How legal contract management tech can support supply chain due diligence

Contractual provisions on sustainability are becoming more common as companies respond to regulations such as the EU’s Corporate Sustainability Due Diligence Directive (CS3D), or take a more proactive approach to supply chain legal risk management. In addition, purchasers are frequently requiring suppliers to pass on contractual provisions, multiplying the effect of one company in the supply chain integrating sustainability provisions into supply contracts. 

Sustainability provisions can include contractual representations across a wide range of topics, including environmental management, human and labour rights, and business ethics. Given the breadth of coverage, these amount to a significant expansion of the representations made by a supplier regarding how it conducts its business. In recent years, there has been doubt about the extent to which these sustainability provisions would be enforced, but the market trend is for companies to take these provisions more seriously as they serve a regulatory compliance or litigation risk management purpose. 

Large corporates contracting on their terms can manage their contracts more easily as they negotiate variations to templates with their suppliers. Suppliers, on the other hand, are frequently contracting with large corporates under heterogeneous terms, rendering compliance efforts highly challenging if managed by individual contract managers on an ad hoc basis. As sustainability provisions start to bite, suppliers will need to find more effective solutions for overseeing compliance with supply contracts. Legal contract management (LCM) technology is well suited to this task. 

Legal contract management technology can enhance functionality 

A common headache for companies is that supply contracts are never just one well-defined document. Contracts typically involve a combination of master agreements, purchase orders, documents incorporated by reference, contract variations negotiated over email, and other communications which may or may not be properly incorporated into agreements. 

LCM technology provides a centralised repository for storing all contracts and related agreements or communications, enabling ease of access and retrieval. This repository also provides in-house legal and compliance teams visibility over contractual agreements that may not previously have been there if contracts were negotiated, agreed and signed by contract managers outside their purview. By being able to access all relevant documents, in-house legal can review the most up-to-date contractual arrangements to provide oversight and conduct regular compliance audits. 

LCM platforms also typically automate certain workflows to streamline contract creation, approval and renewal processes. The most contemporary offerings may also include AI capabilities to provide an initial read-out of contractual obligations before review by in-house legal. Even if companies are operating on buyers’ contractual terms, LCM technology can provide pre-designed templates to maintain consistency and reduce errors, such as the tracking of variations. 

Tech-based solutions can also create audit trails to increase visibility over who did what during the contracting process. 

Better contract management can support compliance efforts 

Armed with better oversight and understanding of sustainability-related contractual requirements, companies can implement more effective compliance programmes and develop prioritised action plans to address sustainability commitments. 

Prioritisation is informed by competing factors such as whether a contractual provision is linked to a regulatory obligation, the language used in the provision – for example, “must” versus “reasonable efforts” – as well as the beneficial impact on the company, and the ease of implementation. 

The practice of agreeing to sustainability provisions and hoping they don’t get enforced is a thing of the past. LCM solutions offer a better way for companies to manage their contractual relationships and support sustainability compliance programmes.