Contracts, Codes & Trust

An IACCM member posted a question on a subject that has been bothering me for some time (and which we included as a discussion item at the most recent IACCM conference). It relates to the area of Codes of Conduct and the extent to which these may represent ‘enforceable’ promises. Or put another way, how do Codes and Contracts interrelate?

This particular question relates to the Codes produced by buyers of goods or services; but of course we are also seeing Codes produced by providers as they seek to reassure or set expectations for their customers.

The question was this:

“I am interested in knowing whether any Purchaser has had a supplier sue or threaten to sue for breach by the Purchaser (including uneven application of the Supplier conduct rules) of obligations on the Purchaser contained in the Supplier Code of Conduct.

I am not focussed on the class action – just on a Supplier who has agreed to a code of conduct as a term of an RFx or a term of its supply agreement and who then sues its Purchaser for breaching its obligations uner the code. Sometimes codes of conduct have very high aspirational standards (like “highest ethical standards”, no “apparent conflict of interest”, no concealment of relevant criteria”) that conflict with sound commercial practice. So there’s an opening here for a Supplier to sue for Purchaser’s breach of the code, if the code is part of the contract, or on collateral warranty if the code is a separate document.”

The issue of ‘codes’ is of great interest to me (and IACCM). For example, to what extent do these supplement or even supercede contracts? Will Corporate Codes be used to replace the need for contract terms in many areas, and in particular used to address the inconsistencies of law between different jurisdictions? And if so, will the result be that they become a source of litiagation, or will ‘the jury’ be public opinion, when companies are called out for failing to match their promises?

We have to remember that Codes are typically used as a marketing technique (setting out capabilities or responsibilities). Contracts (in good companies) may also do this. But more often they are used by each side to limit their capabilities or responsibilities. Codes are about trust; contracts (frequently) are not. So there is a fundamental conflict of philosophy; yet to prosper in the global economy, companies must establish trust in their brand – to attract the best customers and the best suppliers and distribution partners. So Codes seem likely to proliferate ….

My enquiries suggest that in most companies, the group responsible for producing the Codes has little or no relationship to the group producing the contracts. I understand why this may be the case, but it doesn’t seem very smart. The two areeas must bereconciled, or there is a very real risk that they simply cancel each other out (and what does that do for generating either trust or good risk management?).

The question cites the example of Walmart. In the end, Walmart responded to public pressure (reputaion risk) much more than legal pressure. And perhaps that is the way of the future.

If the use of Codes increases, I guess it is only a matter of time before they more frequently get introduced in litigation. What we have yet to see is the extent to which courts are prepared to take thm into account in reaching judgment. Presumably key questions will be the extent to which reliance was palced upon them, whether companies explicitly or by implication include them in their contractual undertakings, the sophistication and history of the other party etc.

And the pattern here is also likely to vary depending on the jurisdiction and its relative readiness to incorporate supplementary materials into its judgments.