not strongly influenced by the market structure and by the size of the firms.¹⁶ The legal unit of analysis continues to be the individual contract, often neglecting contractual interdependences along chains and the functional differentiation of contractual relationships based on market structure (Goetz and Scott 1981). Notice however that many of the economic approaches also look at individual transactions rather than capturing functional interconnectedness.¹⁷

Building on previous work, in this article, we advocate a different perspective that tries to reconcile the legal approach and economic realities (Cafaggi 2013a). We take supply chains as the functional unit of analysis and look at how contract law, private regulatory and certification regimes, sanction breaches of regulatory provisions concerning safety and sustainability. We refer to the food sector as main field of application. Using commercial contracts as vehicles of regulatory implementation strengthens the contractual interdependence along supply chains and influences its governance by creating control systems that ensure coordination in complying with chain of conduct codes (Cafaggi 2013b). The performance of regulatory functions via contracts results in complex contractual architectures rather different from conventional commercial contracting, where two parties, and potentially also the arbitrators, are involved. Not only is coordination among chain’s participants needed to ensure that process standards are complied with but also a transfer of knowledge between parties along the chain is necessary to implement regulatory provisions. Often farmers and small producers do not have sufficient knowledge about the content and the procedures to meet regulatory requirements. Assistance from buyers is therefore needed to instruct suppliers about regulatory technologies and their implementation and to ensure compliance with international standards. Contractual governance supports the development of systems-level innovation based on coordination and strict collaboration among participants (World Bank 2012).

We will explore the interactions among the different transnational regulatory regimes in food safety and sustainability,¹⁸ focusing on the consequences of the breach of contractual regulatory provisions which at the same time constitute regulatory violations and breach of certification contracts. By comparing different remedial regimes for the same violations we want to show how different remedial logics can complement or conflict with each other, and which results these interactions may have on the contractual architecture of the supply chain and its coordination mechanisms.¹⁹

We first show the hypotheses in which coexistence of multiple remedial systems might emerge in practice (par. 2). Then, we engage in a comparative analysis of different systems, namely contractual, regulatory and certification ones. In doing so, we present the selected variables for the comparative analysis (par. 3 and 4) and subsequently focus on some specific remedies (par. 5 and sub-paragraphs). In the last section, we elaborate on the relationships among these coexisting systems exploring possible complementarities (par. 6).

2 The coexistence of multiple remedial systems for a single regulatory violation of transnational commercial contracts

The use of transnational commercial contracts as instruments of regulatory implementation produces important changes in contractual governance of the supply chain. Not only does it increase the number of actors participating to the chain’s governance but it also multiplies the regimes regulating contractual performances along the chain. Both public and private regulators enacting the rules incorporated by reference in transnational commercial contracts acquire direct or indirect monitoring and sanctioning power in case of non compliance. When these standards are subject to certification scheme owners may significantly interfere in the governance. These transformations are not without consequences for contractual practices. The role of certifiers in particular is likely to change the relationships between contracting parties by assuming part of the functions normally performed by the chain leader in monitoring and sanctioning the breach.²⁰ Here, we refer to third party certification schemes (hereinafter TPC), where the certifier is distinct and somehow independent from both the certified producer and its contractor/buyer (Hatanaka et al. 2005; Marx 2012). This evolution should be seen in the light of the growing relevance of process standards and the necessity to monitor compliance during performance rather than at the end of the process when the product is delivered. Certification contributes to increasing the relevance of process obligations that conventional sales contract only partially takes into account. However the emergence of new types of contracts in agri-food chains, in particular farming and production contracts, suggests that the focus has become an intertwined combination of product and services that is difficult to reconcile with traditional sales.

When focusing on the remedies against violation of standards along international food value chains, we adopt a functional approach to define relevant contractual transactions: lacking a harmonised legal form, univocally qualifying contracts for the supply of agri-food products in international food chains, we will refer to “supply contracts” or to “sale contracts” (as well as to “suppliers” or “sellers” and to “buyers”) without deriving any further implication in respect of the legal qualification of the contractual relationship and the applicable piece of relevant legislation either at domestic or at international level.²¹

Having clarified this we can observe that, when a regulatory provision is breached in transnational commercial contracts, multiple remedial systems are triggered, simultaneously or sequentially:

• first, the contractual regime with the different array of remedies, primarily aimed at compensating the victim of the breach but also including the repair or replacement of unsuitable components and even more radically rejection and termination;

• second, the regulatory regime referred to in the contractual provision whose main objective is to ensure regulatory compliance²²;

• thirdly, if relevant, the certification regime which may be referred to in the contract between the buyer and the seller or may be the specific subject matter of a separate contract between the certifier and the certified (usually the seller/supplier).

These remedial systems may not concern the same party if the subscriber of the regulatory body is the buyer rather than the seller. Accordingly we sketch the different hypotheses

• I. The first hypothesis occurs when the party breaching the regulatory provision in the commercial contract is the same as the one who signed the code incorporating the regulatory regime and the certification contract with certifier. Here, the code violation may lead to the application of sanctions as provided by the code, by the certification contract and by the supply contract requesting standard compliance. Sanctions from the different regimes will concern the same party.

• II. A more complex situation arises when the party, who has undertaken the contractual obligation to comply with the private standard, is not the same party that subscribed to the private regulatory regime. This occurs for instance when a buyer (e.g. a final producer) subscribes to a private food safety standard and imposes on the suppliers the contractual obligations to comply with the standard which he has committed to. In this circumstance, the breach of contract by the supplier may correspond to a breach of the code by the buyer for failure to monitor compliance with the regulatory commitments in the contractual supply chain. Unlike the previous example (under (I)), where the breaching party was also infringing the code, here there is a split: the seller/supplier breaches the contract while the buyer/final producer infringes the code of conduct if the supplier is not compliant. The buyer will be subject to the sanctions of the regulatory regime, while the supplier will be subject to the sanctions for breach of contract, which presumably will incorporate some of the consequences of the violation of the code.

  • II.i. When a TPC scheme is in place, then the situation may be more complex. Depending on the structure of the supply chain and on the type of process to be monitored, the final producer may decide to be the sole holder of the certificate or to request suppliers to be individually certified under the same regulatory regime.²³ In the former case, suppliers will be subject to contractual liability under the contract with the buyer/final producer whereas the buyer/final producer will be subject to sanctions for breach of both the certification contract and the code of conduct (see figure below). In the latter case final producers and suppliers all fall into the situation described in the previous example (under I). It is worth mentioning that, since the certifier is himself subject to accreditation, the certified parties may be subject to additional monitoring by the accrediting bodies in case of delay or non-application of sanctions by the certifier. This can happen for example when this certifier’s conduct causes the revocation of his/her accreditation and/or the cancellation of the certification agreement with the standard setter.²⁴

• III. An even more complex situation arises when the breach of contract and the violation of the standard by the supplier imply liability, contractual or extra-contractual, for another actor along the chain in addition to the sanctions generated by the violation of the code. This is the case where a supplier or a final producer breaches a food safety code of conduct and the retailer, who sells to the final consumer, is liable vis-à-vis the consumer for non-conformity with a standard whose due compliance is shown on the label.²⁵ In this case, an additional remedial regime may be triggered along the chain as induced by the consumer’s action and the consequential measures activated by the retailer against the suppliers in breach.²⁶ Tort claims may arise between parties not within privity of contract both against the breaching party and in case of failure to detect the defect against the certifiers (Ferrari 2010).

For analytical purposes we shall focus on the first example to illustrate comparatively the different remedial logics before elaborating more on the second hypothesis where, as a result of the seller’s violation, two sanctioning systems concern the seller and one concerns the buyer for failure to monitor.

We assume that the violation gives rise to a double breach, one related to the supply contract and one related to the certification contract. However, given the different focus on process obligations, it could happen that a breach of the certification contract may not translate into a breach of the supply contract but simply in an obligation of the certified to modify the process and to ensure compliance even before delivery where, in many instances, the breach materialises. In this case the linkages are between remedies in the certification contract and obligations in the supply contracts.

3 Setting the comparative analysis among different remedial systems: the relevant variables

The following analysis is aimed at comparing (i) contractual remedies against noncompliance, as provided by contract law, with (ii) remedies provided by regulatory schemes and by certification agreements. The latter may be formally designed as private rules of regulatory associations and/or as rules provided by the parties within certification agreements, which are contracts themselves. Therefore, the comparison between (i) and (ii) aims to consider, on the one hand, the ordinary regimes for exchange contracts, mainly seen through the lens of default rules in general contract law, and, on the other hand, the certification contractual arrangements as well as, when existing, the articles of association, as application of contract and organisational law in the specific domain of implementation of standards.

We develop the comparative analysis between the two sets of rules (combining regulatory and certification regimes) on the basis of the following variables:

• (a) the pro-active or re-active features of the remedies: we distinguish between compliance induced through ex post cooperation and compliance induced by deterrence and threat of sanctions;

• (b) the impact of the remedy on the process (including production and marketing/trading processes) and/or on the product;

• (c) the impact of the remedy on the single transaction and/or on the supply chain.

Table 1 shows the structure of the analysis whereas the results will be presented in the text and tables below (see par. 5 ff.).

Table 1 The general framework

3.1 Pro-active versus re-active remedial systems

The primary aim of contractual remedies, associated to damages, is compensating the victim for the breach (Treitel 1976, 24)²⁷ and providing the party in breach with correct incentives to choose between performance and breach.²⁸ Indeed, the aggrieved party is entitled to a sum equal to the loss suffered as a consequence of the breach, including loss of profit.²⁹ In most legal systems this represents the main remedy provided by general contract rule and, in fact, the most used also at international level (Uncitral 2012, 227). In a supply contract context, part of the loss, consisting in lost or reduced value, may be recovered through the remedy of price reduction: in this case damages may be claimed only for losses other than the reduced value of the goods.³⁰

Specific performance, to ensure the expected result of the promised performance,³¹ is often subject to limitations and in fact less used.³² When markets are thick and alternatives available, the aggrieved party will prefer to claim mere compensation and enter into alternative transactions rather than relying on the execution of a judicial order for the enforcement of a contractual duty. Specific performance becomes attractive when markets are thin and specific investments high. The right to cure of the breaching party is also subject to limitations³³ and in case law it has been held that the aggrieved party is free to opt for mere compensation without being obliged to seek cure as a prior remedy.³⁴

In addition, in the case of non-conforming goods, parties can ask for replacement or substitution. However, these remedies can be subject to limitations as well.³⁵ Moreover, the ‘cure’ concerns the product but does not oblige the breaching party to remove the cause of the non-conformity from the supply chain when the defect is process related. Therefore, if, for example, the non-conformity is due to a defect in the monitoring system (Haccp), the contractual remedy cannot seek removal of the source of the non-conformity, but simply repair or replacement of the product. It can fix the outcome but does not address the cause, which in repeat interactions along supply chains may be a problem.

This remedial system in contract law is re-active because it provides ex post remedies intended to re-establish a given order without necessarily affecting the probability or future recurrence of violation. Unlike the re-active, a pro-active remedial system, even when providing ex post measures against violation, primarily aims to induce compliance with a given rule influencing human behavior, removing causes of breach, triggering cognitive and organisational responses to achieve conformity through cooperation rather than threat.³⁶ In this different perspective, corrective measures are highly prioritised whereas compensation does not represent a viable and available alternative. In fact the existence of an harm or damages is not a requirement to issue a sanction in certification regimes. As we see below, this is the case for most regulatory and certification regimes where compliance with the code is stated as the primary objective.³⁷ Furthermore the definition of breach differs. Certification schemes allow variations along performances all above the breach threshold. The idea is that performance can meet the standard 100, 80 or 60 % but none of these constitutes a breach. The breach line is only below 60 % compliance with requirements, often distinguished between major and minor.³⁸

The differences in objectives might be based upon different premises. The underlying premise in certification and regulatory regimes seems that most of the times breaches are not the outcomes of intentional and rational choices by the breaching party; rather the result of negligent mistakes or coordination problems along the chain which can be repaired within a cooperative relationship between certifier and certified.³⁹ Even within escalating system the harsher sanctions are meant to induce compliance rather than punishing the infringer or compensate the victims. In sum the logic of contract remedies focuses on the consequences stemming from breach and in particularly the losses suffered by the victim.⁴⁰ The logic of certification focuses on the causes of the default and the means to ensure compliance after the infringement.

3.2 Remedial impacts on product v. process

Across western legal systems contract law is mainly construed upon the exchange model of economic transactions. A contract, so goes the conventional wisdom, mainly serves the purpose of favoring exchanging goods or services for value (Reimann and Zimmermann 2006). Within this domain, sale of goods represents the reference model for general contract law also in the most recent developments (Grundmann 2010).⁴¹ Relative little attention in sales is paid to process related requirements, generally associated with other types of contract, primarily service contracts. Process related obligations deal with ‘facere’ rather than ‘dare’. Reaction to non compliance calls for changes in production process rather than product repair or replacement. Process related standards are associated with collective contractual governance (see below 3.3)

In conventional contract law the concept of compliance with contractual duties along supply chains is then mainly built upon the one of conformity of goods or warranties, depending on legal traditions.⁴² These concepts are mostly focused on characteristics of goods or services that relate to their structure and function as aptness to satisfy the buyer’s expectations.

To what extent these expectations incorporate compliance with standards concerning products only (e.g. the quantity of animal fat included in a food product) or processes also (e.g. the adoption of traceability techniques, good agricultural practices including integrated crop management, compliance with environmental requirements like carbon foot print or pests control) depends on contract drafting and to some extent to the qualification of the contract. However, lacking explicit reference to process-related obligations, it can be questioned whether the current notion of conformity and the one of warranty are wide enough to cover these aspects.

Only partially can this result be achieved through a broad interpretation of the criterion of fitness for purpose or the one of merchantability as referred to warranties (being these expressed or implied) or having regard to other requirements concerning product processing or handling (e.g. packaging, transportation and the like), which can be implied in a sales contract.⁴³ In some cases this approach has led to the recognition of contractual duties concerning, for example, the segregation of contaminated inputs whose presence is hardly observable ex post as product-related quality (e.g. in the case of commingling between GM and not-GM product).⁴⁴ By contrast, in other cases compliance with standards is not intended to necessarily influence the quality of the product, even indirectly, since standards may serve the different purpose of protecting the interests of the environment, of workers or local communities.⁴⁵ In these cases, contractual remedies designed around product related obligations may fail to ensure effective compliance.

Indeed, this approach, generally favouring product-related criteria to assess compliance, influences the system of contractual remedies as well, as these are much more focused on the consequences of the breach related to the final good rather than on the process to produce it. Although different approaches might emerge in specific contracts, mainly in service contracts, a general tendency of contract law in favoring products-oriented remedies over process-oriented ones can still be observed.⁴⁶ More specifically, contract law does not usually provide the party not in breach with injunctive relief that can direct the breaching party to change production process and adapt it to the requirements of the contract. This shortcoming is highly relevant especially when process rather than product standards are at stake. The non-breaching party can specify the result it seeks to achieve but cannot generally impose at remedial stage changes of the production process via injunctive relief in order to ensure compliance with the suppliers’ undertakings.⁴⁷ Some case law shows that even contractual damages may be rejected in a purely sales contract perspective if no express warranty for services can be identified in the contract.⁴⁸

By contrast, regulatory and certification remedial systems, including to a certain extent quality assurance regimes, prioritize the focus on process over product substitution or compensation for damages. Codes of conduct define process obligations related to safety, environmental and social requirements.⁴⁹ The increasing attention to sustainability is changing both the typology of contracts, their content and the mechanisms of compliance. Certification regimes ask certified to fix what went wrong in the production process causing products’ fallacies; if necessary they require changing the organisational framework of production and its governance by contract. As it is shown later, this happens not only as a consequence of the increasing importance of process standards over product standards (Henson and Humphrey 2009),⁵⁰ but also as an effect of evolutionary dynamics within product standards themselves as for example safety management standards. Indeed, even when standards refer to (the safety or quality of) a product, corrective measures aim at revising the process before dealing with the product (see par. 5.2). Clearly a major factor is determined by the increasing interest expressed by consumers and NGOs in compliance with environmental and social standards, which can hardly be captured in the product but have become the subject matter of contractual obligations owed by the seller to the buyer and increasingly by the retailer to the consumer. Examples include from bans against child labour to shade-grown plantations aimed at the conservation of migratory birds. Process requirements are included in the contract via the incorporation of codes of conduct, guidelines and principles that become mandatory and legally enforceable before courts or before private dispute resolution mechanisms (Cafaggi 2013a). This process comes with some tensions. Sustainability requires collective governance of processes along the chain which are hard to reconcile with conventional sales contracts. The contracts include ever more exchanges between services (from the ‘buyer’) and goods (from the seller). These services include different segments of the chain and need some form of governance beyond the specific bilateral transaction.

It is important to underline that, while referring to process, we consider the whole dimension of the economic value chain of a product, thence including not only manufacturing and packaging but also marketing and trading. In fact, the modes of accessing intermediary and final markets may play a major role in ensuring compliance with standards especially when commodities travel across jurisdictional borders characterised by different contract law regimes and standards (Coglianese et al. 2009). Moreover, being these the more critical phases for value allocation along the chain, influencing such access has a significant impact on deterrence, as it happens when decertification from a regulatory regime infringes seller’s ability to contract with some exporters or other intermediaries.

In sum there is a growing relevance of product related standards both in the more conventional aspects of quality and safety and in relation to dimensions integrated within the concept of sustainability that used to remain outside of the domain of transnational commercial contracts. Certification regimes and the codes of conduct are more process sensitive. By incorporating these codes into transnational commercial contracts the combination between product and process obligations is changing as is the combination between sales and service provision.

3.3 The impact on the single transaction versus the impact on the supply chain

In a commercial context the current approach in contract law looks at the consequences of the breach affecting the parties to the contract but, due to the privity requirements, does not specifically address the effects on the contractual relationships along the chain neglecting the strong interdependencies between performances.⁵¹ If A breaches the contract with B and, for example, violates the code of conduct related to safety requirements, the effects of that breach on the contract between B and C are only partly internalized via the remedies owed by A to B.⁵² Contract law operates by segmenting relationships. Further down the chain what happens as a result of the first breach in the relationships between C and D, D and E and so on is not a matter to be litigated in the dispute between A and B, as the principle of privity of contract suggests.⁵³ This approach artificially fragments interdependent relationships taking place along integrated chains unless such interdependence leads to explicit mechanisms of contractual coordination as in the case of agency relations between subsequent buyers⁵⁴ or if sub-suppliers substantially enter into contract negotiation providing for distinct warranties, though implied.⁵⁵ Recent contractual practices suggest that retailers define general terms and conditions not only identifying a lead supplier, which may be a single entity or a consortium, but also warranting direct claims towards third parties.⁵⁶ There is an increasing attention paid by multinational to second, third and fourth tier supplying layers and the necessity to reduce the degree of delegation to first tier suppliers.

This conclusion holds true in general but becomes of paramount importance when a regulatory provision concerning safety, traceability, environmental standards is breached. Take food safety provisions concerning the implementation of the hazard analysis and critical control points (HACCP).⁵⁷ This is a process standard that supply chains have to implement by identifying the critical control points along the chain. It assumes the creation of an organisational structure that coordinates the various critical points along the production process linked through bilateral contracts and general protocols. The objective is to detect hazards and react promptly to minimise risks of harms.⁵⁸ If one party defaults by not detecting the hazard or removing its consequences, the whole system is called to intervene and react in order to minimise the potentially harmful effects. According to the regulatory perspective the consequences of the violation (breach) should be fully internalised by all the other critical points that have to react and remove the hazard not detected. Not only are the consequences of individual defaults ‘socialised’ but so are the obligations to react and mitigate since they cover the whole relevant segment of the chain.

If we were to think in traditional contractual terms, we would say that in the case of breach of regulatory provisions there is a duty to cooperate among the different control points and that, after the breach, there is a duty to mitigate on each party, regardless of whether there is a direct contractual relationship with the party who committed the breach.⁵⁹ Notice that a duty to mitigate in contract law rests on the aggrieved party himself with important theoretical implications on the efficient breach ‘doctrine’. Within the conventional efficient breach approach the choice of the breaching party is limited to the consequences of the immediate transaction and does not internalize third parties’ behavior along the chain involved in collective regulatory regimes. Indeed, the anticipation of due mitigating conduct by the aggrieved party might increase the incentives for an “efficient breach” on the other party.⁶⁰ Going back to the example above, in the context of a safety regulatory regime unlike under current contract law, under the code of conduct she has undertaken to comply with, E could be asked to cooperate and mitigate even if it is the furthest away from the contractual relationship within which the breach has occurred.⁶¹ While according to the traditional contractual account, it would not be legitimate to ask E to mitigate losses created by B’s breach in the context of the contractual relationship with A, the regulatory regime, included in each contract along the chain, allows for this result to be achieved and expands duties to cooperate and mitigate by recognising the functional interdependence among parties within the chain. Clearly the costs associated with mitigation would have to be compensated by the parties liable for the default if there is only one responsible for the malfunction.

Such an approach requires a form of contractual governance organised around the chain or the modules of the chain involved in the implementation of the regulatory provisions, going beyond contractual fragmentation still reflected in the conventional world of contract laws.⁶² Different tools can contribute to redesign the contractual structure along this line: the incorporation of regulatory provisions into the contractual texts of the parties involved; the provision of cooperation duties in favor of third parties acting along the chain; the use of assurance services by certifiers as enabled by contract to monitor over multiple actors.⁶³

In sum the focus of contract law remedies is on individual transactions and limit the consequences of the breach to the immediate parties and so does the duty to mitigate. Regulatory and certification provisions broaden the scope and include many components of global supply chains to react to breaches and ensure compliance with product and process standards.

Some interim conclusions can be drawn. It appears that the approach taken by commercial contract law differs from that of regulatory and certification regimes incorporated by reference. (1) The former aims at redressing the victim of the breach and so inducing compliance by deterrence through a re-active approach; whereas the latter pro-actively tries to restore compliance with regulatory process in order to pursue regulatory objectives by stimulating forms of cooperative enforcement. (2) The former focuses mainly on products, the latter on process. (3) The former concentrates on individual transactions while the latter focuses on the interdependence of contractual relationships along the chain and creates collective governance mechanisms.

The analysis below will compare the different, at times conflicting logics that today coexist when a regulatory provision is breached.

4 Issues and challenges through the lens of contract remedies theory

The illustration of the consequences of breaches concerning regulatory provisions poses some serious challenges to the traditional view in contract scholarship. In particular it calls on the necessity to review the perform/breach alternative and the so-called efficient breach doctrine. For two main reasons, worth elaborating further.

The first reason concerns the different incentive structures to be considered when moving from the single transaction to the supply chain unit of analysis. The consequences of the breach may go well beyond the welfare function of the individual party in breach and that of the victim. In fact, in a supply chain this is always the case since contractual performances operate within a coordinated structure and there are many ‘victims’ of a single breach that occurs at the beginning of the chain especially when specific investments along the chain make outside options costly or impracticable. The ‘value’ of the contract, especially one enshrined in the regulatory provisions, is not restricted within the exchange function.⁶⁴ Moreover, the decision to perform or to breach is influenced by the exposure of the party in breach to measure which could be activated by several actors along the chain, including regulators and certifiers. This situation is similar to the one arising in the case of third party beneficiaries to the contract, although, here, third parties might not be conceived just as another party to the exchange but could be seen as holder of distinct interests influencing the value of the linked transactions.⁶⁵ So, for example, a supplier may be required to comply with sustainable standards given the pressure exercised on the chain by certifiers regardless the value of the single exchange transaction with the buyer.

Secondly and in relation to this, the ‘decision’ to breach a regulatory provision triggers a duty to mitigate on several chain participants besides the contractual partner of the party in breach. Whereas in contract law it is generally accepted that remedies, especially damages, are influenced by the aggrieved party’s ability to take precautions (before the breach becomes final) and/or to mitigate losses (once the breach becomes so) (Hermalin et al. 2007, 104), the supply chain would maximize internal mitigating opportunities but would request much more a complex analysis to assess which parties are in the best position to take precautions along the chain or to react to defaults; not being constrained by the single transaction borders, such analysis could resemble one in torts rather than in contract when considering joint and several liability.⁶⁶ Indemnification should follow similar patterns.

Some of the many challenges posed on current theories by the case of violation of standards along the chain can be sketched along the above proposed frame of variables.

(1) Reactive versus proactive. The conventional contract law framework based on the compensation principle and on the primacy of the expectation interest seems more consistent with a “reactive” rather than a “proactive” approach to contractual remedies. Indeed, that analysis assumes that parties react to the threat of measures, whose economic value is assessed against the expected benefits and costs of individual decisions (to breach or perform). That approach becomes problematic if and when it is acknowledged that parties may not be able to assess such values ex ante and that precautions (and their costs) are not easily observable or verifiable (Scott and Triantis 2006; Triantis 2009). In other words due to the interdependencies and to the difficulty arising in risk management of agri-food supply chain parties may not be able to quantify ex ante costs and benefits of the breach/perform alternative and in the case of breach link the cost to the choice of remedy by the aggrieved party. By using a “pro-active” approach, as exemplified below, regulatory and certification schemes rely on a different incentive structure, based on the transfer of relevant knowledge reducing the costs of compliance and increasing the value of the parties’ economic activity in the medium-long run. The breach in that context is not the expression of an exit option from the individual relationship or from the chain; rather it is the result of a regulatory failure. At the very core, parties to the chain fear termination much more than damages as a consequence of their breach.⁶⁷

(2) Product versus process. Whereas the mainstream theory tends to assess the value of a transaction in terms of product value in order to judge the alternative between performance and breach, such assessment is much more complex if the contract calls for compliance with process standards. Indeed not all process standards involve a straightforward upgrade of a product and, whether, this upgrade might not be priced in the market. In some cases related to environmental protection the introduction of standards aims at creating a market which does not exist⁶⁸; in other cases, it aims at protecting social values or third party interests, which would be hard to incorporate into product pecuniary values to be easily defined. The performance/breach assessment would then fail to capture this dimension according to the conventional approach.

(3) Single transaction versus chain dimension. In the perspective of the theory on contract remedies, the shift from the single transaction dimension to the chain dimension would trigger at least two types of challenges. One would require an examination of the extent to which and by which means parties along the chain can activate measures reacting to the breach and directed at ensuring compliance. As we show below, regulatory and certification schemes tend to provide for some extension of monitoring and sanctioning powers along the chain, thereby influencing the incentive structure underlying the decision to comply or to defect. Another aspect worth mentioning concerns the type of interest at stake: regardless the legitimacy of third parties’ action against the breaching party, to what extent can the legitimate plaintiff recover a loss which goes beyond his/her individual domain, being linked, for example, with reputation effects extending throughout the chain? Can remedies connected with the use of certification be considered as an attempt to incorporate this different value in a way that damages would not be able to do?

By providing evidence of current practices, the analysis below will try to elaborate on some of the lines sketched by these considerations.

5 Addressing remedies for violation of standards in food global chains: evidences from practices

This section of the paper is aimed at comparing different remedial systems for violation of standards within transnational value chains, distinguishing between remedies provided under contract law and remedies provided within regulatory and certification regimes. We refer to the food sector as the field of application.

In doing so, we shall focus on remedies aimed at correcting the problems that led to a nonconformity.

5.1 Ensuring regulatory compliance by fostering cooperation along the chain: re-active versus pro-active approaches

The focus of the remedy in contract law is on the consequences of the breach, whilst in certification and regulation it is on the causes of non-conformity outlined above. This is even more important in the food sector due to the possible impact of a breach on human health or other relevant public interests, including social and environmental ones.

As seen in par. 3.1, although in theory corrective action could be enforced through specific performance, in practice this remedy is not always available under contract law and, if enacted, it is confined to the transactions’ outcome without affecting the risk of recurrence of violation in the future. Also replacement of defective goods, when applicable, is unable to ensure continuous compliance and, in any case, its use may be restricted to particularly serious forms of breach. Moreover in the area of food products the availability of corrective measures may be even more limited. Indeed, unlike other areas like cars or electronics, a non-conformity is generally not subject to cure or repair but only to replacement and recall from the market.⁶⁹

Although case law is quite limited, it should be acknowledged that, following this framework, in practice, in the food sector like in many others, damages are by far more used than specific performance and corrective remedies in contract law. Moreover the priority of damages is not superseded by any general rule prioritising prevention, cure and correction over mere compensation. The lack of such escalation and the final availability of monetary measures as potentially and wholly satisfactory for the victim represent distinctive elements of a remedial system which is reactive rather than pro-active.

By contrast in regulatory and certification schemes the purpose of the remedies is to correct the flaws in the production process and preventing (an increase in) risks rather than sanctioning, which happens only as a last resort. Prevention is driven by prompt intervention more than by incentives induced by ex post remedies following the breach.⁷⁰ Reporting duties, periodic auditing, corrective measures are widely prioritised to ex post sanctions like rights cancellation and contract termination.⁷¹ Regulatory schemes also tend to escalate corrective measures distinguishing between minor and major nonconformities.⁷² Moreover, they call for cooperative practices in the relation between certifier and certified firm.⁷³

With prevention as a prior objective, regulatory schemes tend to emphasise the importance of monitoring steps along the whole production process through site visits, sample analyses and the like. The predetermination of standards offers a guide and a framework facilitating monitoring both in cases of second party control (as enacted by the buyers) and in cases of third party certification (as enacted by independent assurance services providers). Incorporating these logics, the supply contract does not only impose compliance with standards but, when requesting certification from the supplier, may also leave more space for corrective remedies as enacted by the buyer within the contractual relation with the supplier.⁷⁴

At this point it should be acknowledged that this methodology is not unknown in contract practices either, although here we observe a different approach. Indeed, scholars claim that, in order to lower certain types of transaction costs, parties tend to incorporate into commercial contracts (or to even autonomously develop) specific standards for performance assessment.⁷⁵ In fact, a more pro-active approach in inter-firm collaboration contracts is also described by scholars engaging in the observation of contractual practices in the context of technology services or innovation enhancing collaboration: monitoring procedures are indeed provided along the collaborative relation as a means for prompt error detection, adoption of corrective measures, problem solving, enhancing innovative solutions (Helper et al. 2000; Collins 2003; Jennejohn 2008; Geis 2009; Gilson et al. 2009).

Though revealing very important trends in contract theory and practices, the issue is to what extent these analyses represent the core and the common approach taken by contract laws. Indeed, they might rather show that the conventional framework of contract law may be far from what enterprises materially expect when engaging in collaborative relations,⁷⁶ especially if innovation-enhancing activities are at stake. They also show that some firms, mainly larger firms, turn to “tailor-made” contractual design in order to better shape the structure of incentives and the plan of their collaboration.⁷⁷ On the contrary in relationship between MNCs and SMEs along the chain the former impose general terms and conditions that the latter can only take or leave. The costs of this contract drafting may be high, requiring specialised and often interdisciplinary skilled service providers. From this perspective, the legal services market shows fundamental weaknesses worldwide and access to it is in any case limited for most firms, mainly small and medium ones, due to financial or organisational constraints.⁷⁸

Regulatory and certification schemes might be able to address some of these weaknesses: (i) providing enterprises with monitoring mechanisms and procedures that contract default rules do not provide given that they are focused on the value exchange in bilateral transactions and (ii) offering a map for contractual design at lower costs rather than the ones imposed by the access to legal services in the global markets. Whether accuracy of monitoring provided under regulatory and certification’s schemes is high enough to induce the proper level of performance along supply chains, is beyond the scope of this paper (Choi 1998; Blair et al. 2008; Ferrari 2010).

5.2 Product and process in non-conformity

There is a significant difference between the definition of nonconformity in regulation and contracts, especially contracts related to goods exchange (sales). The distinction can be explained and simplified by saying that contract performance and breach are mainly focused on product standards,⁷⁹ while in regulation, including that of goods, they are concerned more and more with process standards (Henson and Humphrey 2009, 4).⁸⁰ Clearly this would not be entirely accurate if, instead of sale of goods, one considers service contracts where processes historically have played a more important role. Yet, as we know, sales law has played a paramount role in defining the principles of contract law and it is still safe to say that in contracts standards are primarily designed around products rather than processes. Moreover, food supply chains mostly rely on the use of goods or service exchange contracts, although increasing use of more sophisticated contractual schemes is taking place in practice in the form of contract farming or agricultural production contracts where the service component is becoming rather relevant.⁸¹ The latter, introduced by many domestic legal systems, suggests the necessity to link goods and services given the increasing relevance of production processes for the quality of the final product. Often the production by the supplier is linked to transfer of knowledge and service provisions by the buyer aimed at ensuring better quality and safety and compliance with regulatory requirements. As seen in par. 3.2, this increasing relevance of compliance with process-related standards within the contractual relationship may lead to extend the concept of conformity and the one of warranties (either express or implied) to the extent that such compliance influences the quality of the product. However, it remains doubtful whether this type of nonconformity may lead to injunctive reliefs and corrective remedies rather than price reduction and damages.

In regulatory regimes concerning food chain, non conformity may have different meanings from contract laws, both domestic and international. In a narrow sense, as we have seen, it coincides with regulatory compliance and may be associated with a process standard.

There is however a deeper change going beyond the difference between product and process standards. Looking at many of the sustainability standards, new concepts of best practices emerge and its close link with (non) conformity becomes clear. Parties have to comply with good agricultural practices (GAP) which often refer to the compatibility with the environment and with local norms defining policy choices about the balance between agricultural development and environmental protection.⁸² These practices often refer to the respect of communities’ rights and the duty to compensate when traditional land use rights are relinquished.⁸³ Some of these standards represent ancillary regulatory tools complementing ordinary process standards: even if exempted from the ordinary sanctioning system provided for other standards, they may be subject to verification so that publication of the assessment results within a specific database creates an important reputational effect within the community of subscribers.⁸⁴ Other schemes are more specifically focused on social and sustainability criteria and provide for an ad hoc certification showing compliance.⁸⁵

Looking at these systems as complementary, three situations should then be distinguished:

• i) one in which contract rules and regulatory schemes cover different types of nonconformity, e.g.: the former related with product quality (i.e. the percentage of animal fat), the latter with process standards (i.e. segregation of ingredients coming from different suppliers in order to ensure traceability); here, though related to the product, compliance with regulatory (process) standards does not necessarily influence product conformity with contract requirements (e.g. commingling of ingredients of different suppliers using similar production techniques in similar environmental conditions with equal percentage of animal fat may lead to equally conforming products);

• ii) one in which compliance with regulatory standards leads to nonconformity of goods also under contract rules (e.g. lack of testing on ingredients makes the product unfit for human consumption);⁸⁶

• iii) one in which compliance with regulatory standards may be totally irrelevant for product conformity since it affects on different interests such as the environment, the respect of human rights, the interests of local communities (for example, certified shade grown plantations are mainly due to ensure birds friendly environment).

Whether a link between compliance with regulatory standards and product conformity may be established (as in ii) does not only depend on technology and physical processes. It may also depend on the ability of the market to “commodify” such compliance in a way that influences product marketability. The use of sustainable labels helps to push this process forward, at least as far as parties are able to substantiate these labels with a clear reference to standards as requirements for product conformity and express warranty.⁸⁷

If this evolution might emerge at the level of compliance and breach, which type of complementarities do we then observe in terms of remedies? In this respect, it seems that the distinction between the reactive and proactive approach, the former being more linked with the contractual remedial system and the latter with the regulatory one, still holds. As seen in par. 3.1 and 3.2, both specific performance and correction of defective processes, which are necessary for the production of conforming goods, may be subject to limitations and more likely lead to the goods’ substitution (also via secondary market) without guarantee of process correction in the specific transaction and (even less) in future ones.⁸⁸ Similar concerns regard the enforcement of duties or warranties which are not immediately connected with the quality of the product as characteristic performance, like in the case of social or environmental standards: in a contractual perspective these forms of breach may more easily lead to liquidate damages than provide for injunction reliefs.⁸⁹

5.3 Corrective remedies against nonconformity and the value chain dimension

A third related difference between the commercial and the regulatory logic is that the former concentrates on individual transactions while the latter extends to the web transactions within the supply chain.⁹⁰ This difference is linked to the previous distinction between product-related remedies (the contractual ones) and process-related ones (the regulatory and certification measures); indeed, the process normally involves collaboration of several players and multiple transactions.

As mentioned some process standards are incorporated into product quality assurance and into warranties whereas others remain outside nonconformity assessments. Remedies may differ if they refer to nonconformity of goods for violation of process standards concerning quality or safety or if they refer to process standards related to the protection of environmental or community interests that can be integrated into the conventional notion of nonconformity with some difficulty.

Process standards presuppose collective contractual governance. This consideration implies that, within regulatory schemes, remedies concern the whole supply chain or at least those segments involved in hazard detection and reparation. A nonconformity triggers a wider enquiry. Cooperation among parties not directly linked by bilateral contracts is needed to identify the origins of the hazard; it is generally organised by making the product traceable, clearly defining the different steps of the identification of defects and remediation process in the case of nonconformity.

The focus on single bilateral transactions does not capture the interdependencies of the regulatory process associated with the implementation of the standards (1) when products do not conform with safety and quality requirements or (2) when processes do not comply with agricultural good practices and principles of environmental and social sustainability. While cooperation aimed at joint problem solving is necessary across the chain, the consequences of the breach may go beyond the single transaction domain with repercussions on the certification and the regulatory domain. Cooperation among supply chain participants is required both to prevent and to remedy the failure that created the hazard or did not detect it promptly.

Given this approach, contract law remedies show at least two possible shortcomings:

• compliance with contractual duties is generally required by the parties to the contract and not by third parties even if participating to the same chain⁹¹; however, looking at the general terms and conditions, ever more we see the emergence of clauses that bind the final or lead supplier for performances of the entire upstream chain;⁹²

• specific compliance with contractual duties may not be awarded if, in any other way, specific performance would affect existing relations between the liable party and a third party.⁹³

How do regulatory and certification schemes contribute to overcome these problems?

Ordinarily, they extend the scope of compliance well beyond the boundaries of the single certified firm and so follow the paths of the supply chain. As a consequence, implicit or explicit monitoring duties are imposed to such firm with regard to subcontractors and/or suppliers in order to ensure adequate compliance with the standards. When required by the complexity of the chain, monitoring duties are imposed on each participant that outsources part of the functions to third parties.⁹⁴ Furthermore the link between due diligence and monitoring the entire supply chain is expanding the scope of contractual definition.

5.3.1 Different models for regulatory enforcement of corrective measures along the supply chain

We here compare different models of regulatory coordination to ensure conformity or to react to nonconformity along the supply chain promoted by certification regimes and at times incorporated into the contractual governance. Here are the most common ones.

(i) The multiple certification model. All participants to the chain have an individual and separate certification and are personally responsible for taking due measures for compliance⁹⁵; in order to accomplish this result, the regulatory and certification scheme may request that the certification applicant provides a list of suppliers or differently ensures the involvement of each chain participant in the certification process or that it reports due certification to the certification body.⁹⁶

(ii) The single certification model. The certification holder remains a single firm in charge of monitoring duties, corrective actions and responsibility concerning the spheres of action of its subcontractors or suppliers⁹⁷; the certifier itself may in any case retain the power to inspect and monitor over the certified firm’s suppliers and/or subcontractors.⁹⁸

(iii) The group certification model. When there is group certification, a comprehensive certified unit is constituted with a central implementation system (CIS) or an internal control system (ICS) coordinating monitoring and adopting corrective measures; this unit is generally also the certification holder whereas no individual certification is requested for actors operating into the unit.⁹⁹

(iv) The mixed model: coupling central implementation system and multiple certification. A supply chain management system is established, ensuring compliance along the chain and monitoring the effective certification per each player; here certification is applied to each player but, unlike in the first case, a comprehensive control system is established with coordination and monitoring functions; moreover, the unit boundaries are determined following the whole supply chain approach.¹⁰⁰

To what extent can these models be seen as instances of supply chain certification exemplifying the role of coordination for remedial purposes? Although they introduce collective governance mechanisms for monitoring compliance with standards in multiple relations settings, these models do not always follow the chain structure.

Indeed, the above analysis suggests that the model of group certification (under iii) is generally conceived as targeting horizontal groupings of smallholders carrying on homogeneous activities. Only sometimes it is evolving towards more articulated groupings possibly resembling (segments of) supply chains.¹⁰¹ It is worthwhile specifying that, since the homogeneity of needs concerning standard compliance is still relevant under this respect, a difference between group certification and multi-group certification is introduced by some scheme.¹⁰²

A more specific instrument for a supply chain compliance control is, however, attained in the fourth case among the ones above mentioned (the so called “mixed model” under iv): here explicit responsibility is given to the organisation in charge of the chain of custody along the filière.

(v) A different evolution of a multi-stakeholder organisation that is in charge of implementing standard compliance in the food supply chain is the one in which a comprehensive association is set up, including producers, traders, industry and civil society, to sustain and implement the regulatory scheme: in this framework, the compliant firm is at the same time subject to the rules of the association and to the sanctioning powers of its governing bodies (which are conceived as multi-stake as well).¹⁰³ Given the size and the openness of the association, however, here the supply chain logic tends to blur towards a sector or a commodity logics.

When conforming with a supply chain dimension, the remedial structure also changes accordingly. Indeed, when chain coordination is made explicit (either by vesting a control management unit with monitoring power or linking the several certification contracts with each of the chain’s participants), the agent entrusted with auditing and sanctioning powers may trigger correction along the chain without being barred by the privity principle and inducing cooperation among participants well beyond the conventional contractual perspective. For example, by monitoring the chain of custody of a given product due to be handled by different service suppliers, the certifier may become aware of nonconformities due to different actors along the chain, whose correction may prevent risk occurrence to a higher extent than it could be achieved should the corrective measure be limited to the first audited producer. This type of coordination is more likely to develop compliant behaviours and practices along the chain since all parties involved directly perceive the (collective as well as individual) benefits deriving from chain compliance.

Conclusively, the emergence of standard implementation coordinating structures, being these contractual, organisational or even informal, may be of primary importance to shape mechanisms of compliance in accordance with the supply chain dimension. In fact many of these structures tend to take the form of inter-firm networks fostering system level innovation (Cafaggi and Iamiceli 2012).

5.3.2 The enforcement of corrective measures along the supply chain: regulatory versus contractual approach

Having described these models, one could conclude that the need for involving multiple actors along the chain reinforces the tension discussed earlier between the conventional approach to contract and regulatory approach. Indeed, contract law in its traditional interpretation not only focuses on liability and ex post remedies in general rather than on preventive and corrective measures; but, even considering the exceptions in the food area, it is also guided by the principle of privity, that prevents it from extending the scope of remedial provisions beyond the single transaction and the boundaries of the parties’ domain (see par. 3.3). Different interpretations have been proposed to reconcile the traditional contract law approach with the supply chain dimension. However, the debate is still open.¹⁰⁴

From this perspective, the incorporation of the regulatory dimension into the framework of contractual governance goes beyond the reference to duties and standards: it also serves the purpose of assigning monitoring and corrective powers to actors not involved in assessing debtor’s performance according to the conventional contractual perspective. It hence changes the contractual architecture (Cafaggi 2013b).

The combination between contract and regulatory tools generates advantages, since it stimulates a multiple and complementary source of information and risk detection along the production process and therefore increases the possibility of preventing accidents that may also negatively affect contractual performance. Even from this perspective, however, the different logics of the two systems risk undermining the effectiveness of their combination if coordination is not adequately ensured. It could happen, for example, that those who have the useful information about non compliance (e.g. final producers or retailers using more sophisticated detecting devices) may not dispose of prompt and effective remedies in terms of risk prevention and those who do dispose of such remedies (e.g. certifiers or other auditors) do not have useful and prompt information. Adequate coordination among remedies and their sequence should therefore be attained, starting from a sound contractual design and explicit coordination mechanisms among supply contracts, standard incorporation and certification agreements; an example could be the provision of information duties and “whistle blowing” measures as imposed by contracts beyond the reach of bilateral relations.¹⁰⁵

Table 2 summarises the main findings of the analysis developed in par. 5.1, 5.2 and 5.3.

Table 2 Corrective remedies against non-compliance

6 Different remedial systems in action: exploring functional complementarities

The analysis above shows significant differences in the role and functioning of remedies against breach as provided by either contract law or regulatory and certification schemes. Indeed, (1) contractual law remedies aim at redressing the victim of the breach inducing deterrence through a re-active approach, primarily aimed at compensating the aggrieved party for damages determined by the breach; whereas regulatory and certification regimes pro-actively try to restore compliance with regulatory process in order to pursue regulatory objectives related to food safety, environmental protection and consistency with good agricultural practices. (2) The former class of remedies focuses mainly on products, the latter on process. (3) The former concentrates on individual transactions while the latter focuses on the interdependence of contractual relationships along the chain.

As broadly analysed above, these two regimes are intended to coexist and such coexistence may generate, at least in principle, complementarities as well as possible tensions. The two logics are the consequences of different objectives often coexisting within the same chain. Clearly they have to be reconciled within an integrated scheme of supply chain’s contractual governance. We recommend that organizations drafting transnational commercial contracts, model laws and guidelines take duly into account the evolution of the supply chain and the relevance of regulatory provisions in its governance.

The previous analysis suggests that cooperation to address the consequences of violations of regulatory provisions included in contracts does not only occur before but also after the breach, when appropriate remedies have to be selected and implemented. While in previous analysis the breach has often represented a breaking point in the contractual relationship, we claim that in the context of supply chain governance breaches may not have such a disruptive effect; hence the distinction before/after the breach and the consequences for parties’ conduct, though meaningful, may not represent the end of cooperation between contracting parties and even more importantly between them and the other participants in the supply chain. This modification is driven by the combination between conventional contractual remedies and remedies that become available when integrating the certification regime(s) into the contractual architecture. This combination as illustrated can occur by direct incorporation into the contract or by linking the supply contract with the certification contract even without direct incorporation.

What is the role of parties’ autonomy in respect of these changes? Contract law remedies are provided by (domestic or international) law as also based, though not exclusively, on default rules.¹⁰⁶ This means that, within limits that may vary from one legal system to another, parties are often able to depart from these rules or adapt and specify them in order to tailor remedies against breach in accordance with their own specific needs. Parties can expand or reduce the number and scope of available remedies; they can prioritise remedies and establish forms of hierarchies within them; they can correlate remedies with the type and effects of the breach especially considering the impact on the supply chain. In particular parties are normally free to escalate contractual remedies reducing the space for termination, leaving more room for corrective measures, cure and specific performance. We have shown that the architecture of contractual remedies may be modified and expanded by using techniques with different governance implications, among which are direct incorporation of regulatory standards and separate but linked contracts.

Framed in this way, one could conclude that the examined aspects of contract law rules (as more re-active than pro-active, more oriented to product than to process assessment, more focused on the bilateral relation than on supply chains) do not represent an obstacle as such, as parties may depart from this approach by the means of private autonomy.

Moving from this perspective the reference to practice may provide useful insights. This article has shown indeed that, in some contexts, businesses engage in contractual design with the purpose of enriching the set of remedies provided by contract law. More particularly, they adopt quality assurance schemes, identify control points and provide contractual parties or third parties with the power to monitor the adequacy of performance, assess the results achieved, award excellence, detect errors and instruct correction.¹⁰⁷ Of course, the expansion of contractual scope related to the use of certification schemes does not come without costs. The more specific these rules are with respect to contractual relationship, the more costly it is for parties to engage into comprehensive contractual design. In long and complex supply chain contracts tend to be very simple and managed by procurement agents which refer to the general terms and conditions. In these settings transaction specific issues may be left out of the initial contract. This is another side of the known trade-off examined by law and economics literature between the ex ante costs of contracting and the litigation costs faced ex post by parties when relying on courts’ decisions based on open ended rules provided by law (Scott and Triantis 2006).

Does third party certification offer a more viable option for parties not willing or able to engage in customised design of contractual remedies? Indeed, not only private regulation provides for standards as substantive rules defining processes and outcomes of economic activities. It also “standardises” complementary remedial systems mainly operating through a market of assurance and certification services.¹⁰⁸ In other words certification schemes could be seen as complementary enforcement mechanisms due to be incorporated into the contract at lower costs than those incurred in customised drafting of contract rules on monitoring over compliance and delivery of due performance.

Is the market of certification services more accessible than the market for legal services needed for a “tailor-made” contractual design¹⁰⁹? Does it provide more effective solutions in terms of quality of contractually expected performance? The possible answers do not only depend on the features of this market, as this is more or less concentrated, and as service providers are more or less reliable in terms of independence and skills (Blair et al. 2008). They also depend on the type of contractual relationship, whose performance needs to be certified, and the type of supply chain in which such relation is embedded. The use of certification systems and remedies is primarily aimed at improving effectiveness of contracts as instruments for regulatory implementation of transnational standards, shifting monitoring costs from the buyer to the seller or to the entire supply chain (Cafaggi 2013b). Whether the higher level of complexity is justified by real improvements is an empirical question which needs further investigation.

The list of open issues stemming from the previous analysis is in fact longer than this. Having acknowledged the space for the private design of complementary remedies, possibly by means of contractual reference and incorporation of the certification scheme, one should consider the implications deriving from the combination between contractual remedies and certification measures. Three dimensions of contract law may be influenced by this combination:

• (i) contract drafting, since parties should be encouraged to coordinate different remedial systems when addressing the consequences of the breach;

• (ii) contract law interpretation, since courts should take into account the role of certification schemes when assessing the scope and preconditions of contractual remedies (e.g. when defining the concept of breach or the conditions for specific performance);

• (iii) contract law making, since legislators and other standard setting institutions could enhance complementarity and reduce tensions between the two sets of remedies by means of coordination and escalation between them, e.g. prioritizing in some circumstances the use of certification-type remedies over traditional contract law remedies.

(i) More particularly, with respect to contract drafting, greater awareness of the coexistence of the two (or more) sets of remedies should lead the parties to address their link, which does not appear in current agricultural production standard contract forms and in the general terms and conditions related to suppliers issued by MNCs’: for example, does a warning issued by the certifier suspend the buyer’s right to ask for remedies that preclude the achievement of a cooperative solution (e.g. reduction of price or termination)? What are the effects of certification suspension on the supplier’s performance? How does decertification affect the selection of remedies by the buyer in particular between performance and termination? When does decertification amount to a fundamental breach and when does it enable cure by the supplier, if ever? To what extent can a buyer claim a price reduction or replacement in the case of decertified products? In fact, most often standard contract forms fail to address these issues, therefore increasing the costs of litigation; neither legal interpretation provides univocal answers in this respect. We recommend that a clear coordination between contractual and regulatory remedies is carefully designed in order to anticipate interpretive disputes over the links between the two regimes.

Improvements in contractual design may be achieved by more careful coordination between suppliers guidelines produced by transnational corporations and certification scheme owners, especially when chain of custody regimes apply. Nevertheless, the need for an integrated approach should characterise international principles of commercial contracts, and the work of institutions drafting standard contracts. There is no clear indication that these institutions have become fully aware of the interplay between transnational commercial contracts and the regulatory standards and the new functions of contracts. In the near future this situation could change and NGOs and other types of multi-stakeholder organizations could play an important role in drafting model clauses due to be used in B2B contracts within food supply chains.

(ii) From the perspective of legal interpretation the combination between different remedial systems may lead to rethink the scope and functioning of contractual enforcement rules. For example, the incorporation of certification remedies, including correction of non defective processes, could be interpreted as an express preference for specific performance when this agreement is recognised by law.

In other cases the interpreter should emphasise the different logics between the two systems rather than reconcile them. For example, we have assumed that the same violation gives rise to two breaches but this is not necessarily the case. The definition of a breach or the performance standards may differ in the certification regimes and in the supply contracts. If that is accidental, then clearly better coordination is needed to ensure correlation. But correlation does not necessarily imply coincidence. There might be good reasons to have instances where a breach of the certification contract does not result into a breach of the supply contract. A more nuanced approach in certification may be justified by the dominance of cooperative enforcement. Even if we have claimed that the breach in contract law should not have disruptive effects, clearly it represents a major change in the relationship which in certification regimes is much more gradual. When there is discrepancy between the two systems coordination is even more important than those instances where the definition of breach coincides.

(iii) The combination between regulatory and contractual remedies should also be taken into account by lawmakers and standard setting institutions when drafting principles and rules on the functioning of B2B relations in food supply chains. For example, addressing the different mechanisms to enforce contractual duties concerning the compliance with safety or sustainable standards, these institutions could propose an escalating principle due to prioritize corrective measures over contract termination or other disruptive remedies. In case of incorporation of certification schemes, resort to certification remedies could be prioritised over other contractual remedies. More than cross-sectors, this evolution could be fostered in the food sector specifically thanks to the activism of international institutions operating as standard setters or “think tanks” at the European or, mostly, global level. One very important opportunity might be provided by the project recently started by Unidroit and Fao for the formation of a Legal Guide on contract farming.¹¹⁰ Without any aim to introduce a form of legislation at international level, one could envisage that this contribution could draw the attention of policy makers and courts on the impact of standards and certification on the rules of the contract along and across the food supply chains: a promising path definitively worth future analysis.