M -EPLI

MAASTRICHT EUROPEAN PRIVATE LAW INSTITUTE

WORKING PAPER No. 2016/03

THE EXPANDING CIRCLE OF CONTRACT LAW

Jan M. Smits

FACULTY OF LAW
MAASTRICHT UNIVERSITY

SEPTEMBER 2016

This paper can be downloaded without charge from the Social Science Research
Network at http://www.ssrn.com
Electronic copy available at: http://ssrn.com/abstract=2831584
 THE EXPANDING CIRCLE OF CONTRACT LAW

Jan M. Smits
Maastricht University
jan.smits@maastrichtuniversity.nl

Abstract

People and corporations are increasing held liable in private law for the external
effects of their actions, in particular in cases that involve some fundamental aspect of
“justice” such as severe violations of labour standards or threats to the environment.
These public interests are traditionally guarded by the state, but are now
increasingly enforced by private individuals, in particular in cross-border situations
where the injustice takes place in a “far-away” country. This contribution explores
what is the potential of contract law in dealing with this “private law justice across
borders.” It asks whether the doctrine of privity of contract should be traded in for
an approach that better takes the externalities of contracts into account. It is argued
that current contract law is ill-suited to deal with this challenge and should adopt
new techniques to expand the circle of people contract law seeks to protect.

Keywords: Contracts and third parties; Privity; Voidability; Private law justice;
Corporate Social Responsibility; Foreign direct liability claims; Externalities; “far-
away” countries
2

Electronic copy available at: http://ssrn.com/abstract=2831584

THE EXPANDING CIRCLE OF CONTRACT LAW

Jan M. Smits

1 Introduction

Few principles of private law are more obvious

2
than privity of contracts. Only the
contracting parties themselves have the rights and obligations that follow from their
agreement; third parties are not affected by it. Legal doctrine has it that no real
exceptions to this principle of the relative effect of contracts exist. Agency, a contract
for the benefit of a third party (stipulatio alteri) and so-called “direct actions” from
3
third parties to a contracting party, or from contracting parties to a third party, all
have an independent justification that leaves
4 the doctrine of privity intact.

However, the sanctity of the dogma of privity does not mean that contracts do not
affect third parties. On the contrary, if one looks beyond legal doctrine at the reality
of contract practice, it becomes abundantly clear that individual contracts can affect
other people in many different ways. If I buy the etching entitled “Echoes and
Shadows” and hang it on my wall, I am depriving many others from enjoying it. In
the same vein, my decision to buy a Volkswagen will make pollution increase to the
detriment of others. Similarly, when two business partners agree to open a
restaurant, they are likely to lure customers away from existing eateries in the area.
The law usually does not consider these side effects of exchange as relevant. Yet the
question gaining importance in present-day society is whether this approach to
privity is still the right one and whether contract law should not expand the circle of
people it seeks to protect. This explorative contribution offers some thoughts on

1 See e.g. Hein Kötz European Contract Law I (1997) 245 ff.
2
Widely accepted in civil law jurisdictions, as reflected in art 6:110 of the Principles of European
Contract Law (PECL).
3
Fr example recognised in French law, on which Kötz European Contract Law 254, but not in all
o
jurisdictions.
4
Cf Michael J Trebilcock The Limits of Freedom of Contract (1993) 58 ff.

Electronic copy available at: http://ssrn.com/abstract=2831584

whether there is indeed a need to expand the circle of contract law and, if so, how
this could be realised.

2 Defining the problem: private law justice across borders

In April 2013, the world was shocked by the collapse of the Bangladesh Rana Plaza
garment factory killing more than 1100 workers. The factory mostly produced
garments for international clothing companies, including Benetton, Mango, JC
Penney, Primark and Wal-Mart. Interestingly, victims and their relatives filed a class
action in an American court against (inter alia) the American retailers, claiming that
5
the defendants were aware of the unsafe conditions at the place of work and failed
to inspect the building properly, thus violating both international human rights
6
standards and the American law of torts. Such a so-called foreign direct liability
claim aims to hold a wealthy party located in the United States liable for a wrong
committed by one of its suppliers or sub-suppliers in another country. One can
readily see why such a claim is brought: not only is it likely that the multinational
company has deeper pockets than the local employer, also as a matter of policy it
seems not so odd to consider the local supplier as part of a supply chain that reaches
all the way from the local employee to the multinational clothing company that
profits from the use of cheap labour.

This phenomenon of direct claims brought against a multinational company

benefiting from wrongs committed by persons it should have controlled better, is
7
now rapidly spreading to other jurisdictions. Another example is the mass claim of
South African workers against Cape/Gencor to seek compensation for asbestos-
related diseases in the English courts. One can also think of environmental cases.
These usually deal with very concrete situations of environmental pollution, as in

5 Abdur Ramahan et al v JC Penney Company Inc et al District of Columbia 26-04-2015 case no

1:2015cv00619 <pdfserver.amlaw.com/nlj/RahamanRanaPlazacomplaint.pdf>.
6
See eg Liesbeth FH Enneking “Crossing the Atlantic? The Political and Legal Feasibility of European
Foreign Direct Liability Cases” (2009) 40 Geo Wash Int'l L Rev 903 903-938.
7
Lubbe v Cape PLC [2000] UKHL 41 (HL), subsequently settled. For an overview of other cases, see
<www.business-humanrights.org/en/law-lawsuits>.

4
 8

Kiobel v Royal Dutch Petroleum in which oil company Shell was sued (albeit
unsuccessfully) in the US courts for oil spills in the Nigerian Ogoni River Delta. 9
Such cases can also aim to protect the environment in general. A recent example is
the much publicised 10 Dutch Urgenda case in which a non-governmental

organisation together with 886 individual claimants sued the State of the
Netherlands, arguing that its climate policy was wrongful against them and future
11
generations. The district court ordered the State to ensure a reduction of carbon
emissions to 25% of the level of 1990. A direct claim against an energy company
before a German court is envisaged by the Peruvian farmer Saúl Luciano Lliyua. He
claims that German company RWE, as a major emitter of greenhouse gases, is
causing global warming and that he is directly threatened by this as a glacier close to
his home in Huaraz is likely to melt and cause repeated flooding. The claimed
12
damages of € 20 000 would allow Lliyua to install a glacial flood early warning
system. In much the same way as in the previously mentioned labour cases, these

claims aim to establish a legally relevant link between the party that benefits from a
certain activity (in these cases oil companies and carbon emitters) and the person
who is suffering damage as a result.

These examples show the increasing wish to hold people liable in private law for
the external effects of their actions, in particular in cases that involve some
fundamental aspect of “justice” like the above severe violation of labour standards
or threats to the environment. These are to a large extent public interests that are
traditionally guarded by the state, but which private individuals now increasingly
seek to enforce themselves. This does not come as a surprise as it is highly difficult
for a state to enforce its norms legally through public law across the borders of its

8 Kiobel v Royal Dutch Petroleum Co. 133 S.Ct. 1659 (2013).

9
A similar case by Milieudefensie and Nigerian farmers is pending in the Dutch courts: see eg District

Court The Hague 30 January 2013 ECLI:NL:RBDHA:2013:BY9854 (Akpan and Milieudefensie v Royal
Dutch Shell), appeal is pending.
10
See eg Arthur Neslen “Dutch Government ordered to Cut Carbon Emissions in Landmark Ruling”

The Guardian (24-06-2015), appeal is pending.

11 District
Court The Hague 24 June 2015, ECLI:NL:RBDH:2015:7145 (Stichting Urgenda v Staat der
Nederlanden), appeal is pending.
12
<www.germanwatch.org/de/der-fall-huaraz>.

5
own country, and the vacuum must be filled by individual parties relying on private
law 13 They seek what could be called “private law justice across borders.”
.
However, the mere fact that these claims are increasingly made does not imply
that they will also succeed. Apart from issues of international jurisdiction, 14

substantive private law has difficulty in accommodating externalities that are as

remote as described above. In case the law of delict is used as a basis for holding the
defendant liable, the plaintiff needs to show that the company did not exercise
reasonable care in preventing the damage to occur. When applying Lord Atkin’s
timeless neighbour principle, this comes down to the question whether the plaintiffs
15

are so closely and directly affected by the act of the multinational company that the
latter ought reasonably to have had them in contemplation as being so affected. In
other words, must Benetton, Royal Dutch Shell, and RWE regard a Bangladeshi
worker, an Ogoni fisherman and a Peruvian farmer as their neighbour in law? This
seems difficult to construe in the present law, even though the need is increasingly
felt to regard them as such.

Contract law provides another potential basis for liability. Benetton, Shell and
RWE must conclude a great variety of contracts with other parties (including
producers, suppliers and consumers) before they are even able to damage the
interests of the mentioned plaintiffs. As indicated in section 1, these are interests that
the present law usually considers as external to the contract and therefore as
irrelevant. This is not only true in international cases, but also in the typical domestic
16
situation of two parties in a distribution network who agree on a certain price or
quality, which will subsequently affect the downstream and upstream parties in the
chain. Existing contract law does not consider this worrying in any way, but here
too the question is whether this is indeed the right approach in present-day society.

13 See in more detail Jan M Smits “Het privaatrecht van de toekomst” (2015) 52 Tijdschrift voor

Privaatrecht 517-547.
14
The case of Kiobel v Royal Dutch Petroleum Co. 133 S.Ct. 1659 (2013), failed already on this ground.
15
Donoghue v Stevenson [1932] AC 580 (HL).
16
Roger van den Bergh “Private Law in a Globalising World: Economic Criteria for Choosing the
Optimal Regulatory Level in a Multilevel Government System” in Michael Faure & André J Van der
Walt (eds) Globalization and Private Law: The Way Forward (2010) 83.

6
 There is one specific way in which contract law is relevant to the above cases. In
practice, companies tend to make unilateral declarations about their commitment to
the environment, fair labour and respect for human rights. They usually do so by
declaring that they will comply with voluntary codes for corporate social
responsibility. These Corporate Social Responsibility (“CSR”) Codes, including the
2009 King Code of Governance Principles for South Africa (“King18III”), 17 the 2011
United Nations Guiding Principles on Business
19 and Human Rights and the British
2014 Ethical Trading Initiative Base Code, contain guidelines for socially sensitive
businesses. Such codes may considerably raise the potential for claims. 20 If, for

example, multinational garment company A states that it will observe a CSR Code
that ensures safe and hygienic working conditions in the manufacturing of the
apparel it sells, but its suppliers or sub-suppliers do not provide for a safe working
place for their employees, many parties within the supply chain have an interest in
enforcement because they all share one another’s reputational risks. Thus, potential
claimants could range from the end-consumer to A ’s retailers, and any other
suppliers or sub-suppliers and their employees within the chain. 21

This does not mean that all these parties can in fact make a successful claim based
on the violation of a CSR Code. The scarce case law shows that the closer the
relationship between the claimant and the defendant, the higher the chances of
success. For example, the claim by the University of Wisconsin for breach of contract
against its direct contracting partner Adidas for not complying with anti-sweatshop
provisions, requiring Adidas to provide certain benefits to workers producing
college-branded apparel, led Adidas – settling in the shadow of the law – to pay

17 Institute of Directors King Code of Governance Principles for South Africa (2009).
18
Business and Human Rights Resource Centre “ U N Guiding Principles” (2015) Business and Human

Rights Resource Centre <www.business-humanrights.org/en/un-guiding-principles> (accessed 21-04-

2016).
19
Ethical Trading Initiative “ETI Base Code” (2015) Ethical Trading Initiative
<www.ethicaltrade.org/eti-base-code> (accessed 21-04-2016).
20
For a meticulous analysis of how CSR Codes fit the existing system of private law see Anna Beckers

Enforcing Social Responsibility Codes (2015).

21
See on this Jan M Smits “Enforcing Corporate Social Responsibility Codes under Private Law, or: on

the Disciplining Power of Legal Doctrine” (2016) 23 Ind J Global Legal Stud forthcoming.

7
 22

compensation to 2 700 workers in Indonesia. However, the claim of employees of

Wal-Mart’s foreign suppliers in China, Bangladesh and Indonesia against Wal-Mart
to improve local labour conditions failed, even though Wal-Mart was eager to
advertise on its home market that it only used responsible suppliers. The California
Court of Appeal found it impossible to regard the employees
23 as third-party
beneficiaries of standards Wal-Mart obliged its suppliers to use. The obligation for
suppliers to comply with the set standards was seen as an obligation between Wal-
Mart and its suppliers, and not as one between Wal-Mart and the plaintiffs.
Similarly, the claim that Wal-Mart was the joint employer of claimants was not
accepted as this would have required Wal-Mart to have had control over day-to-day
employment, while this was not the case. This decision is an exemplary application
of the established principles of contract law (courts in other jurisdictions would
probably have reached a similar result), but it does not pay heed to the possibly
changing perceptions of global justice.

The question that remains is therefore whether, despite the current reluctance to
allow claims in the above cases, emerging societal views about the importance of
corporate social responsibility have not developed in such a way that a claim must
be allowed in case of severe cross-border violations of labour standards or threats to
the environment. It may not matter too much whether the basis for this claim lies in
tort or contract because in both instances the ultimate question is which interests
private law must protect: only the interests of a victim who stands in a “direct”
relationship with the potential tortfeasor or of another contracting party, or also the
interests of people who are further away? Put differently: which relationship is
sufficiently close to be relevant for the law? My focus in the remainder of this
contribution is on contract law, for which I wish to phrase the question in terms of
externalities: which side effects of an individual contract must the law take into
account? Put differently: should contract law expand the circle of people it wants to
protect? It is impossible to answer this question without a small survey of the
current way in which externalities are dealt with by contract law and on what view

22 University of Wisconsin v Adidas claim filed on 13 July 2012 in the US federal court, settled in April
2013: see <www.business-humanrights.org/en/adidas-lawsuit-re-university-of-wisconsin#c18941>.
23
 Doe v Wal-Mart Stores 572 F.3d 677 (2009).

8
of contracts this is in fact based (section 3). This leads me to explore an alternative
view and its consequences in section 4. Section 5 concludes.

3 Externalities and contract law

It was seen in the above sections that contracts could have many external
consequences, but that the law does not always consider these. This section looks at
when the current law does still do so, and on which underlying view of contracts
this is based.

The focus of present-day contract law is almost entirely on what the contract
implies for the parties. Exceptions to the doctrine of privity are preferably seen as
consistent with the rule that only the parties can derive rights and obligations from
their agreement. This explains why the topic of unfair contracts or terms is seen as
24
being about unfairness in the direct relationship between the two parties.
Contractual fairness is at best a matter of applying doctrines such as good faith or
unconscionability. Parties need, to a certain extent, take into account each other’s
25
interests, not those of others who may also be affected by the contract.

This does not mean that the side effects of free exchange are never considered.
They are, but mostly through the doctrine of prohibited contracts. Underlying the
reasons for illegality – violation of a statute or of national public policy and good
morals (boni mores) – lies not only the wider interest of society in general, but often
also the wish to protect people who are not a party to the contract. This explains
why, in a previous26age, this overriding public interest curtailed the pernicious effects
of the industrial revolution, while today it still puts limits on a wide variety of
contracts including cartel agreements, discriminatory contracts, and contracts in
restraint of trade. A Dutch case provides a good example of how the interests of
third parties can inform the notion of good morals. In Club 13, a brothel was
purchased by a defendant who relied on making profits by renting out rooms to
prostitutes. The Dutch Hoge Raad considered this a contract that could be contrary to
25

26

24
9 On which eg Jan M Smits Contract Law: A Comparative Introduction (2014) 136.
For a European perspective: Kötz European Contract Law 124 ff.
See also Stephen A Smith Atiyah’s Introduction to the Law of Contract 6th ed (2005) 20 ff.
good morals if its foreseeable consequences
27 consisted of facilitating exploitation of
third parties such as prostitutes.
28
The true question is therefore not whether contract law considers externalities, but
which external effects it considers relevant and how it protects these as a matter of
29
legal technique. The answer that the present-day law gives is not optimal in view of
facilitating plaintiffs in “far-away” countries.

First, when it comes to the type of externalities taken on board, the current law
reasons that the more harm suffered by others as a result of contracting is taken into
account, the more freedom of contract would be curtailed. This is clearly in line with
30
the classical liberal view that contracting parties must be given full autonomy in
setting their own rights and obligations. The more externalities must be taken into
account, the less autonomy exists. This may explain why current contract law has no
well-defined concept of externalities: liberal political theory lacks a convincing
theory of how to accommodate harm done to others through contracting. 31 Defining
32

a practice as immoral if “the thought of it makes the man on the Clapham omnibus
sick” is all nice and well, but it is too open-ended for assessing whether contracts
leading to a severe violation of norms of corporate social responsibility must be
prohibited.

Although thinking in terms of externalities is the precinct of economists, they are

also unable to provide a satisfactory answer to the question when the law must
consider externalities. Economists define negative externalities as costs suffered by
third parties as a result of an economic transaction. In that case, the total social costs
emanating from the transaction differs from the private costs borne by the parties. 33

Economists may argue that these costs are preferably internalised, but are not able to
say in which cases this must happen, leaving open when the multinational company

27 Hoge Raad 2 February 1990 NJ 1991 265 (Club 13).

28
Rightly so: Trebilcock Limits of Freedom 58 and Lyn KL Tjon Soei Len The Effects of Contracts Beyond

Frontiers: A Capabilities Perspective on Externalities and Contract Law in Europe (2013) 95.
29 32

30 33

31
F his term: AJP Taylor “Far-Away Countries ” The New York Review of Books (06-06-1968). See for
o an overview of contract theories eg Robert A Hillman The Richness of Contract Law (1997). See
r Trebilcock Limits of Freedom 58 ff.

Lord Devlin’s view, as described by HLA Hart The Morality of the Criminal Law (1964).
t
See eg Richard A Posner Economic Analysis of Law 6 ed (2003) 71.

10
must bear the costs of bad labour practices or environmental damage suffered in
other countries. This means that the current law is in need of a new theory of when
the effects of contracts outside of the direct circle of the parties must be taken into
account.34

There is a second reason why current contract law finds it difficult to

accommodate externalities. This is because of the use of the legal doctrine of
prohibited contracts itself, which is not conducive to reaching acceptable results.
Two difficulties exist. The first has to do with the substantive norm of public policy
35
and good morals itself. Without going into the intricacies of the doctrine of
36
prohibited contracts, it is clear that this norm, as referring to fundamental interests
of the community, is essentially a national one: it aims to protect national society.
This comes out best in the German37§138 BGB that emphasises the effects of the
contract on the German public order, but a similar national interpretation of public
order can be found in other jurisdictions. This makes it more difficult to also
consider the effects of the contract that appear outside the own borders. The Dutch
case of Club 13, referred to above, is a case in point: the persons possibly exploited in
that case were the prostitutes affected by the defendant’s purchase of the brothel.
These “third parties” were close enough to be directly affected by the contract, but it
is not likely that the same conclusion would have been reached in case the
exploitation 38
takes place at a geographically remote location (as in the case of
sweatshops).

Even if one would be able to apply a more international version of public policy
and good morals, a second difficulty emerges. If we assume that certain types of
corporate behaviour violate public policy and good morals, it is doubtful whether
this leads to the desired legal effect. Following the maxim ex turpi causa non oritur

34 Tjon Soei Len The Effects of Contracts offers a theory based on Martha Nussbaum’s capabilities
approach to minimum justice.
35
See in a comparative perspective, Kötz European Contract Law 154.
36
Cf Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A).
37
Cf H-P Haferkamp “§138” in M Schmoeckel, J Ruckert & R Zimmerman (eds) Historisch-kritischer

Kommentar zum BGB Band I (2003) 708. Even though there is discussion about the question whether
public policy and good morals can also refer to a specific part of society and not only to society as a
whole.
38
Tjon Soei Len The Effects of Contracts 152 probably reaches a different outcome.

11
 39

actio, an illegal contract is void or at least unenforceable. This makes illegality a

crude instrument, even
40 if we accept that it is possible to mitigate the consequences of

prohibited contracts. Declaring the multinational’s contract with a local supplier

unenforceable means throwing away the baby
41 with the bathwater: the contract must
not be unenforceable, it must be different. Moreover, it would gravely undermine
42
the willingness of parties to conclude contracts if their bindingness is debatable.
One is therefore in need of a more nuanced technique.

The conclusion from this section is that current contract law assesses externalities
of individual contracts mainly through the doctrine of prohibited contracts. This is in
line with a classical view of contracting that gives pride of place to the autonomy of
the parties in setting their own rights and obligations. However, this approach
suffers from the disadvantage that the doctrine of illegality is not particularly suited
to accommodate either a substantive norm on international corporate behaviour or
the consequences of violating this norm. This prompts the question whether an
alternative approach is possible.

4 Towards an alternative view: Can we expand the circle?

What the law qualifies as reasonable expectations of contracting parties is directly

influenced by social norms. These norms tend to enter the legal system through
open-ended concepts such as reasonable care, good faith, public policy, and good
morals. The current interpretation of these concepts implies a rather limited view of
whom we owe legal duties. It was seen above that the circle of contract law
essentially only extends to the contracting parties and that externalities are therefore
rarely taken into account. The techniques currently available in private law are also
not conducive to include externalities. However, this does not mean that views of

39 Cf art 15:101-15:102 PECL.

40
Art 15:103 of the PECL. In our type of situation, it is difficult to see how the techniques of partial
nullity or severance could help in upholding the contract.
41
For a different view, see Tjon Soei Len The Effects of Contracts 161-162.
42
Cf Anthony Kronman “Contract Law and Distributive Justice” (1980) 89 Yale LJ 472 and Charles

Fried Contract as Promise (1981) 106.

12
 43

what the law should be, and the instruments it uses, cannot change. This section
therefore aims to do two things. First, it explores whether any signs exist that today’s
societal views are changing with regard to the need to do justice in the type of cases
discussed in section 2. Second, it asks how these potentially changing views are best
realised within the current legal framework.

Any potential answer to the first question must start with asking about the effects
of globalisation on society. There is an increasing amount of literature that looks at
what it means for interpersonal relationships that the world is becoming ever more
connected in terms of communication,44commerce, and culture and in facing crises
45
such as migration and global warming. This literature explains that globalisation is
affecting our mode of thinking about ethics and law. Alan Fairnington has coined
46
the term selfish altruism, which would denote a break with the egoistic
consumerism of the past. He argues that the twenty-first century society will see
the rise of a new global morality with consumers who still want the best for
themselves, but not at the cost of others. They wish to avoid collateral damage in
their consumption pattern. Fairnington argues that this change in perspective is
caused by increasing sensitivity of people to the cost of consumption as a result of
issues like global warming, carbon footprints 47
and business scandals. Companies will
have to answer to this need for “real values.” On this view, ethical behaviour is no
48
longer opposed to self-interest: it is simply not in our interest to ignore ethics
because it will lead to global injustice and environmental catastrophe.

43 On this in the context of public policy David Ibbetson A Historical Introduction to the Law of
Obligations (1999) 213: Courts have always moulded their ideas of social needs and interests.
44
Jürgen Habermas The Divided West (2006) 175 describes globalisation as: “[T]he cumulative

processes of a worldwide expansion of trade and production, commodity and financial markets,
fashions, the media and computer programmes, news and communications, networks, transportation
systems and flows of migration, the risks generated by large-scale technology, environmental damage
and epidemics, as well as organised crime and terrorism.”
45
Cf Jeremy Rifkin The Empathic Civilisation (2010).
46
Alan Fairnington The Age of Selfish Altruism (2010).
47
Fairnington Selfish Altruism. See also John H Dunning (ed) Making Globalization Good: The Moral
Challenges of Global Capitalism (2003).
48
Peter Singer “The Drowning Child and the Expanding Circle” New Internationalist Magazine (April

1997).

13
 49

If people were indeed becoming “do-gooders”, this would be in line with what
William Lecky referred to as “moral progress.” He wrote already in 1869:

“ A t one time the benevolent affections embrace merely the family, soon the circle
expanding includes first a class, then a nation, then a coalition of nations, then all
humanity.” 50

This nicely fits Peter Singer’s observation that interpersonal

51 relationships have
over the years only become more important. People have always had the tendency to
help “their own” and not “others”, but in a globalising world less and less “others”
exist: the circle of people one cares for is expanding. Interestingly, there is also
experimental evidence for this globalisation of morality.
52
Experiments show that the
willingness to donate to strangers increases with the extent of
53
a country’s
globalisation. If globalisation increases, the desire to cooperate across the globe, and
consider other people’s interests, increases as well.

Now, the crucial point is whether this rise of ethical consumerism must also be
reflected in the law. Does tomorrow’s reasonable person have to take into account
the interests of third parties at far away locations? The problem here is not so much
the existence of a general legal norm that prescribes to do so. Many will accept that
there must be an enforceable obligation to avoid labour exploitation and
environmental damage, but the real problem is against whom this norm can be
enforced. It is impossible to give an answer without considering the exact
relationship at hand. When it comes to the liability of the multinational company vis-
à-vis the local employees in another country, 54 I have already hinted at arguments

that speak in favour of extending the scope of liability. If the multinational company
profits from the use of cheap labour within the supply chain, it could be argued that

49 Larissa MacFarquhar “Extreme Altruism: should you care for strangers at the expense of your

family?” (22-09-2015) The Guardian <www.theguardian.com/world/2015/sep/22/extreme-altruism-

should-you-care-for-strangers-as-much-as-family> (accessed 21-04-2016).
50
William EH Lecky History of European Morals from Augustus to Charlemagne I (1869) 103.
51
Peter Singer The Expanding Circle: Ethics, Evolution, and Moral Progress (1981 and 2011).
52
N Buchan, G Grimalda, R Wilson, M Brewer, E Fatas & M Foddy “Globalization and human
R
cooperation” (2009) 106 PNAS 4138 4138-4142.
53
Cf John McMurtry Unequal Freedoms: The Global Market as an Ethical System (1998).
54
Different situations are discussed in Smits (2016) Ind J Global Legal Stud.

14
it must also be responsible for the working circumstances of the labourers employed
by its subcontractors. This argument is even stronger if the company adheres to a
CSR Code containing committing
55 language about the intention to comply with
acceptable labour standards. Another argument is that the multinational company
is better able to insure against the risk of disaster than the local employer. However,
much depends on the exact circumstances and I do not believe that a general legal
norm against violations of corporate social responsibility has already matured. 56 The

same is true for environmental standards: even though there is a general

understanding that global warming must be stopped, this does not imply that
individual energy producers, acting at least partly in the public interest, can be held
liable for all damage occurring in remote places of the world.

This leads me to the second question. If a general legal norm in favour of

responsible corporate social behaviour is evolving – and assuming such a norm will
come about in the foreseeable future – how is it best accommodated within the legal
57
framework? This accommodation also influences the extent to which liability must
be accepted: The doctrinal system at least partly steers the appropriate outcome. It
was already seen that invalidity of the contract is not the optimal consequence.
Instead, the traditional answer is that distributive concerns (including the taking into
58
account of externalities) are best dealt with by public law, for example through
progressive taxation. However, it is clear that this solution will not work across
borders: making Wal-Mart pay taxes in the US will not help workers in Bangladesh,
just like the German tax collector will not pay for the damage RWE may cause in
Peru. It is precisely this aspect that calls for a private law solution in taking

55 Much depends on how the CSR-Code is formulated: see Smits (2016) Ind J Global Legal Stud.
56
See for this cautious approach Smits (2016) Ind J Global Legal Stud and for a cautious opposite view

Hugh Collins, “Conformity of Goods, the Network Society, and the Ethical Consumer” (2014) 22
European Review of Private Law 619 619-640. Beckers Enforcing Social Responsibility Codes argues in favor
of legislative intervention to regulate third-party rights.
57
See in more detail Jan M Smits “What is legal doctrine? On the aims and methods of legal-dogmatic

research” in Rob van Gestel, Hans Micklitz & Edward L. Rubin (eds) Rethinking Legal Scholarship
(2016) forthcoming.
58
For opposing views of the role of distributive justice in private law see Ernest J Weinrib Corrective

Justice (2012) and Martijn W Hesselink CFR and Social Justice (2008).

15
externalities into account. Theoretically, we may then enter a field that lies in
between the private and the public, and the corrective and the distributive.

The legal instrument best geared towards doing such private law justice across
borders would allow a party to seek redress that not only satisfies his own interest,
but also contributes to achieving the wider collective goal of preventing the same
type of damage to occur in the future. In the contractual setting of a party able to
rely on a CSR Code (which, as we saw, will depend on the exact wording of the code
and the relationship between the parties), the action to be brought would ideally
consist of forcing the company to perform its proclaimed policy in the future. This
necessarily entails a shift from damages claims towards injunctions. A claim in tort
law will also preferably consist in preventing someone from causing damage instead
of in compensating losses already suffered. In brief, the shift necessary to deal with
the externalities identified in this contribution is a shift from compensation towards
prevention. This naturally requires a judge who is willing to take up this more
political role.

One firm conclusion can be drawn from this section – externalities of contracts
need not only be dealt with through the unpolished technique of declaring a contract
unenforceable. The interests of third parties such as labourers and farmers in far-
away countries can also be protected by other means. However, expanding the circle
of contract law in this way does require a moving away from contractual autonomy.
Privately enforced injunctions avoid that negative externalities will occur at all.

5 Instead of a conclusion

This contribution is in many ways an exploration. The nice thing about exploring a
new area is that one is likely to find new things; the bad thing is that one is not sure
how to deal with the newly found. Is it really a new species or only an existing one
in disguise? The claim made in the above is that we are indeed facing a new
challenge in private law. In our increasingly interconnected world, courts are
increasingly confronted with cases in which some type of cross-border justice is
sought for violation of labour standards or environmental damage. This invokes the
need in both the law of delict and contract to reflect upon the externalities that are to
16
be taken into account. The traditional solution of contract law is to do this primarily
by declaring contracts unenforceable, but this is not the optimal solution. Instead, we
are in need of private law remedies that prevent a party from doing wrong. This
means that a public goal is partly achieved through private law means. Future
contract law may therefore no longer be just a matter of the doing of “simple
59 justice
between man and man”, as the South African court once called it, but also of
including the interests of third parties. With this, the circle is indeed expanding.

59 Sasfin (Pty) Ltd v Beukes 1989 1 SA 1 (A) 9 per Smalberger JA.

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