If you’re hugely successful in expanding your business into foreign countries and deal with manufacturers and suppliers beware you don’t exploit cheap labor.
While it might be “the in thing to do,” expanding a business into foreign countries and hiring manufacturers and suppliers right on the spot, you need to watch that you do not exploit local labor. If you do, and insist they follow “your” notions of minimum labor standards, working conditions and health benefits; chances are you might wind up as a party to a nasty lawsuit later, just the very thing that happened to retail giant Wal-Mart, Inc.
Now you may think it odd that U.S. lawyers are representing plaintiffs in foreign exotic countries, however it appears to be a growing legal trend. They are doing this because the foreigners can sue U.S. companies in the United States. Perhaps this is the wave of the future; the legal industry relying more on imports over domestic sources to stay in business.
Just the Facts Ma’am!
The plaintiffs are workers of foreign companies that sell goods to Wal-Mart Stores, Inc. They collectively brought claims against the retail giant based on working conditions in each of their employer’s factories. The basis of the claims was that a code of conduct included in Wal-Mart’s supply contracts with these foreign companies stated that the suppliers had to meet basic labor standards.
The standards insisted foreign suppliers adhere to local laws and local industry standards relating to working conditions like discrimination, child labor, forced labor, hours and pay and something called a right of inspection. The right of inspection clause stated: “Wal-Mart or a third party designated by Wal-Mart will undertake on-site inspection of production facilities, to implement and monitor said standards. Any supplier which fails or refuses to comply with these standards or does not allow inspection of production facilities is subject to immediate cancellation of any and all outstanding orders, refuse [sic] or return [sic] any shipment, and otherwise cease doing business [sic] with Wal-Mart.”
Wal-Mart promotes itself to the public as a corporate entity that improves the lives of its suppliers’ employees and won’t stand for any violations of their standards. The plaintiffs argue that Wal-Mart doesn’t properly monitor the suppliers and that standards are honored more in the breach than in actuality. They further alleged inspectors are coerced to produce positive reports for those not in compliance and that the short deadlines and low prices of Wal-Mart’s contract conditions forces suppliers to violate the standards to meet the agreements.
And the Contentions Are
The plaintiffs offer four legal theories that attempt to establish that Wal-Mart’s standards and California common law provides obligations that may be enforced by foreign workers against Wal-Mart. Those theories are that the plaintiffs are third-party beneficiaries of the standards contained in Wal-Mart’s supply contracts; Wal-Mart is the plaintiffs’ joint employer and they negligently breached a duty to monitor the suppliers and protect plaintiffs from the suppliers’ working conditions and finally that Wal-Mart was unjustly enriched by the plaintiffs’ mistreatment.
And the Court Said
Re: Third-party beneficiary contracts: the Court set out the oft quoted rule that a person will be entitled to sue on a contract as “an intended [third party] beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties.” Furthermore it is accepted that “contract interpretation is a question of law that the court reviews de novo.”
The court felt that Wal-Mart’s supplier agreement didn’t obligate them to inspect and a workplace’s standards violation has no consequence if there were no inspection. Therefore, Wal-Mart didn’t obligate itself with a duty owed to the supplier’s workers as 3rd party beneficiaries of the supplier contracts between Wal-Mart and its foreign based suppliers.
Re: Wal-Mart was the direct employer of the foreign based supplier’s employees. The court stated that “in order to be a direct employer, they must be determined to have the right to control and direct people’s activities or the manner/method used to perform those activities.” In addition any finding as to the right to control workers requires a comprehensive and “immediate level of ‘day to day’ authority over employment decisions.”
The agreement that Wal-Mart could monitor the work environment was already determined not to create a duty to carry that out. Therefore, this can’t rise to the level of control over method or manner necessary since Wal-Mart didn’t assume the obligation.
Re: Wal-Mart is liable in tort to the workers for negligently supervising the supplier’s facilities and their working conditions.
The court said that “Negligence requires a duty owed by defendant to plaintiff which is alleged to have been breached.” And further that “Wal-Mart did not owe the plaintiffs a common-law duty to monitor Wal-Mart’s suppliers or to prevent the alleged intentional mistreatment of the plaintiffs by the suppliers. Without such a duty, the plaintiffs’ negligence theories do not state a claim.”
Re: Wal-Mart was unjustly enriched because it knowingly profited from their suppliers substandard labor practices.
The court’s response to this contention was that “A person who has been unjustly enriched at the expense of another is required to make restitution to the other.” California’s approach to unjust enrichment is consistent with this general understanding. And in addition, “The fact that one person benefits another is not, by itself, sufficient to require restitution. The person receiving the benefit is required to make restitution only if the circumstances are such that, as between the two individuals, it is unjust [emphasis added] for the person to retain it.”
The lack of any prior relationship between Wal-Mart and its supplier’s employees precludes the application of the unjust enrichment theory to recover. As you can see, this case was very nearly a case of no good deed goes unpunished and is a warning shot fired at other entrepreneurs and large corporations to watch their step when dealing in foreign countries.…… at least that’s what this lawyer thinks.
Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.