1. Swiss and EU statutory framework of ESG-compliance in the supply chain is complex and evolving 

Companies are under increasing pressure to ensure sustainable and responsible supply chains in today’s globalized economy. Mindful of the international instruments on human rights,[1] both the European Union («EU») and Switzerland have hardened statutory provisions on ESG.

In Switzerland, various new ESG obligations have come into effect in 2021 and 2022, imposing on companies of public interest reaching certain thresholds transparency obligations on non-financial matters,[2] covering environmental matters, social issues, employee-related issues, respect for human rights and fight prevention of corruption. Swiss legislation also imposes transparency obligations for companies operating in sensitive industries such as the extraction of minerals, oil or natural gas, or in the harvesting of timber in primary forests.[3] Furthermore, Swiss law foresees due diligence and reporting obligations for companies whose business is connected to certain minerals where there is a reasonable suspicion that their products may have been manufactured or provided using child labour.[4] According to Swiss law, transparency reports must be published electronically and made available for at least ten years.

At EU level, the Directive on Corporate Sustainability Due Diligence Directive («CSDDD»)[5] – which entered into force on 25 July 2024 and must be implemented at national level until 26 July 2026[6] – aims to further promote sustainable and responsible business practice. In particular, the CSDDD imposes the obligation to ensure that human rights in the supply chain are safeguarded, including all five fundamental principles and rights as defined in the 1998 ILO Declaration on fundamental principles and rights to work. In case of non-compliance, the CSDDD provides for both penalties with maximum fines of 5% of global net turnover, and the possibility of pillorying companies by means of publication.[7] Furthermore, a company can be held liable for damage caused to natural or legal persons in specified cases.[8]

The CSDDD focuses on enforcing mandatory due diligence obligations to ensure that companies identify, prevent, mitigate, and account for adverse impacts on human rights and the environment across their supply chains, spanning through their entire value chain. In this respect, the CSDDD stipulates that companies shall be required to seek contractual assurances from its direct business partners that the company’s code of conduct is complied with and, if necessary, a prevention or corrective action plan.[9]  In addition, in some cases contractual assurances shall be sought also from direct business partners. In sum, the CSDDD introduced the obligation for companies to seek the contractual commitment that human rights in the supply chain are respected. On this front, Article 18 CSDDD provides that the European Commission shall adopt guidance about voluntary contractual model clauses by 26 January 2027. 

This said, companies should think ahead and be prepared to face commercial disputes dealing with human rights compliance in the supply chain. Given its global reach, the CSDDD also impacts Swiss companies that operate globally or do business with EU companies. The question is, hence, whether commercial arbitration could be the right mechanism to solve those disputes. But what kind of disputes related to human rights in the supply chain could one expect? 

2. Disputes related to human rights compliance in the supply chain can be diverse and complex 

There are certain industries that are particularly exposed to ESG risks in the supply chain. Companies active in sectors with reliance on resource or labour-intensive production or with complex and opaque supply chains are especially vulnerable and prone to disputes and reputational damages. High risks of human rights violations in supply chains have been identified in particular in the sectors of cocoa, beef, tobacco, tea, coffee, cobalt and shrimps. For example, a coffee chain was sued in a US court in 2024 over claims of labour and human rights violations in the farms, where the chain sourced its coffee and tea, despite having committed to «100 % ethical» sourcing. In 2021, some chocolate companies faced a lawsuit in the Ivory Coast of eight children from Mali that accused the companies of sourcing its cocoa from farms that used child labour. In such cases, the sued companies might want to take recourse to the suppliers which infringed the contractually agreed ESG standards. 

Dispute related to human rights compliance in the supply chain are often global and touch upon different jurisdictions. Companies must therefore be mindful of the potential regulatory risks and carefully tailor their contractual relationship with business partners to ensure that regulatory compliance is guaranteed. 

3. Reputation at risk 

The purpose of having ESG contractual clauses is also to avoid reputation risks for the business.[10] If ESG violations or corresponding allegations are reported, there is often a huge public outcry, which can have a serious adverse impact on a company’s public image. 

Such reputational damage must be distinguished from moral damage. While moral damage compensates for mental or emotional harm, the notion of reputational damage covers actual economic damage. Reputational damage may for instance materialize in share or price volatility or downturns, change in the perceptions of shareholders, reduced ability to generate revenue (e.g., loss of investment or loss of customers), increased financing or other cost to do business. The question is, thus, whether and how reputational damage can be quantified. 

Courts and arbitrators are generally reluctant to award reputation damage as causation may be difficult to prove. There exist various approaches to quantify reputational damage and there is no «one-size-fits-all approach». The right quantification method must be chosen on a case-by-case basis.

4. Companies must be mindful of the applicable legislation, soft law, and standards, but also on available remedies and dispute resolution mechanisms

This said, companies need to cope with complex legislation that may vary from country to country, and which is constantly evolving. The consequences for companies in case of non-compliance can easily become immense, namely in terms of reputation and loss of business. Therefore, it is essential for companies to keep up to date with the latest legislation, both mandatory and voluntary standards and soft law, and to implement them in their ESG-compliance and supply chain correctly. 

One way to implement the legal framework in the supply chain is using ESG contractual obligations. According to the Report on the use of ESG contractual obligations and related disputes of 30 October 2023[11] of the ESG Subcommittee of the International Bar Association («IBA») Arbitration Committee, there has been a proliferation of ESG specific requirements in commercial contracts in the last 10 years, due to increased legislation.[12] The incorporation of ESG-provisions by companies that operate globally will likely increase the number of related commercial disputes. In view of increasing ESG risks, companies should not passively expose themselves to the risk of litigating in an unsuitable forum but early on consider which the best dispute resolution mechanism is. In other words: it is not sufficient for a company to seek contractual assurances that human rights in the supply chain are respected. It should rather carefully tailor its contracts by including a suitable dispute resolution clause. In this respect, international arbitration will likely be the chosen disputes resolution mechanism. Let us consider the advantages of choosing arbitration. 

5. Advantage of arbitration as the mechanism to solve human-rights-related commercial disputes in the supply chain 

International arbitration can provide companies operating internationally with a useful tool to solve human rights disputes in the supply chain. The reasons are manifold:

• Arbitrability: Depending on the seat of arbitration, commercial disputes related to human rights can be decided through arbitration. If the international arbitration is seated in Switzerland, for instance, it is sufficient that the claim involves a financial interest.[13] It is in principle irrelevant whether the dispute may not be arbitrable under the law that applies to the contract.[14] 

   

• Expertise of the arbitrators: In arbitration, parties can choose arbitrators with specific knowledge. This is particularly important in commercial disputes related to human rights in the supply chain, where arbitrators must be familiar not only with international commercial arbitration, but also with human rights and corporate responsibility. 

   

• Applicable law or «rule of law»: Parties can agree on the law applicable to the dispute. If the arbitration is seated in Switzerland, they can also agree that the arbitral tribunal shall decide the dispute according to the rules of law chosen by the parties,[15] which may include soft law instruments such as for instance the United Nations Guiding Principles on Business and Human Rights («UNGPs»). Such a possibility is not granted in court litigation in Switzerland.[16] Parties could even allow the arbitral tribunal to decide based on fairness (ex aequo et bono).[17] 

   

• Tailor-made procedure: Parties are free to decide on the procedure applicable to the arbitration,[18] provided that equal treatment and right to be heard in adversarial proceedings are safeguarded.[19] Parties can decide on the arbitral procedure specific to the case or to refer to already existing arbitration rules, such as for instance the Hague Rules on Business and Human Rights Arbitration.[20] This may prove to be particularly useful for complex human rights-related disputes in the supply chain, where rigid courts procedures rules may not be suitable as not meant to deal with the specificities of ESG-related disputes. For instance, parties can agree on the participation of third parties to the arbitration, already at the stage of the arbitration clause.[21] 

   

• Specific performance: Parties are free to tailor their relief sought in the contract. They could for instance include – in addition to a claim for compensation for damage – a non-monetary relief, such as requesting specific performance from the breaching party to avoid or remedy an adverse impact on human rights. For instance, the arbitration clause itself could foresee that the award shall include compliance with a corrective action plan. Such flexibility might not be available in court litigation, where compensation for damages and specific performance may not be claimed together depending on the jurisdiction. 

   

• Interim measures: Parties can request interim measures, either prior to arbitration (i.e., through emergency arbitration if available according to the applicable rules) or during the arbitration.[22] The possibility to act quickly may be of paramount importance in human-rights-related disputes, where severe human rights violations may be at stake. Interim measures through arbitration may be obtained faster than in state courts. 

   

• Confidentiality: Parties can keep the arbitration confidential if there is agreement in this respect. According to the survey conducted by the ESG Subcommittee of the IBA Arbitration Committee, the industry considers confidentiality as the most important factor for choosing the dispute resolution system.[23] 

   

• Agreement regarding costs: Parties can tailor the allocation of costs. Such possibility is usually not available in court litigation. Agreeing on costs – in particular in disputes opposing a bigger company to a smaller one – may also be seen as an effort from big corporations to ensure effective remedy[24] and therefore positively impact on the company’s reputation.  

   

• Fast procedure: Arbitration is usually much faster than court litigation. The main arbitration rules have expedited procedures when the value of the dispute is under a certain threshold. Even when the expedited procedure is not applicable, arbitration is usually faster as arbitrators are generally under pressure to decide the matter efficiently. Depending on the complexity of the disputes, awards under the most modern arbitration rules are generally issued within six to twenty-four months. In addition, in arbitrations seated in Switzerland, parties can challenge an award only before the Swiss Federal Tribunal as a sole instance[25] and based on exhaustive grounds,[26] which further fosters a quick resolution of the dispute.  

This said, arbitration will be the right solution for many cases, unless at the seat of the arbitration or the seat of the prospective jurisdiction(s) of enforcement of the award, human-rights-related disputes in the supply chain are not arbitrable. It is therefore advisable for companies to seek expert advice as to whether arbitration or court litigation is the best option to safeguard the company’s interests in ESG disputes on a case-by-case basis. 

This blog does not intend to exhaustively address the advantages or disadvantages of international arbitration for human rights disputes in the supply chain. The authors of this blog are available for more information and for a detailed analysis of a specific case.  

[1]     E.g. Universal Declaration of Human Rights, UN Global Compact, UN Guiding Principles on Business and Human Rights, OECD Guidelines for Multinational Enterprises, OECD Due Diligence Guidance for Responsible Business Conduct, ILO Declaration on Fundamental Principles and Rights at Work, European Convention for the Protection of Human Rights.

[2]     Article 964a et seq. of the Swiss Code of Obligations («CO»). SR 220 - Federal Act of 30 March 1911 on the Ame... | Fedlex (last accessed on 11 February 2025). 

[3]     Article 964d et seq. CO. 

[4]     Article 964j et seq. CO

[5]     Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 (Directive - EU - 2024/1760 - EN - EUR-Lex (last accessed on 11 February 2025).

[6]     Article 37 CSDDD. 

[7]     Article 27 CSDDD. 

[8]     Article 29 CSDDD. 

[9]     Articles 10(2)(b) and 11(3)(b) CSDDD. 

[10]    https://www.ibanet.org/report-on-use-of-ESG-contractual-obligations, page 7 (last accessed on 11 February 2025).

[11]    https://www.ibanet.org/report-on-use-of-ESG-contractual-obligations (last accessed on 11 February 2025). 

[12]    https://www.ibanet.org/report-on-use-of-ESG-contractual-obligations, page 7 (last accessed on 11 February 2025). 

[13]    Article 177(1) of the Swiss Private International Law Act («PILA»), https://www.fedlex.admin.ch/eli/cc/1988/1776_1776_1776/en (last accessed on 11 February 2025). 

[14]    See for instance decision of the Swiss Federal Tribunal 4A_338/2012 dated 18 March 2013, reasoning 3. 

[15]    Article 187(1) PILA. 

[16]    See decision of the Swiss Federal Tribunal DFT 132 III 285 reasoning 1.2. 

[17]    Article 187(2) PILA. 

[18]    For international arbitration in Switzerland, see Article 182(1) PILA. 

[19]    Article 182(3) PILA. 

[20]    https://docs.pca-cpa.org/2019/12/The-Hague-Rules-on-Business-and-Human-Rights-Arbitration.pdf (last accessed on 11 February 2025). 

[21]    See for instance the Model Clause to grant third party arbitration rights in the Hague Rules on Business and Human Rights Arbitration, https://docs.pca-cpa.org/2019/12/The-Hague-Rules-on-Business-and-Human-Rights-Arbitration.pdf, page 106 (last accessed on 11 February 2025).

[22]    Article 183 PILA. 

[23]    https://www.ibanet.org/report-on-use-of-ESG-contractual-obligations, page 33 (last accessed on 11 February 2025).

[24]    Pillar III of the UNGPs. 

[25]    Article 191 PILA. 

[26]    Article 190 PILA.