From soft law to the hard edge of business

Polly BotsfordWednesday 27 September 2023

New mandatory legislation for companies on human rights due diligence shows how ‘soft’ law is becoming ‘hard’ law. Global Insight asks what this means for lawyers.

Professor John Ruggie, author of the UN’s Guiding Principles on Business and Human Rights (UNGPs), said the guidance ‘marked the end of the beginning’ in tackling the more concerning byproducts of corporate power and practices. The phrase, which captures both an optimistic and pragmatic approach, was prescient, as the UNGPs began evolving almost as soon as the ink was dry after their publication in 2011. Since then, there’s been a discernible shift from lofty principles towards hardnosed legal rules in the area of business and human rights.

The reason the UNGPs were endorsed by the UN Human Rights Council was out of concern for the pervasive influence that corporations have in how we experience our everyday lives. Indeed, there’s no debate over the pivotal role corporations play in shaping the modern world, only over what to do about it – if anything. The principle of ‘business and human rights’ stems from the position that we should do something about it, and that with corporate’s role comes responsibilities. Indeed, ‘stakeholder capitalism’, the notion that companies should be designed to serve all their stakeholders – and not just the interests of their shareholders – is becoming mainstream thinking.

From a legal perspective, getting companies to take human rights seriously has three missing links. First, historically, human rights were a protection against violations by states and so have been a matter of public law. Second, large corporations operate beyond national borders and are sometimes more powerful and wealthy than the states in which they operate, which makes legal accountability difficult. Lastly, the UNGPs are not of themselves legally binding, though they can be embedded into a contract. Instead, they are ‘soft’ law principles. What we are seeing now is the forging of these links.

That’s not to say there haven’t historically been many complaints against companies for violations through various mechanisms, such as via the Organisation for Economic Cooperation and Development Guidelines, or, for financial institutions, the Equator Principles. There certainly have. Companies have been alive to the reputational risk of violating human rights. But that has been more about risk in the eyes of consumers, and not in courts of law. Now, there’s a discernible shift in each of the three areas mentioned above towards ‘hard’ law – that is, to obligations that have legal effect and can be enforced in court. There’s even work ongoing to convert the UNGPs into a legally binding treaty.

Law firms are stepping up their practices to build in business and human rights expertise. Firms with multinational clients now have in-house human rights practitioners who can be called upon. This resource sits across a number of sectors, such as energy and natural resources or industrials, and practice areas including litigation, dispute resolution and arbitration, compliance and investigations, as well as commercial and corporate practices dealing with M&A, or global supply chains and contracts.

Though we have yet to see a national bill enforcing business and human rights in any standalone way, its language is increasingly cropping up in national domestic legislation dealing with other themes, such as the environment, labour rights, data protection or consumer protection. The Dodd-Frank financial reform in the US includes obligations for listed companies to disclose whether so-called ‘conflict minerals’ have been used in their products. There are new requirements under modern slavery legislation, for example in the UK, for commercial entities to publish a statement on what action they’ve taken to ensure there’s no slavery involved in either their own organisation or in their supply chains. The US has also re-invigorated its trade laws to prevent products made from forced labour being imported into the country. Originally, the reform focused on certain parts of China, such as Xinjiang – where the US has concerns about the treatment of ethnic minorities – but the US is now also enforcing the law in relation to other areas globally.

And human rights law itself has developed. Since July 2022, the right to a clean, healthy and stable environment has been declared by the UN to be a human right. The result is that environmental non-governmental organisations (NGOs) have a legal springboard from which to challenge projects and policies that contribute to the climate crisis and damage biodiversity and nature.

Be vigilant, be diligent

In the past few years in Europe, we’ve seen a new wave of mandatory rules focused on due diligence which, according to many commentators, represent a revolution in legal practice. Human rights due diligence is not new, and some companies have been engaged in the practice for some time. Already, there are vendors in the market who have products to help with risk, with screening or auditing suppliers, with analysing data on geography, sector, activity and so on, or with creating risk maps and dashboards so that clients can meet their obligations on reporting and disclosure.

The new rules are, however, taking due diligence to the next level. Germany’s Supply Chain Due Diligence Act came into effect earlier this year. As an ongoing obligation, large and medium-sized German companies must set up risk management systems on human rights and the environment to ensure that their own business and their supply chains are not violating the law. The legislation’s scope includes direct suppliers, known as ‘tier one’. And there’s a new enforcement authority with the potential to levy fines of up to two per cent of a large company’s annual turnover.

‘This is a pioneering law’, says Christian Ritz, a partner in the Munich office of Hogan Lovells whose expertise lies in advising clients on ESG and supply chain compliance and investigations. The law is a ‘best efforts’ obligation, in that companies don’t have to guarantee that no human rights violations are occurring in their supply chain but that they’ve done their homework and applied appropriate due diligence efforts to prevent and avoid such violations. Even with this caveat, ‘this is hard law with significant enforcement already happening’, says Ritz. Indeed, at the time of writing, less than a year since the legislation entered force, there have been 14 complaints – six of them under further investigation by the new enforcement authority.

The Norwegian Transparency Act has a similar framework but is even wider in scope, requiring Norwegian companies to examine and report beyond only tier one in their supply chains. Helene Bogen, a compliance, human rights and environment lawyer in Norway with Wiersholm, says the new Act is ‘very positive’ and that ‘companies have responded well – particularly as the relevant authorities have been proactive in explaining what they expect companies to do’. Perhaps most far-reaching of all is that the Norwegian Transparency Act also enables members of the public to request information from a company about the negative social impacts that may come as a result of their operations.

France has had its Corporate Duty of Vigilance Law in place since 2017. It requires French corporations with over 5,000 employees in France – or 10,000 worldwide – to implement a ‘vigilance plan’, which identifies possible human rights risks in either the parent company, the group or with suppliers and subcontractors. The French courts have described the law’s ambitions as ‘monumental’. But there has been no official guidance on implementing the legislation and there’s no separate enforcement authority, which means it’s up to civil society and NGOs to act as watchdogs and ensure the law is being followed, bringing civil claims as needed. There have been 14 human rights-related cases so far, with over half of those relating to the environment.

All these national laws are anticipating a new EU directive on corporate sustainability and due diligence, which is currently being negotiated. It follows a similar trajectory, with mandatory risk assessments and reporting. The draft is now into the trilogue stage, where all three branches of the EU will thrash out the final issues. Shirley Pouget, Co-Vice Chair and European Regional Forum Liaison Officer on the IBA Human Rights Law Committee and a senior consultant in business and human rights with DLA Piper in Paris, says ‘the Directive is a positive development. It will ensure there is a common denominator among EU Member States. Companies want legal certainty and for the fragmented legal obligations across the EU to be harmonised. The EU is leading the way and other jurisdictions may follow its lead. Given the broad scope of application of the draft directive, we expect 10,000 foreign global groups with a presence in the EU to be in scope’.

‘Creative’ courts

A series of judicial decisions are re-shaping the scope of corporate responsibilities in our courts. There’s an increasing willingness to explore a national court’s jurisdiction over companies headquartered in their state but in relation to the company’s activities or those of their subsidiaries outside that state. This is the pivotal point in a globalised world: companies headquartered in Europe or North America who operate in the Global South have found themselves on the sharp end of litigation in their home courts for activities that are geographically very far away. Vedanta Resources Plc v Lungowe (2019) was a tort claim brought by a Zambian subsistence farming community over the toxic waste that spilled into streams and waterways from a copper mine run by a subsidiary of Vedanta. The UK Supreme Court found that a parent company could be liable for a subsidiary’s actions where it exercises, or purports to exercise, some control and responsibility for the subsidiary’s operations, and that there could be a duty of care between a parent company and individuals who are negatively impacted by the acts of the subsidiary. In 2020, Vedanta and its subsidiary settled the claims without admission of liability.

In the Netherlands in 2021, in the case of Four Nigerian Farmers and Milieudefensie v Shell, the Dutch courts found that Shell Nigeria was liable for pollution coming from oil spills affecting the villagers in the Niger Delta, with its parent company, Royal Dutch Shell, having a duty of care to third parties affected by pipelines managed by a subsidiary. Shell settled in late 2022 on a no admission of liability basis.

In Canada, in Nevsun Resources Ltd v Araya, the Supreme Court found that the Canadian parent company could be liable for the violation of customary international laws by a foreign subcontractor’s actions – in this case, the alleged use of forced labour in an Eritrean mine. The matter was settled in 2020. Nevsun denies the allegations.

The courts are taking a ‘creative approach’, says Bogen. In Begum v Maran, the widow of a worker in a Bangladesh ship-breaking yard brought a claim against the British-domiciled shipbroker in an English court. It was alleged that the broker had facilitated the sale of an oil tanker to a third-party company which arranged for it to be broken up in an unsafe yard. The UK accepted that it could, in principle, hear such cases, ‘indicating potential and revolutionary avenues for claims in extra-territorial situations’, says Bogen. Maran argued that the worker’s death was not a result of the shipbroker’s actions but rather the conduct of a third party. The compensation claim didn’t ultimately go to trial.

These cases are not without practical and jurisprudential problems. They are few and far between and take many years to come to fruition.

There are wider concerns around delocalised justice, says Sarah Ellington, Advisory Board Liaison Officer of the IBA Business Human Rights Committee and a partner in the dispute resolution group at Watson Farley & Williams in London. ‘Claimant lawyers in human rights cases often argue that their clients won’t get a fair trial or proper access to a remedy in their local court system […] that courts are corrupt, that the local lawyers aren’t good enough’, she explains. ‘Some of these arguments have been accepted by the English court as consistent with the case law which has developed over the past decades.’

However, Ellington adds that, as legal markets continue to evolve, we need to consider whether this approach may actually hinder the development of legal systems in, say, an African or South-East Asian country if those jurisdictions are being deprived of the opportunity to make their own case law in these areas and develop specialist expertise. ‘Perhaps more fundamentally’, she says, ‘in many cases raising such arguments conflicts with the solid legal foundations of “jurisdictional comity”. That is, the underlying principle that we respect each other’s jurisdictions and that we don’t interfere with the legal orders of other countries. In many instances, there is definitely a case for investing more in enabling access to justice locally, rather than simply taking a colonial approach’.

There’s no doubt, however, that courts are showing they are more willing and able than before to allow cases to be heard where there are environmental and human rights violations at stake.

Turning to treaties

Though not an obvious place to envisage nurturing human rights, investment arbitration flowing from bilateral investment treaties has seen development. Updated arbitration rules now tend to include provisions for amicus briefs – the only way in which communities affected by corporate projects can make themselves heard in an arbitration. This increases openness and transparency. But only a handful of decisions can be said to really take on board business and human rights.

In Bear Creek Mining Corporation v Peru, the investing company sought damages through international arbitration from Peru, which had revoked the company’s licence to operate the Santa Ana mining project on the grounds that it was no longer in the national interest. The project was the subject of controversy and led in part to some social unrest. Bear Creek claimed its investment had not been afforded protection under the free trade agreement between Canada and Peru, seeking damages of over $500m. The tribunal awarded over $18m to the investor, with the award calculated based on Bear Creek’s investment.

Philippe Sands KC, the arbitrator appointed by Peru, wrote a partial dissenting opinion to the decision. While agreeing with his tribunal colleagues on the majority of points, he argued that local support – in this case, from the community of the Aymara peoples – for the project was essential but the claimant had not, based on the evidence before the tribunal, taken real or sufficient steps to address the concerns and grievances of these communities and therefore hadn’t earned their trust. This contributed to the discontent felt by some of the population towards the project. In this way, the investor hadn’t obtained a ‘social licence’ to operate. Sands KC did make the point that while Peru needed to act given the social unrest, it had less draconian options available to it, short of revoking the agreement, which it didn’t explore. Nevertheless, he felt the lack of social licence was significant in leading to the collapse of the project. (see box: Show us your licence) .

Douglass Cassel, Professor Emeritus at the University of Notre Dame and counsel with King & Spalding in New York, highlights that business responsibilities for human rights and the environment are already incorporated in new bilateral and model investment treaties. For instance, the Dutch model BIT, from 2019, requires investors to comply with domestic laws, which includes ‘human rights, environmental protection and labour laws’. According to Cassel, ‘intellectually, it’s becoming harder to claim that businesses are not subject to international public law’.

‘It actually gets easier for lawyers as we move from soft to hard law because the client knows it has to pay attention’, says John Sherman III, former General Counsel at independent nonprofit centre for business and human rights Shift and one of the original team supporting Professor Ruggie in drafting the UNGPs back in 2008–2011. But regardless of this, business and human rights is about pushing our own boundaries. ‘As business lawyers, we should take a hard look at whether our advice and services enable business involvement in human rights abuse’, says Sherman, who’s also a former Co-Chair of the IBA Business Human Rights Committee. ‘This means paying attention to context. For instance, a procurement lawyer should understand whether the supply chain contract will [probably] lead to harm to workers in the company’s supply chain. This means understanding whether the terms of the contract incentivises the supplier to cheat on its human rights performance obligations in order to meet its commercial obligations under the contract. The client may tell you they know the answer, but you should interrogate that. Lawyers need to ask smart questions.’

There’s a caveat to these developments, says Surya Deva, the UN Special Rapporteur on the right to development and a professor at the Macquarie Law School at Macquarie University in Sydney. He tells Global Insight that ‘the current focus in business and human rights standards as well as mandatory human rights due diligence laws is about ensuring that companies “do no harm”. This should be the absolute minimum. What about companies contributing to society in a positive way? The world is facing huge swathes of poverty, inequality and catastrophic climate change. Human rights due diligence laws on their own are unlikely to take us very far in dealing with these problems’.

For Deva, the laws we have are only scratching the surface. ‘What is needed is a new way of thinking that puts human rights at the heart of our economies’, he says. ‘Economic growth and job creation are not worth fighting for if they create gross inequalities and destroy our ecosystem.’

It’s a sobering conclusion and reminds us that these laws are, all things said, in a state of permanent evolution and there are likely to be many more iterations to come.

Polly Botsford is a legal and current affairs journalist and can be contacted at polly@pollybotsford.com