Supermarket and retailer litigation risk: Claimants using novel Value Chain Liability concepts to target household names

There is a global movement to make businesses accountable for human rights and environmental impacts both up and down their value chain, often in emerging markets where transparency can be lacking.  In the UK, this has primarily been driven by (i) public pressure campaigns on businesses and (ii) transnational tort litigation brought by claimant law firms although, in Europe, this is also being driven by the European Commission with its Corporate Sustainability Reporting Directive ("CSRD") and proposed Corporate Sustainability Due Diligence Directive ("CS3D"). 

As we noted above, it should not be overlooked that value chain liability claims are still highly speculative and ambitious but given some recent procedural victories, they continue to be brought by claimant law firms.  Most value chain liability claims that have received public attention relate to events that occurred in foreign countries, and often in circumstances where the harm was caused as a result of criminal acts by a third-party.  When bringing value chain liability claims, claimant law firms tend to target businesses that either have particular risk profiles (e.g. businesses in the mining & extractives, agriculture or fashion sectors, all sectors where human rights risk is known to have the potential to exist along the value chain) or businesses with particular vulnerability to negative publicity in order to attempt to extract an early settlement.  This means that even though the law around value chain liability may be uncertain, the fact that an allegation has been made against a business may prove to be reputationally detrimental. 

There are several reasons why supermarkets and large retailers may become targets for claimant law firms, not least of which is the fact that they often have ample resources to compensate alleged victims of poor human rights practices or remedy environmental damage. Indeed, there are several well-known examples of claims that have already been brought against retailers (see our summary, below, of claims brought in the UK, France and Canada).  Beyond purely financial considerations, (i) they have extensive value chains, (ii) they are well-known to the public and are therefore vulnerable to negative publicity and (iii) they tend to make public statements about their level of value chain control and oversight.   

This latter point is important to keep in mind as value chain liability claims often refer to statements made by the defendants relating to the control of, or knowledge of, aspects of their value chain, as these statements may point to a heightened level of proximity and foreseeability as between the defendant and the harm caused to the claimant.  These sorts of statements are commonplace in the retail sector as many retailers, such as supermarkets, do make voluntary human rights disclosures and may expressly state that they conduct human rights impact assessments, or that their policy is to require suppliers to remediate harm caused by negative human rights impacts, often using these to tout their environmental and social credentials. 

Public statements / voluntary disclosures about control and oversight are important to claimant law firms because it makes it easier for them to plead that a defendant had a heightened level of proximity and foreseeability (and therefore, a duty of care to the claimant), even in circumstances where the alleged harm occurred in a different country.  Public statements about value chain audits or standards (even if it is perceived to only be PR "fluff") can have very real consequences if a business is targeted by a claimant law firm as these statements may very well find their way into the claimant's pleadings.  For the purpose of a value chain liability claim, any of these factors may be used by a claimant to allege that a supermarket or retailer had a measure of "control" or "oversight" over its supply chain which may, in turn, allegedly give rise to a duty of care.  These are certainly not the only factors that may be used, but they have particular relevance to supermarkets and large retailers. 

In light of these risks, it would be tempting to conclude that supermarkets and other large retailers are better off not enquiring too closely into practices at other levels of their value chain. Tempting, but wrong. A court will not be sympathetic to defendants who have wilfully turned a blind eye to practices of which, in the court's view, it should have been aware. A more constructive response would be for supermarkets and retailers to address their known legal risk in the value chain.

From a contractual perspective, the primary focus should be on the codes of conduct and supply chain principles which large retailers habitually impose on their suppliers. These standard form documents may benefit from a fresh look in light of changes to the customer's risk profile, as well as a dose of realism. Are these codes and principles identifying the right risks and prescribing realistic and practical measures to ensure compliance? Policy, as ever, needs to be backed up by practice. If retailers expect to hold suppliers to promises they have made in the due diligence process, audit rights in contractual documentation should be carefully scrutinised and customised, if necessary, rather than being regarded as boilerplate.

Caution also needs to be exercised when making public statements about supply chain standards and sustainable and ethical practices, because as explained above, these may be exploited.  That said, it is almost certainly unrealistic for large retailers to effectively take a vow of silence on these issues for fear of encouraging litigation – particularly against a background of both increased reporting requirements and growing customer awareness of ethical issues, leading to heightened expectations of "good citizenship" from businesses.  The answer, once again, lies in having robust processes for ensuring that public statements can be backed up by properly audited information and policies which are actually enforced in practice (rather than merely appended to the contract as an afterthought).

What is clear is that supermarkets and major retailers will need to confront these new litigation strategies and be prepared to address novel allegations relating to their value chains going forward. They must also be clear-sighted and prepared about the reputational risk that attends such claims. They should certainly give careful consideration to any public statements they make about value chain oversight or control, including any certifications schemes or auditing schemes which they may endorse or use. This "good hygiene" is important to maintain in order to avoid unforeseen litigation risk. For more on this, please see our recent article on refreshing human rights corporate policies and procedures.

Finally, it should not be overlooked that regulators are also taking a look into the sector, using their existing powers, and this may have an impact on the relationship between UK retailers and their value chains. In the UK, the Competition and Markets Authority (in common with regulators in other jurisdictions) has begun to dig deeper into consumer-facing claims to eco-friendliness and ethical business practices, calling into question whether businesses are making misleading claims about the sustainability of their products. This may result in higher scrutiny over value chains, as businesses look to tighten value chain control in response to heightened regulatory pressure. 

Properly focused and managed, supply chain controls offer a win for retailers, who can make these claims more credibly and promote best practices in their businesses, as well as for the individuals at in the value chain who might experience infringements to their human rights. As noted at the outset to this article, it is not clear where the courts will land on value chain liability claims if and when one does eventually reach trial.  Conventional legal theory strongly suggests that in many of these claims, the claimants will fail to demonstrate that the defendant did, in fact, owe a duty of care to a claimant. However this is not a certain outcome. Further, it is not known whether the UK Government will introduce a corporate sustainability due diligence regime which, irrespective of the views the courts may reach, may introduce a value chain liability-style legal obligation (as is being done in Europe) paving the way for claims to be brought against UK supermarkets and retailers (in the same way that is being done in France against Casino). We expect that novel claims will continue to arise and NGOs are also increasingly active in holding corporates to account for failing to police their supply chain adequately.