Handbook for lawyers: Chapter 2

MENU Introduction Chapter 1 - Corporate M&A Chapter 2 - Commercial Transactions

Chapter 2 - Commercial transactions

How can commercial transactions lawyers work in a way that is consistent with the UN Guiding Principles on Business and Human Rights?

This chapter is part of a series of educational resources aimed at raising awareness among legal practitioners about the different ways in which business enterprises can become involved in adverse impacts on human rights and the roles and responsibilities of legal practitioners in helping their corporate clients to:

manage those human rights risks effectively; and
meet their corporate responsibility to respect human rights

Orientation

In this chapter you will find a series of exercises and resources designed to help you develop your skills as a legal practitioner at identifying and addressing human rights risks connected with clients' business activities.

What are human rights risks?

The term “human rights risks” when used in this handbook refers to the risk of an adverse impact on the ability of people to enjoy their internationally recognised human rights which is either caused by, contributed to, or directly linked to the business activities of a business enterprise.

To find out more about human rights standards, see here.

See further OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’

This means that:

if you are acting for a corporate client:
- in relation to a purchase of goods and/or services from another company;
- in relation to the sale of goods and/or services to another company; or
- in relation to a distribution agreement or franchise arrangement,

you are able to:

identify and discuss with your client the salient the human rights risks raised by the proposed transaction;
design and implement the due diligence and disclosure processes necessary to enable you and your client to thoroughly investigate and analyse human rights risks;
suggest and discuss with your client appropriate ways of managing those risks (contractually and from a broader risk management perspective) including, for example, human rights risks in the supply chain; and
know when to seek (and/or recommend seeking) advice and assistance from relevant internal and/or external expertise with respect to the identification, prevention, mitigation and addressing of adverse human rights impacts.

whatever the nature of the transaction, you are able to identify and suggest appropriate ways of dealing with human rights risks that may arise post-completion and/or in the course of implementation of legal risk management and/or governance arrangements agreed between the parties to a commercial agreement (e.g. in the context of (a) a long-term supply arrangement between your client and another business enterprise, or (b) a relationship of franchisor and franchisee), as part of an ongoing lawyer-client relationship and to the full extent of your mandate to do so.

The ‘Getting Started’ section:

tells you more about how and why human rights issues can arise in commercial transactions work; and
provides some hypothetical case scenarios, discussion questions and model answers which you can use to develop your skills with respect to
- identifying human rights risks; and
- integrating consideration of these issues into how you advise your client in specific transactional contexts.

The ‘Practical Resources’ section:

outlines the different due diligence methodologies you could consider using to help you identify human rights risks arising from or connected to
- your client’s business activities; and/or
- the business activities of the target company and/or the target assets.
shows how human rights risks can be relevant to the negotiation of key contract terms;
offers suggestions as to the different ways in which parties to commercial transactions can respond to human rights risks contractually, including
- the various ways in which contractual regimes can assist the parties to anticipate, identify, prevent, mitigate, address, remedy and allocate responsibilities with respect to human rights risks; and
- ways to ensure that parties have appropriate leverage
provides ideas as to additional activities and/or services that you could discuss with your corporate clients in the course of and/or following completion of a transaction (depending on the nature and scope of your client’s business activities and your on-going lawyer-client relationships) relevant to the future identification, prevention and mitigation of human rights risks.

The ‘Further reading and resources’ section:

provides links to further materials, information and resources relating to business and human rights that may be of interest to commercial transaction lawyers.

Getting started

Preamble

A. Because, whether you work as an in-house lawyer or for a law firm as external legal counsel, your employer has a responsibility, along with all business enterprises, to respect human rights.

“The responsibility to respect human rights requires that business enterprises: (a) avoid causing or contributing to adverse human rights impacts through their own activities, and address such impacts when they occur; (b) seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts.”

UN Guiding Principles on Business and Human Rights, Guiding Principle 13.

More about the IBA's training work on business and human rights

A. Because human rights risks can create legal, commercial, financial and reputational risk for companies.

What are human rights risks?

To find out more about human rights standards click here.

See further OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’

Legal risks will depend on a range of factors, including prevailing regulatory standards, the potential for private law (also referred to as “civil”) claims, and prospects of enforcement. The level of reputational risk faced by a business enterprise as a result of poor human rights standards or performance may depend on the extent to which the business invests in, maintains and benefits from valuable stakeholder relationships (such as (a) with the public for a “consumer facing” business or (b) one with a recognisable brand (or brands). Serious financial consequences may be connected to legal risk (e.g. in the form of a potential investigation or fine, or damages award or financial outlay to remedy and prevent future harm). Serious financial consequences may also result from reputational damage (e.g. lost future sales and/or business opportunities following adverse press coverage). Business enterprises should also be aware of the potential for access to and maintenance of capital and funding to be impacted by human rights risks. There may also be adverse commercial consequences for a business enterprise, such as:

o an adverse impact on the ability of the business enterprise to secure equity financial support or investment from development finance institutions, or multilateral organisations, or sovereign wealth/pension fund investors, especially those with strict environmental, social and governance criteria;

o loss of eligibility for government or private procurement contracts; or

o difficulties securing support from governments, for example in the form of development finance or export credit guarantees.

As a commercial transactions lawyer, you have a key role to play in identifying, analysing and addressing human rights risks arising from or connected with your clients’ activities and/or business relationships, both as a business participants yourself, and as a trusted advisor to your business clients. In fulfilling this role, you should bear in mind that human rights issues connected to, or arising from, your clients’ business activities may not be expressed, understood, or analysed by the client in human rights terms. Therefore, as part of your client work, you should be prepared to explain the linkages between different established compliance and risk management activities and the management of human rights risks.

For further information see here

A. Because, from the perspective of the UN Guiding Principles on Human Rights, the human rights responsibilities of a company are not able to be transferred by contractual means.

Here, it is important to recall the distinction between legal, financial and contractual liabilities of companies (with which lawyers will all be familiar) and the concept of the Corporate Responsibility to Respect human rights which, as explained in the introductory sections to this handbook is “a global standard of expected conduct for all business enterprises wherever they operate”.

While legal, financial, and commercial risks may be allocated and/or transferred contractually (see further the Practical Resources section below), the buyer’s human rights responsibilities under the UN Guiding Principles cannot. This means that, from the perspective of the UN Guiding Principles, responsibilities for addressing adverse human rights impacts with which a business enterprise is involved (i.e. by virtue of having caused or contributed to adverse human rights impacts, or because it is directly linked to the adverse impacts through its operations, products or services) remain with that business enterprise.

A. As a commercial transactions lawyer, you are likely already to have encountered and advised on a range of human rights risks in your work, even if those issues were not framed in human rights terms.

This is because most, if not all, business enterprises have the potential to impact on people’s enjoyment of their human rights, both positively and negatively.

Businesses can impact the human rights of their employees (and the employees of sub-contractors), their customers, business partners, people working in their supply chains, local communities and end users of their products or services. As the UN Guiding Principles on Business and Human Rights state, “businesses can have an impact on virtually the entire spectrum of internationally recognized human rights” (see Guiding Principle 12).

For further information about human rights, including different kinds of rights and their legal status, click here

A. As an in-house lawyer, you are likely to be involved in drafting and negotiating commercial contracts, including the kinds of commercial transactions covered by this chapter, i.e long-term supply agreements (goods and services), distribution agreements and franchise agreements.

However, you may also be involved in many other aspects of contract formation and management, including developing requests for proposals, participating in due diligence activities, performance assessment and audits, and contract-mandated liaison with counterparts in other business organisations. Whatever the nature and scope of your involvement, you will need to be able to anticipate, analyse and react appropriately to actual and potential human rights risks and to bring them to the attention of the relevant decision-maker(s). In-house lawyers often have a critical role with respect to the implementation of the governance arrangements under a contract which create the conditions under which the parties can work together to identify, analyse, and address human rights risks on a day to day basis.

For further information about the role of in-house lawyers with respect to business and human rights issues , click here

For further information about the role of in-house lawyers in the post-transaction integration or implementation phase, click here

Further reading:

Benjamin W. Heineman, The Inside Counsel Revolution: Resolving the Partner-Guardian Tension (Ankerwycke, 2016).

John F. Sherman, III, ‘Wise Counselling on Global Supply Chains: The IBA Practical Guide on Business and Human Rights for Business Lawyers’, (forthcoming).

Discussion exercises

Below you will find four discussion exercises based around four hypothetical case scenarios. These scenarios, which have been inspired by real-life cases and events, are included in this handbook to illustrate:

the different ways in which business enterprises can adversely impact on human rights; and
the different ways in which human rights risks can become significant both in the course of corporate/M&A transactions and in the post-transaction phase.

The aim of these scenarios is to encourage reflection on the role and responsibilities of legal practitioners in identifying human rights risks and advising clients on how to address them. Some of these case studies may raise other regulatory issues (e.g. competition, export licensing, sanctions, disclosure and reporting requirements, etc). However, for the purpose of these exercises, the human rights risks and their implications are the main focus. Note that these discussion exercises are not intended to relate to any particular jurisdiction(s); all locations are fictitious.

As you will see, each of these scenarios is followed by a series of questions to prompt further discussion.

To help you to answer these questions, you may wish to consult the Practical Resources section of this chapter. In the Practical Resources section you will find:

information relating to due diligence investigations into human rights risks, and the different approaches that may be needed depending on whether the aim is
- human rights due diligence (in the sense used in the UN Guiding Principles on Business and Human Rights); or
- transactional legal due diligence.
  
  Note: This is not to suggest that human rights due diligence and transactional legal due diligence are necessarily different processes. As explained further in the section on due diligence below, there can be significant overlap between human rights risks to people and human rights risks to companies in practice. Moreover, as noted in the OHCHR Interpretative Guide

“For many enterprises, there will already be processes in place for other forms of due diligence (environmental, health and safety, etc.) that can be drawn on or built on to provide for human rights due diligence. Care should be taken to ensure that such systems are adapted to the particular task of managing human rights risks effectively. It is important for all enterprises to ensure that the personnel responsible for human rights due diligence have the necessary skills and training opportunities. They also need to have sufficient influence within the organization.”

See further OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’ p. 34.

explanation as to how human rights risks can be relevant to the negotiation of key contract terms;
suggestions as to the different ways in which parties to corporate/M&A transactions can respond to human rights risks contractually, including
- the various ways in which contractual regimes can assist the parties to anticipate, identify, prevent, mitigate, address, remedy and allocate responsibilities with respect to human rights risks; and
- ways to ensure that they have appropriate leverage with respect to human rights risks.
- ideas as to additional activities and/or services that you could discuss with your corporate clients in the course of (and/or following completion of) a transaction (depending on the nature of your client’s business activities and your on-going lawyer-client relationship) relevant to the future identification, prevention. mitigation and remedying of human rights risks.

Important notes on model answers PLEASE READ:

(i) Model answers are available for each question. However, these model answers are intended to be illustrative only and are provided for educational purposes merely as a prompt for further reflection and discussion. They are not intended as, and cannot be taken as, legal advice. They are not necessarily (and are not intended to be) an exhaustive discussion of all relevant issues.

(ii) To ensure the widest possible relevance and applicability, the model answers are generic in nature and not formulated with any particular jurisdiction in mind. In practice, the answers to these questions will be shaped by a range of legal, economic, structural and social factors (including the requirements of specific legal systems) that will, in many cases, be specific to the particular contexts and locations. As a consequence, these model answers may not be relevant to, or appropriate for, all jurisdictions. In some jurisdictions, some of the solutions suggested in the model answers below may carry additional legal risk.

(iii) You may wish to reflect (i.e. in your own answers to the questions posed) on how these different risks (e.g. human rights risks and/or the legal risks and opportunities arising from different risk management strategies) may be influenced by the different domestic legal systems with which you are familiar.

Modish Clothing Company (“MCC”) entered into a contract last year with Reliable Clothing Suppliers (“RCS”) whereby RCS agreed to supply MCC’s next Spring, Summer, Autumn and Winter clothing ranges. However, the arrangement has run into difficulties. In the past three months, only half the clothing orders made under the agreement were delivered on time. Then, two weeks ago, the world was shocked by news of a disastrous factory fire in the notorious export processing zone of Poulan, in which hundreds of people, mostly young women, were killed. According to news reports, the number of fatalities was exacerbated by poor health and safety conditions at the factory, which included serious overcrowding and a lack of fire escapes. Worse, some fire escapes appeared to have been deliberately blocked by management at the factory. According to investigators working at the scene, employees at the factory were engaged in clothing manufacturing for a number of well known brands, including brands owned by MCC. RCS does not own or lease the factories.

The human rights that may have been adversely impacted in this scenario, based on the facts provided, might include:

The right to life;
- Universal Declaration of Human Rights (1948), Article 3
- International Covenant on Civil and Political Rights (1966), Article 6
The right to security of the person;
- Universal Declaration of Human Rights (1948), Article 3
- International Covenant on Civil and Political Rights (1966) Article 9
Rights to just and favourable conditions of work;
- Universal Declaration of Human Rights (1948), Articles 23 and 24
- International Covenant on Economic, Social and Cultural Rights (1966) Article 7
- See also the many conventions and recommendations adopted by the ILO
the right to gain a living through work and the right to an adequate standard of living;
the rights of freedom of association and collecting bargaining;
- Universal Declaration of Human Rights (1948) Article 23.4
- ILO Convention No. 87 Concerning Freedom of Association and Protection of the Right to Organise (1948)
- ILO Convention No. 98 Concerning Application of the Principles of the Right to Organise and to Bargain Collectively (1949)
- ILO Declaration on Fundamental Principles and Rights at Work (1998)
The rights of the child (n.b. this includes a prohibition on the worst forms of child labour);
- Universal Declaration of Human Rights (1948) Article 25.2
- UN General Assembly, Convention on the Rights of the Child, 20 November 1989.
- ILO Convention No. 182 on the Worse Forms of Child Labour (1999)

According to the OHCHR Interpretative Guide,

“there are three basic ways in which an enterprise can be involved in an adverse impact on human rights:

(a) It may cause the impact through its own activities;

(b) It may contribute to the impact through its own activities—either directly or through some outside entity (government, business or other);

(c) It may neither cause nor contribute to the impact, but be involved because the impact is caused by an entity with which it has a business relationship and is linked to its own operations, products or services”.

Note: The UN Guiding Principles on Business and Human Rights provide a useful framework for understanding and analysing the different modes of involvement of business enterprises in adverse human rights impacts. The answers given below adopt the same system of categorisation, i.e.“caused”, “contributed to” and “directly linked”. However, this system of categorisation can be difficult to apply in practice. As the concepts form part of a continuum of potential involvement, they are often not susceptible to clear delineations. Moreover, the nature of involvement can change over time and will always be heavily fact dependent. The use of the terms “caused”, “contributed to” and “directly linked” in the question above should not necessarily be taken to imply legal liability or a technical interpretation. Questions of legal liability (along with other possible risks to the business enterprises in this scenario arising from these adverse human rights impacts) are explored in more detail in the model answers to questions 3 and 4 below.

Applying this framework, the companies most likely to have caused the adverse human rights impacts would be the owners or leasees of the factories and/or the employers of the workers who had been killed and injured. In addition, recruitment companies responsible for recruiting workers for the factories may also have contributed to those adverse human rights impacts, for instance if they had used misleading or coercive tactics. In addition, adverse human rights impacts may be directly linked to both RCS and MCC by virtue of their business relationships (i.e. in the form of supply agreements and subcontracting arrangements). In addition, it is possible that either MCC or RCS (or both) may be deemed to have contributed to exploitation of factory workers in Poulan if, for example, their purchasing policies or practices (e.g. pricing policies and/or notice periods for orders and/or frequent changing of orders) had made the use of exploitative or abusive working practices much more likely.

As a legal practitioner advising MCC, one of your concerns will be the likelihood of disruption to MCC’s supply as a result of the tragedy in Poulan. You may wish to consider whether there may be similar issues in other garment supply arrangements. You will also be concerned about the impacts on MCC's brand and/or reputation as a result of the disaster, the publicity that followed it, and the information about working practices at factories engaged in producing MCC products that is now emerging as a result of the subsequent investigation. Brand and reputational impacts might also affect future commercial opportunities. You will need to consider what duties of disclosure (e.g. to the public, to investors, to financial institutions or other business partners or through procurement processes) exist in relation to information that has emerged. You will need to consider the possible reactions of shareholders and institutional investors who may now be concerned about the implications of these developments for the value of their investments or who may no longer wish to be associated with MCC due to ethical concerns. Finally, even if civil actions for damages against MCC (as buyer and distributor of the clothing) seem unlikely, there remains the possibility of complaints against MCC under other schemes, (e.g. the National Contact Point procedures of the OECD Guidelines for Multinational Enterprises), which could result in further adverse publicity and reputational damage, and possibly even litigation.

As RCS’s legal counsel you will be concerned about RCS’s contractual liabilities to MCC under the clothing supply contract. You will be alert to the risk that non or late delivery under the contract with MCC may cause RCS to be in breach of contract and therefore liable to financial penalties or possible termination of the supply arrangement. You will want to ensure that all other contractual requirements relating to the governance of the supply and purchase arrangement (e.g. with respect to access to information, access to premises, reporting and disclosure) are properly observed. In order to avoid being in breach of its supply obligations to MCC, RCS may need to make alternative arrangements, which could be financially costly. If employees or agents of RCS were injured or killed in the factory fire, then criminal or civil enforcement action (or both) might be taken (e.g. either by the authorities or the affected individuals and their families). Even if the injured or deceased workers were actually employed by subcontractors of RCS, then you may still need to consider the possibility of either criminal liability or civil liability based on theories of secondary liability (or “complicity”). Even if civil actions for damages against RCS seem unlikely in the circumstances, there remains the possibility of complaints against RCS under other schemes, (e.g. the National Contact Point procedures of the OECD Guidelines for Multinational Enterprises) or involvement in investigations by, for example, labour inspectorates or parliamentary committees. In any event, RCS’s reputation as a reliable and ethical clothing supplier will have been damaged by these events, which could have a bearing on its ability to attract future investment, finance, commercial and/or procurement opportunities.

This model answer is concerned with different ways in which companies can meet their Corporate Responsibility to Respect human rights which, as explained in the introductory sections to this handbook, is conceptually distinct from questions of legal liability.

A reminder of the relevant provisions of the UN Guiding Principles on Business and Human Rights

MCC

In this case scenario, the kind of steps that MCC may be need to take in order for MCC to address adverse human rights impacts in the manner set out in the UN Guiding Principles might include:

a detailed review of its existing contractual arrangements with suppliers (including a review of the adequacy and suitability of supply contract terms), from the perspective of the UN Guiding Principles on Business and Human Rights;
a detailed review of its purchasing policies and practices with a view to identifying contracting and purchasing practices that may risk contributing to adverse human rights impacts (including the use of child labour in the supply chain);
developing and implementing an action plan for the mitigation of human rights risks in the supply chain in future;
providing remedies for past harm which it may have caused or contributed to

drawing in each case on internal and/or independent external human rights expertise and the outcomes of meaningful consultation with potentially affected groups and other relevant stakeholders (see Guiding Principle 18 and Commentary).

For further information on the kinds of provisions that can be included in long-term supply contracts to help the parties better identify, prevent, mitigate and manage human rights risks, see below .

MCC would need to develop effective strategies and methodologies for tracking and reporting on the effectiveness of its responses to adverse human rights impacts (potential and actual).

In addition, there may be ways in which MCC can exercise its influence (or “leverage”) as a purchaser of clothing from external suppliers to address the human rights impacts that those suppliers may have caused or contributed to, taking due account of local legal advice with respect to the legal, financial, commercial and reputational risks and opportunities associated with different options.

RCS

The kind of steps that RCS may be need to take in order for RCS to address adverse human rights impacts in the manner set out in the UN Guiding Principles on Business and Human Rights might include:

a detailed review of its existing contractual arrangements with suppliers (including a review of the adequacy and suitability of supply contract terms), from the perspective of the UN Guiding Principles on Business and Human Rights;
a detailed review of the workplace health and safety conditions and recruitment practices of sub-contractors and suppliers (including the policies and practices of such sub-contractors and suppliers with respect to workers who may be vulnerable or at risk of marginalisation, or workers who may be subject to disguised or informal working practices);
a detailed review of its purchasing policies and practices with a view to identifying contracting and purchasing practices that may risk contributing to adverse human rights impacts (including the use of child labour in the supply chain);
developing and implementing an action plan for the mitigation of human rights risks in the supply chain in future;
providing remedies for past harm which it may have caused or contributed to

Q6. If you had been engaged by MCC as legal counsel in relation to the negotiation and conclusion of the clothing supply contract with RCS..., what steps might you have recommended to ensure that human rights risks arising from or connected with the proposed supply arrangement were:

(a) properly identified; and

(b) adequately mitigated and addressed (including through contractual means);

in light of your client’s Corporate Responsibility to Respect human rights and in order to manage the legal, commercial, financial and reputational risks you have identified in your answers to Qu. 3 and Qu. 4 above?

Reminder: The commentary to Guiding Principle 19 of the UN Guiding Principles on Business and Human Rights states

Important note: As MCC’s legal counsel you will need to consider and discuss carefully with your client the legal, commercial, financial and reputational risks and opportunities of different human rights risk management options against the background of applicable law and legal systems.

(a) Any actual or potential human rights risks (of the kinds identified in the model answers to Qu. 1 and 2 above) and the legal, commercial, financial and reputational risks arising from them (e.g. of the kinds described in the model answers to Qu. 3 and 4 above) could potentially have been identified by discussing and agreeing with the client a due diligence process that:

examined carefully RCS’s approach to the identification, management and mitigation of human rights risks generally;
involved a thorough review of (or investigation into, as appropriate) RCS’s purchasing and pricing policies and practices;
considered RCS’s approach to sub-contracting and, specifically, the steps taken to ensure that sub-contractors are compliant with internationally recognised labour standards, including international prohibitions on the worst forms of child labour;
considered the extent to which RCS’s standard terms for sub-contracting arrangements place obligations on sub-contractors with respect to the management of human rights risks and the nature of those obligations;
sought the views of civil society organisations, trade unions and other stakeholders as to RCS’s past record with respect to management of human rights risks;
proactively sought out information with respect to the locations of RCS’s facilities and/or sub-contractors, and the regulatory environment in those locations;
took account of any past legal (or other) complaints made against RSC with respect to its observance of human rights standards or its management of human rights related risks (e.g. in any court, or non-judicial mechanisms, such as tribunals, ombudsmen, operational level grievance mechanisms or any other sectoral, multi-stakeholder or other collaborative initiative).

(b) Ways to address, manage, and mitigate human rights risks (including through contractual means) include:

considering and exploring:
- ways to ensure that MCC has (and continues to have) access to sufficient information from RCS about RCS’s sourcing arrangements and human rights risks; and
- how to open a dialogue to appropriately manage the situation in terms of remedy and/or remediation;
ensuring that the contract includes provisions sufficient to enable MCC properly to monitor the risks of adverse human rights impacts in the supply chain, including provisions relating to reporting and rights of access and audit;
seeking appropriate representations, warranties and covenants from RCS as to its management and mitigation of human rights related risks;
seeking appropriate indemnities from RSC;
requiring RCS operate to recognised supplier codes of conduct (e.g. aimed at ensuring fair and decent working conditions in the supply chain);
requiring that RCS obtain and maintain specified management certifications and/or quality marks;
ensuring that MCC (as purchaser) has the ability to review and/or terminate the contract if certain human rights risks materialise or in the event that RCS fails to observe agreed standards with respect to the management of human rights risks in the supply chain;
developing and implementing a human rights due diligence process, consistent with the UN Guiding Principles on Business and Human Rights (which could include, in this case, a review of purchasing policies and practices to assess the extent to which these may be contributing to adverse human rights impacts in the supply chain);
establishing the establishment of an appropriate company-level grievance mechanism to enable those claiming to have suffered adverse human rights impacts as a result of the activities of different enterprises in the MCC supply chain to raise concerns and/or bring complaints to MCC directly and to obtain remediation in accordance with the standards laid down in the UN Guiding Principles on Business and Human Rights (see especially Part III: Access to Remedy).

For further information and ideas see the “Practical Resources” section of this chapter.

Surveillance Solutions Company (“SSC”) is a leading developer of surveillance technology. The company supplies products to a range of clients, predominantly law enforcement and security agencies around the world. In 2010 it announced the development of a new technology for the remote tracking and recording of conversations made via mobile phones. In 2012, following a decision to rationalise the business and focus future efforts on on-line surveillance products, the rights in the technology were transferred to a company called Telecommunications Consultants (“TC”). The following year, the technology featured in an investigative television documentary entitled “The Snooper State! How Our Tech Companies Prop Up Foreign Despotic Regimes” in which it is alleged that TC had been supplying products derived from the technology, together with after-sales services, to State-owned telecommunications companies in countries governed by undemocratic and authoritarian regimes. More specifically, it was alleged that this technology had been used to spy on the activities of suspected political dissidents and that this had, in some cases, contributed to their detection, incarceration, torture and deaths while in custody.

The human rights which may have been adversely impacted in this scenario, based on the facts provided, might include:

the right to life;
- Universal Declaration of Human Rights (1948), Article 3
- International Covenant on Civil and Political Rights (1966), Article 6
the right to security of the person;
- Universal Declaration of Human Rights (1948), Article 3
- International Covenant on Civil and Political Rights (1966) Article 9
the right not to be subject to arbitrary arrest or detention
the right not to be deprived of liberty except on grounds and in accordance with procedure established by law;
the right to privacy;
- Universal Declaration of Human Rights (1948) Article 12
- International Covenant on Civil and Political Rights (1966) Article 17

According to the OHCHR Interpretative Guide,

“there are three basic ways in which an enterprise can be involved in an adverse impact on human rights:

(a) It may cause the impact through its own activities;

(b) It may contribute to the impact through its own activities—either directly or through some outside entity (government, business or other);

Applying the above framework, it is possible that TC has contributed to the human rights abuses suffered by political dissidents in different countries through its own activities, i.e. by supplying the technology that was instrumental to devices used for their location, apprehension and imprisonment, as well as by providing after-sale services. In addition, or in the alternative, these abuses may be directly linked to TC’s operations, products or services by its ongoing business relationships with the State-owned entities, even if TC has not contributed to these abuses itself.

As legal counsel to TC you will be concerned about the possibility of damage to TC’s reputation as a result of the television coverage regarding the uses to which its products and services have been put. You may be concerned about possible commercial implications of adverse publicity (e.g. in terms of future opportunities for investment, finance and business development). You should also consider whether there is a prospect of TC being the subject of legal claims for damages by affected individuals and their families (for instance, whether the relationship between TC and the relevant State telecommunications agencies by virtue of an ongoing services contract might meet the threshold necessary to establish TC’s legal liability for the serious human rights abuses perpetrated by State agencies on the basis of legal theories of “complicity”). Depending on the legal requirements in the jurisdictions involved, you may need to consider the need for broader human rights risk reporting under specific regulatory regimes. Even if civil actions for damages against TC are unlikely in the circumstances, there remains the possibility of complaints (and further associated adverse publicity) under other schemes, e.g. complaints mechanisms operated by National Human Rights Institutions, or the National Contact Point procedures of the OECD Guidelines for Multinational Enterprises or other public or government committee enquiry processes.

Note: This model answer is concerned with different ways in which companies can meet their Corporate Responsibility to Respect human rights which, as explained in the introductory sections to this handbook, is conceptually distinct from questions of legal liability.

Reminder: The relevant provisions of the UN Guiding Principles on Business and Human Rights

In this scenario, the kind of steps that TC may be need to take in order for TC to address adverse human rights impacts in the manner set out in the UN Guiding Principles might include (drawing in each case on internal and/or independent external human rights expertise and the outcomes of meaningful consultation with potentially affected groups and other relevant stakeholders; see Guiding Principle 18 and Commentary):

examining the adequacy and appropriateness of company policies from the perspective of the UN Guiding Principles on Business and Human Rights (including the implementation of such policies) with respect to matters such as:
- marketing and distribution of products and services; and
- provision of products and/or services to State agencies and/or State-owned entities
  
  and making the necessary revisions to company policies and procedures to improve their future effectiveness;
remedying past harm which it may have caused or contributed to.

In addition, there may be ways in which TC can exercise its influence (or “leverage”) as a supplier of surveillance products and after-sales services to State-owned companies to address the human rights impacts that may be directly linked to its operations, products or services, taking due account of local legal advice with respect to the legal, financial, commercial and reputational risks and opportunities associated with different options. (See further the model answer to Qu. 5 below)

Further reading

OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’

Q5. If you had been engaged as legal counsel to TC with respect to the negotiation and conclusion of an agreement to supply products and services... (i.e. derived from the surveillance technology developed by SSC) to State-owned telecommunications companies, what steps might you have recommended to ensure that any human rights risks arising from, or connected with, the proposed supply arrangement were:

(a) properly identified; and

(b) appropriately addressed, managed, and mitigated (including through contractual means)

in light of your client’s Corporate Responsibility to Respect human rights and in order to manage the legal, commercial, financial and reputational risks you have identified in your answers to Qu. 3 and Qu. 4 above?

Reminder: The commentary to Guiding Principle 19 of the UN Guiding Principles on Business and Human Rights states

Important note: As TC’s legal counsel you will need to consider and discuss carefully with your client the legal, commercial, financial and reputational risks and opportunities of different human rights risk management options against the background of applicable law and legal systems.

(a) Actual or potential human rights risks (of the kind identified in the model answers to Qu. 1 and 2 above) and the legal, commercial, financial and reputational risks arising from them (e.g. of a kind described in the model answers to Qu. 3 and 4 above) could potentially have been identified by discussing and agreeing with the client a due diligence process that

considered the human rights records of States and State agencies wishing to purchase the technology, taking account of the views of civil society organisations with relevant knowledge and expertise as well as or country risk reports prepared by or on behalf of governments and/or international organisations.

(b) Ways to address, manage, and mitigate human rights related risks (including through contractual means) include:

seeking appropriate representations, warranties and covenants from the purchaser(s) (or licensees) of products and services as to its management and mitigation of human rights related risks;
seeking appropriate indemnities from the purchaser(s) of products and services;
ensuring that TC (as supplier of products and services) has the ability to review and/or freely terminate the contract if certain human rights risks materialise or in the event that the purchaser fails to observe agreed standards with respect to human rights;
ensuring that the contract includes provisions sufficient to enable TC (as supplier of products and services) properly to monitor the risks of TC becoming directly linked to adverse human rights impacts as a result of the business relationship (e.g. through rights to certain information, communication obligations).

See further ‘OHCHR “The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’

For further information and ideas see the “Practical Resources” section of this chapter.

New Order Drinks (“NOD”) is the owner of a number of popular brands of caffeinated “energy boost drinks” aimed at the sports market. It manufactures and distributes its drinks around the world through around 60 different franchise agreements. In 2010 it entered into a franchise agreement with the Bastonia Drinks Company (“BDC”), in which it granted exclusive rights to BDC to manufacture its best selling brand, SugarRush#2, within the State of Bastonia. BDC owns and operates a factory in an agricultural region in the west of the country. BDC hoped to be able to begin production of SugarRush#2 within the next six months but operations are not off to a good start. A local campaign group has recently formed with the aim of “shutting down BDC for good”. They complain that BDC’s past environmental record has been poor and that, as a result of their drink manufacturing processes, dangerous chemicals have found their way into the local water supply. The same group has also launched a legal challenge to the factory’s planning approvals, arguing that, because of serious flaws in the public consultative procedures, the grant of the planning approvals was invalid and should be overturned.

The human rights which may have been adversely impacted in this scenario, based on the facts provided, might include:

rights to water and sanitation;
the right to a safe, clean, healthy and sustainable environment, which is integral to the full enjoyment of a wide range of human rights, including:
- the right to life;
  - Universal Declaration of Human Rights (1948), Article 3
  - International Covenant on Civil and Political Rights (1966), Article 6
- The right to health; and
  - Universal Declaration of Human Rights (1948) Art 25.1
  - International Covenant on Economic, Social and Cultural Rights (1966) Art 12
  - See also International Health Conference. Constitution of the World Health Organization. (1946).
- the right to food.
  - International Covenant on Economic, Social and Cultural Rights (1966), Articles 11 and 12
  - See also United Nations General Assembly 64/292 (28th July 2010) UN Doc A/RES/64/292
the right to gain a living through work and the right to an adequate standard of living (n.b. potentially relevant if there has been damage to agricultural and/or fishing interests).
- Universal Declaration of Human Rights (1948), Articles 23 and 24
- International Covenant on Economic, Social and Cultural Rights (1966) Article 7
- See also the many conventions and recommendations adopted by the ILO
the right not to be deprived of a means of subsistence
- International Covenant on Economic, Social and Cultural Rights (1966), Articles 11 and 12
- See also United Nations General Assembly 64/292 (28th July 2010) UN Doc A/RES/64/292

According to the OHCHR Interpretative Guide,

“there are three basic ways in which an enterprise can be involved in an adverse impact on human rights:

(a) It may cause the impact through its own activities;

(b) It may contribute to the impact through its own activities—either directly or through some outside entity (government, business or other);

BDC

Applying the above framework, it is possible that BDC has caused adverse human rights impacts through its own activities (e.g. if BDC’s drink manufacturing operations were the sole or main source of pollution in the community’s drinking water supply due to chemical effluents from production processes). In addition, you should be alert to the possibility that BDC may have contributed to a lack of observance of rights of participation in public decision-making with respect to the process for the grants of planning approval for factory (e.g. if representatives of BDC had unduly influenced or pressured government officials in the course of the planning processes or subsequent review).

(b) NOD

These adverse human rights impacts may also be directly linked to NOD’s own operations, products or services, having been caused by its own franchisee. NOD might have also contributed to these adverse human rights impacts by its own activities (if, for example, the adverse environmental impacts were the result of flaws in production processes, technology, know-how and/or equipment supplied by NOD under the franchise agreement).

As legal counsel to NOD, you are likely to be concerned about the risks posed by the problems in Bastonia to the reputation and hence value of your client’s brand, as well as any financial and commercial consequences that could result from a disruption to operations of the franchisee (especially if this ends in the termination of the franchise agreement). You will want to consider whether similar issues may exist under other franchise arrangements with other franchisees, and the potential for renegotiation of the relevant parts of those agreements, e.g. at the point of renewal. You may need to consider what duties of disclosure (e.g. to the public, to investors, to financial institutions or other key business partners) exist in relation to the human rights risks that have emerged. Even if civil actions for damages against NOD (as franchisor) seem unlikely, there remains the possibility of complaints against NOD under other non-judicial schemes, e.g. the National Contact Point procedures of the OECD Guidelines for Multinational Enterprises. As legal counsel for NOD you should also be aware that recourse to these complaints mechanisms may have adverse consequences in terms of, for example, relations with shareholders and other stakeholders, including local communities.

Reminder: The relevant provisions of the UN Guiding Principles on Business and Human Rights

BDC

In this scenario, the kinds of steps that BDC may be need to take in order for BDC to address adverse human rights impacts in the manner set out in the UN Guiding Principles on Business and Human Rights might include (drawing in each case on internal and/or independent external human rights expertise and the outcomes of meaningful consultation with potentially affected groups and other relevant stakeholders, see Guiding Principle 18 and Commentary):

taking steps to limit or prevent contaminants from the drinks manufacturing factory from entering the local water supply;
remedying past harm (e.g. through financial compensation);
examining the adequacy and appropriateness of company policies (including the implementation of such policies) with respect to:
- engagement with local regulatory authorities and public officials; and
- community relations;
- and making the necessary revisions to company policies and procedures to improve their effectiveness.

In addition, BDC would need to develop effective strategies and methodologies for tracking and reporting on the effectiveness of its responses to adverse human rights impacts (potential and actual).

NOD

In this case scenario, the kind of steps that NOD may be need to take in order for NOD to address adverse human rights impacts in the manner set out in the UN Guiding Principles might include (drawing in each case on internal and/or independent external human rights expertise and the outcomes of meaningful consultation with potentially affected groups and other relevant stakeholders (see Guiding Principle 18 and Commentary) could include:

examining the adequacy and appropriateness of company policies and practices from the perspective of the UN Guiding Principles on Business and Human Rights (including the implementation of such policies) with respect to:
- recruitment of franchisees; and
- negotiation of franchise terms;
making the necessary revisions to company policies and procedures and standard franchise contract terms to improve their future effectiveness and to ensure that NOD has an appropriate degree of leverage as franchisee to address the human rights impacts that BDC (and other franchisees) may have caused or contributed to, taking due account of local legal advice with respect to the legal, financial, commercial and reputational risks and opportunities associated with different options;
remedying past harms that it may have caused or contributed to; and
develop effective strategies and methodologies for tracking and reporting on the effectiveness of its responses to adverse human rights impacts (potential and actual).

Further reading

OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’

Q5. If you had been engaged as legal counsel to NOD with respect to the negotiation and conclusion of a franchise agreement with BDC to produce NOD branded products, what steps might you have recommended, to ensure that human rights risks arising from, or connected with, the proposed supply arrangement were:

(a) properly identified; and

(b) appropriately addressed, managed, and mitigated (including through contractual means)

in light of your client’s Corporate Responsibility to Respect human rights and in order to manage the legal, commercial, financial and reputational risks you have identified in your answers to Qu. 3 and Qu. 4 above?

Reminder: The commentary to Guiding Principle 19 of the UN Guiding Principles on Business and Human Rights states

Important note: As NODs legal counsel you will need to consider and discuss carefully with your client the legal, commercial, financial and reputational risks and opportunities of different human rights risk management options against the background of applicable law and legal systems.

included a proper assessment of BDC’s capacity, as a prospective franchisee, to carry on its drinks manufacturing business in accordance with internationally recognised human rights standards;
considered the process by which the planning approvals had been granted (as well as whether these had, on the face of it, been legally granted or in accordance with international standards relating to transparency and/or due process);
took account of the possibility of misuse and/or abuse of public power and/or corruption in the grant of the planning approvals;
sought to understand the concerns of potentially affected stakeholders by consulting them directly in a manner that takes into account language and other potential barriers to effective engagement;
proactively sought the views of relevant civil society organisations as to human rights risks arising from or connected with BDC’s operations (past, current and planned); and
sought expert opinion as to the levels of environmental management and performance at each of the relevant facilities.

(b) Ways to address, manage, and mitigate human rights related risks (including through contractual means) include:

considering and exploring (a) ways to ensure that NOD has (and continues to have) access to sufficient information from BDC about BDCs ability to identify and manage human rights risks and (b) how to open a dialogue to appropriately manage the situation in terms of remedy and/or remediation;
ensuring that the franchise agreement includes provisions sufficient to enable NOD to properly monitor the risks of adverse human rights impacts arising from or connected with the activities of the franchisee, including provisions relating to reporting and rights of access and audit and/or cooperation in dealing with any human rights risks;
seeking appropriate representations, warranties and covenants from BDC as to its management and mitigation of human rights risks;
seeking appropriate indemnities from BDC with respect to human rights risks;
requiring that BDC operate recognised codes of conduct and/or management standards (e.g. with respect to employment practices, or management of social and/or environmental risk);
requiring that BDC obtain and maintain specified management certifications and/or quality marks;
ensuring that NOD (as franchisor) has the ability to review and/or readily to terminate the contract if certain human rights risks materialise or in the event that BDC fails to observe agreed standards with respect to the management of human rights risks;
developing and implementing a human rights due diligence process, consistent with the UN Guiding Principles on Business and Human Rights;
establishing a company level grievance mechanism to enable those whose human rights have been adversely impacted by the activities of either NOD or any of its franchisees to bring concerns and bring complaints to NOD directly and to enable an appropriate response consistent with NOD’s Corporate Responsibility to Respect human rights under the UN Guiding Principles on Business and Human Rights.

For further information and ideas see the “Practical Resources” section of this chapter.

Ultimate Protection Company (“UPC”) is a private security company incorporated in Ruritania. Its clients include Divergent Mining Company (“DMC”), the owner and operator of several mining sites and associated processing facilities around the country. In the last few months, trade union leaders have raised a number of concerns with DMC’s management. These concerns included poor pay and conditions, widespread use of “zero hours contracts” and potentially dangerous conditions in the workplace. After a meeting between DMC management and worker representatives ended acrimoniously, workers and their families staged a sit-in protest at one of DMC’s facilities. The following day, news reached the protestors of a fatal accident at another of DMC’s facilities and the protest suddenly became violent. Unable to contain the situation, employees of UPC began firing on the protestors, killing two people and seriously injuring several others, including one child.

The human rights that have been adversely impacted in this scenario, based on the facts provided, might include:

the right to life;
- Universal Declaration of Human Rights (1948), Article 3
- International Covenant on Civil and Political Rights (1966), Article 6
the right to security of the person;
- Universal Declaration of Human Rights (1948), Article 3
- International Covenant on Civil and Political Rights (1966) Article 9
the right to just and favourable conditions of work (including safe and healthy working conditions); and
- Universal Declaration of Human Rights (1948) Art 25.1
- International Covenant on Economic, Social and Cultural Rights (1966) Art 12
- See also International Health Conference. Constitution of the World Health Organization. (1946).
the right to gain a living through work and the right to an adequate standard of living.
- Universal Declaration of Human Rights (1948), Articles 23 and 24
- International Covenant on Economic, Social and Cultural Rights (1966) Article 7
- See also the many conventions and recommendations adopted by the ILO

According to the OHCHR Interpretative Guide,

“there are three basic ways in which an enterprise can be involved in an adverse impact on human rights:

(a) It may cause the impact through its own activities;

(b) It may contribute to the impact through its own activities—either directly or through some outside entity (government, business or other);

UPC

UPC may have caused adverse human rights impacts through its activities as a private security contractor, for instance in failing to exercise sufficient care in the recruitment of its operatives, or in failing to train and/or supervise staff appropriately or adequately.

DMC

DMC may have caused adverse human rights impacts through its own activities in its treatment of its own workers and in its failure to ensure safe working conditions at its mining sites and associated processing facilities. In addition, it is possible that DMC might be said to have contributed to any adverse human rights impacts resulting from the actions of personnel of UPC if, for example, the actions of DMC managers had exacerbated or inflamed the situation in some way. In addition, or in the alternative, those adverse human rights impacts might possibly be directly linked to DMC’s operations, products and services, having been caused by an entity with which it has a business relationship (in this case a security services contract).

As legal counsel to DMC you are likely to be concerned about the legal and financial implications of the disruption at DMC facilities, including, for example, an inability to meet (or a delay in meeting) commitments under agreements with third parties. As well as ethical concerns about the treatment of workers and workplace safety, you may be concerned about the possibility of enforcement action by local labour inspectorates, as well as the possibility of civil claims for damages or, if the applicable law permits, criminal prosecution for corporate homicide. You will need to consider the possibility of legal liability towards those killed and injured at the protests as a result of the actions of private security providers at the facilities (e.g. on the basis of negligence). Even if liability under civil claims does not appear to be likely or possible, there remains the possibility of complaints (and further associated adverse publicity) under other schemes, e.g. complaints mechanisms operated by National Human Rights Institutions, or the National Contact Point procedures of the OECD Guidelines for Multinational Enterprises. You will need to consider what duties of disclosure (e.g. to the public, to investors, to financial institutions, and/or to other key business partners, etc) exist in relation to the human rights related risks that have emerged. You will also want to consider any rights to require information or review or terminate the UPC contract, and potentially whether other security contracts with other providers at the site (or indeed at other sites) may present the same or similar risks. You will need to consider the implications of this scenario for any commercial financing, export financing or export credit arrangements (e.g. whether the human rights impact monitoring and/or performance of DMC represents a breach of any commitments given in the course of seeking finance or governmental support). Your client may also be concerned about the reputational damage that could arise from the revelations about its employment practices and the deaths and injuries sustained at the protests, and the implications of this for investor, customer and stakeholder relations generally.

As legal counsel to UPC you are likely to be preparing yourself and your client for the possibility of criminal enforcement action against the company, its management, or its staff (or a combination of the above). You will need to consider the possibility of legal liability towards those killed and injured at the protests as a result of the actions of employees of UPC at the facilities (e.g. on the basis of private law theories of negligence). You will also be concerned about the reputational damage that may flow from UPC’s response to the security situation at the DMC facilities, and the possibility that this will affect UPC’s ability to continue to fulfil obligations under current contracts and to secure future contracts for security services.

A reminder of the relevant provisions of the UN Guiding Principles on Business and Human Rights

DMC

In this scenario, the kind of steps that DMC may need to take in order for DMC to address adverse human rights impacts in the manner set out in the UN Guiding Principles on Business and Human Rights might include (drawing in each case on internal and/or independent external human rights expertise and the outcomes of meaningful consultation with potentially affected groups and other relevant stakeholders; see Guiding Principle 18 and Commentary):

a detailed review of its policies and practices with respect to:
- workplace health and safety; and
- engagement with trade unions;
- recruitment, management, supervision and monitoring of private security providers;
development and implementation of a comprehensive strategy to address management deficiencies identified through the review mentioned above;
provision of appropriate remedies (e.g. financial compensation, restorative remedies, apologies) for past harm;
cooperation with the relevant domestic regulatory agencies with respect to the provision of such remedies
development and implementation of effective strategies and methodologies for tracking and reporting on the effectiveness of its responses to adverse human rights impacts (potential and actual).

UPC

In this case scenario, the kind of steps that UPC may need to take in order for UPC to address adverse human rights impacts in the manner set out in the UN Guiding Principles on Business and Human Rights might include (drawing in each case on (i) internal and/or independent external human rights expertise, (ii) the content pf internationally recognised “good practice” standards for private security contractors and (iii) the outcomes of meaningful consultation with potentially affected groups and other relevant stakeholders; see Guiding Principle 18 and Commentary):

a detailed review of its policies and practices with respect to recruitment, training, monitoring, remuneration or staff (such review to include a review of the standard terms of employment contracts for security personnel);
a detailed review of its field operational policies and procedures, including its policies on storage and use of weapons;
development and implementation of a comprehensive strategy to address management deficiencies identified through the review mentioned above;
provision of appropriate remedies (e.g. financial compensation, apologies) for past harm;
cooperation with the relevant domestic regulatory agencies with respect to the provision of such remedies;
development and implementation of effective strategies and methodologies for tracking and reporting on the effectiveness of its responses to adverse human rights impacts (potential and actual).

Further reading

OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’

Q6. If you had been engaged as legal counsel to DMC with respect to the negotiation and conclusion of an agreement with UPC to provide security services to DMC facilities, what steps might you have recommended, to ensure that any human rights risks arising from or connected with the proposed supply arrangement were:

(a) properly identified; and

(b) appropriately addressed, managed, and mitigated (including through contractual means)

in light of your client’s Corporate Responsibility to Respect human rights and in order to manage the legal, commercial, financial and reputational risks you have identified in your answers to Qu. 3 and Qu. 4 above?

Reminder: The commentary to Guiding Principle 19 of the UN Guiding Principles on Business and Human Rights states

Important note: As DMC’s legal counsel you would need to consider and discuss carefully with your client the legal, commercial, financial and reputational risks and opportunities of different human rights risk management options against the background of applicable law and legal systems.

(a) Any actual or potential (of the kind identified in the model answers to Qu. 1 and 2 above) and the legal, commercial, financial and reputational risks arising from them (e.g. of a kind described in the model answers to Qu. 3 and 4 above) could potentially have been identified by discussing and agreeing with the client a due diligence process that:

included a thorough review of UPC’s past record as a private security provider, which would include a review of past complaints made against the company and its employees under voluntary mechanisms as well as pursuant to applicable regulatory regimes;
included a thorough review of UPC’s practices and policies with respect to recruitment and training and supervision of security operatives;
included a thorough review of employment terms and conditions for security staff;
included a thorough review of UPC’s field operational policies and procedures, including its policies on storage and use of weapons;
took account of UPC’s record of adherence to and compliance with the Voluntary Principles on Security and Human Rights

(b) Ways to address, manage, and mitigate human rights related risks (including through contractual means) include:

ensuring that the contract includes provisions sufficient to enable DMC to properly monitor the risks of adverse human rights impacts arising from or connected with the activities of the private security contractor under the services agreement, including provisions relating to reporting, rights of access and audit;
seeking appropriate representations, warranties and covenants from UPC as to its management and mitigation of human rights related risks;
seeking appropriate indemnities from UPC;
requiring UPC operate in line with recognised codes of conduct and/or management standards such as the Voluntary Principles on Security and Human Rights
requiring that UPC obtain and maintain specified management certifications and/or quality marks;
ensuring that DMC has the ability to review and/or readily terminate the services contract if certain human rights risks materialise or in the event that UPC fails to observe agreed standards with respect to the management of human rights risks in its private security operations;
developing and implementing a human rights due diligence process, consistent with the UN Guiding Principles on Business and Human Rights;
establishing site level or operational level grievance mechanisms to enable those whose human rights have been adversely impacted by DMC and/or certain contractors with whom DMC has a business relationship and whose adverse human rights impacts may be directly linked to DMC’s operations, products or services) to raise concerns and bring complaints to DMC directly and to obtain remediation in accordance with the standards laid down in the UN Guiding Principles on Business and Human Rights.

For further information and ideas see the “Practical Resources” section of this chapter.

Practical resources for commercial transactions lawyers

Pre-engagement checks and screening

In order to comply with their professional and legal obligations, lawyers must carry out certain checks before they can accept instructions from clients. For instance, if you work as a lawyer in a law firm you will need to check for possible conflicts of interest between the work contemplated in the new instructions, any other work being carried on by the firm, and any other business interests of the firm or its lawyers. In many jurisdictions it will be obligatory to carry out identity checks prior to accepting instructions from new clients, for instance under economic sanctions, anti-money laundering or anti-corruption regulations, so that you are in a position to identify potentially higher risk transactions and verify the client’s identity. You should be thoroughly familiar with the local professional and legal standards that apply to you as a practising lawyer, as well as the internal controls and compliance systems that your firm has put in place to help you to identify and miminise these risks.

Pre-engagement human rights screening can help you, at an early stage to:

identify potential human rights risks associated with (i) a proposed commercial transaction and/or (ii) the business activities of the companies involved;
identify potential ethical and/or reputational risks to your firm and/or your client; and
begin to develop, with your client, a strategy for responding to these risks in a manner which is consistent with:
- your legal and professional obligations as a lawyer;
- your (and your firm’s) responsibilities under the UN Guiding Principles on Business and Human Rights as a business actor and as a professional adviser to other business enterprises; and
- the client’s own approach and/or stated intentions.

However, this is no substitute for detailed transactional legal due diligence, discussed further below.

Pre-transaction human rights screening: commercial transactions: general: example checklist

Important notes: The checklist below is illustrative only. It is not exhaustive and will not identify all of the human rights issues that may be relevant to your prospective client and/or the proposed transaction. Furthermore, not all of these questions will be relevant in a given context; and those that appear relevant will obviously need reviewing and adapting to suit the specific transaction and circumstances.

Prospective client’s approach to business and human rights generally

Has the prospective client (or its parent company if it is a member of a corporate group) made a public policy commitment in relation to business and human rights?
Does the prospective client operate in accordance with a human rights code of conduct? Where is this documented and how is it conveyed to managers and staff? Is human rights training part of staff induction and/or training?
Does the prospective client (or its parent company if it is a member of a corporate group) report publicly on the human rights risks arising from or linked to its business and how it manages those risks? Is the report externally verified? If so, is a recognised reporting framework used? Is this reporting consistent with applicable laws on public reporting and other requirements to disclose human rights risks?
Does the prospective client (or its parent company if it is a member of a corporate group) participate in any self-regulatory or industry-specific initiatives relating to business and human rights? If so, which?
Has the prospective client (or its parent company if it is a member of a corporate group) been the subject of (a) independent benchmarking or reporting initiatives (b) adverse press comment or (c) shareholder action or (d) public demonstrations or consumer boycotts as a result of adverse human rights impacts arising from its [business activities, products or services].

Agreement for legal services (also referred to as an “engagement letter” or “retainer” agreement): business and human rights: key provisions potentially relevant to business and human rights

Scope of work:

In light of the outcomes of pre-engagement checks and screening for human rights issues (see example 1 above) you will want to discuss with your client the extent to which human rights issues will need to be covered in any pre-transaction due diligence, and in any other project-related work (including follow up and supplemental legal services and ensure that this is reflected in the “scope of work” provisions in the retainer agreement between you and your client.

Responsibilities of client:

For more complex commercial transactions work, your engagement letter is likely to contain provisions relating to your access to information and documents relevant to the transaction. If the pre-engagement screening has highlighted possible human rights risks associated with the transaction, you may wish to tailor those provisions to ensure that information and documents relating to those specific risks come within the scope of what you will have access to.

Integrity and ethics:

Your engagement letter may set out, in general terms, your firm’s policies and aspirations as regards professional, ethical and business standards. In addition, it may record the expectation that the client operate to similarly high standards (particularly if the client has its own code of ethics or human rights policy which the law firm/lawyer may be required to adhere to) and will not request any services from the lawyer that would be disreputable or compromise the firm’s integrity or ability to comply with applicable professional standards or regulations. You may want to consider, in light of your pre-engagement checks and screening, whether there is a need for any specific reference to human rights standards in these general terms.

Due diligence

Preamble

In the context of preparations for a commercial transaction, such as a long-term supply agreement, or a distribution or franchise agreement, you may hear two kinds of “due diligence” processes mentioned:

transactional legal due diligence (or simply, “due diligence”); and
human rights due diligence (in the sense used in the UN Guiding Principles on Business and Human Rights).

Both kinds of processes involve investigations into human rights risks, and they are often discussed as if they were interchangeable. However, they have different purposes and aims, even if the methodologies may be similar. The differences, similarities and links are explained more fully in the Q&A below.

Due diligence is a comprehensive investigation into, and assessment of, a company or business (or a group of companies or businesses) to determine:

whether the price sought by a seller for the shares or assets is a fair one (and whether any price adjustments should be sought by the buyer);
what risks and liabilities may exist (or may subsequently crystallise) for which the buyer/merger company/joint venture party/partner could become liable to; and
in light of the above:
- the steps that could be taken to address these potential sources of liability and/or allocate legal risk or its consequences;
- potential obstacles to completion; and
- appropriate contractual protections for the parties (e.g. through representations and warranties, and indemnities).

Human rights due diligence is the process through which “an enterprise identifies the information it needs in order to understand its specific human rights risks at any specific point in time and in any specific operating context, as well as the actions it needs to take to prevent and mitigate them.”

OHCHR, ‘ The Corporate Responsibility to Respect, an Interpretative Guide’ , p. 31.

In the context of a share or asset purchase, human rights due diligence will help to ensure the buyer continues to meet its Corporate Responsibility to Respect human rights following completion, through the early identification of, mitigation of, and preparation for proper management of the relevant human rights risks. The Commentary to the UN Guiding Principles on Business and Human Rights recommends that human rights due diligence “be initiated as early as possible in the development of a new activity or relationship, given that human rights risks can be increased or mitigated already at the stage of structuring contracts or other agreements, and may be inherited through mergers or acquisitions” (See UNGP 17, Commentary).

Note: The key difference between transactional legal due diligence and human rights due diligence (in the sense used in the UN Guiding Principles on Business and Human Rights, is that transactional legal due diligence focuses on risks (i.e. legal, financial, commercial and reputational) to the relevant companies, businesses and/or assets, while human rights due diligence is concerned with risks to people (i.e. risks of having an adverse impact on human rights more generally, regardless of whether these represent a material risk to the enterprise itself). However, in practice these different risks can be inter-linked, as the presence of risks of adverse human rights impacts can pose a risk to the company’s bottom line, and the greater the severity of these risks, the greater the likelihood of legal liability and financial loss in practice. See further the discussion on severity and prioritisation towards the end of this section.

The methodology used and the time commitment involved will vary from transaction to transaction. However, due diligence investigations into human rights risks will typically involve:

reviewing documents;
interviews and discussions with managers, employees and other people with relevant knowledge;
interviews and discussions with representatives of local communities and other affected stakeholders; and
where necessary, site visits.

“The [human rights due diligence] process should include assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and communicating how impacts are addressed. Human rights due diligence: (a) Should cover adverse human rights impacts that the business enterprise may cause or contribute to through its own activities, or which may be directly linked to its operations, products or services by its business relationships; (b) Will vary in complexity with the size of the business enterprise, the risk of severe human rights impacts, and the nature and context of its operations; (c) Should be ongoing, recognizing that the human rights risks may change over time as the business enterprise’s operations and operating context evolve. (Guiding Principle 17).

See further UN Guiding Principles on Business and Human Rights, esp. 17-22, and OHCHR, ‘The Corporate Responsibility to Respect, an Interpretative Guide’

The buyer’s lawyers will wish to focus on the human rights risks that pose the greatest legal, financial, commercial and reputational risks to the relevant company, business and assets, as well as to the client’s own business activities following completion.

The question of how to prioritise of human rights issues in human rights due diligence processes is addressed in the UN Guiding Principles on Business and Human Rights.

“While business enterprises should address all their adverse human rights impacts, it may not always be possible to address them simultaneously. In the absence of specific legal guidance, if prioritization is necessary business enterprises should begin with those human rights impacts that would be most severe, recognizing that a delayed response may affect remediability. Severity is not an absolute concept in this context, but is relative to the other human rights impacts the business enterprise has identified.” (Guiding Principle 24, Commentary.

“… the severity of human rights impacts “will be judged by their scale, scope and irremediable character”. This means that both the gravity of the impact and the number of individuals that are or will be affected (for instance, from the delayed effects of environmental harm) will be relevant considerations. “Irremediability” is the third relevant factor, used here to mean any limits on the ability to restore those affected to a situation at least the same as, or equivalent to, their situation before the impact. For these purposes, financial compensation is relevant only to the extent that it can provide for such restoration. OHCHR, ‘The Corporate Responsibility to Respect, an Interpretative Guide’ , p.83.

However, the UK Guiding Principles make it clear that companies should not address only severe human rights risks and ignore others. The OHCHR Interpretative Guide suggests that business enterprise concentrate their efforts on addressing the most “salient” human rights issues connected to their business activities. However, “as soon as the most severe impacts are addressed, the enterprise should turn to those with the next greatest severity and so on until it has addressed all its actual and potential impacts on human rights (bearing in mind that this is likely to be an ongoing exercise that adjusts to changing circumstances).” OHCHR, ‘The Corporate Responsibility to Respect, an Interpretative Guide’, p.82.

You will need to take local advice with respect to the design and implementation of due diligence investigations into human rights risks. This advice will need to cover questions such as
- whether human rights due diligence is mandatory in certain circumstances, and, if so, what requirements must be met; and
- what could be the consequences of a failure to carry out due diligence (or the failure to carry out thorough due diligence into specific human rights risks), for instance under the law of negligence?
- the legal consequences and risks (if any) associated with the use of specific human rights due diligence methodologies and techniques.

Explainer box: The UN Guiding Principles on Business and Human Rights on the relationship between human rights due diligence and legal liability

“Conducting appropriate human rights due diligence should help business enterprises address the risk of legal claims against them by showing that they took every reasonable step to avoid involvement with an alleged human rights abuse. However, business enterprises conducting such due diligence should not assume that, by itself, this will automatically and fully absolve them from liability for causing or contributing to human rights abuses.”

Guiding Principle 17, Commentary.

As noted above, transactional legal due diligence processes will focus on the human rights risks that pose the greatest risks for the financial standing and future performance and prospects of the relevant business activities and the enterprise itself, whereas human rights due diligence, carried out in accordance with the UN Guiding Principles on Business and Human Rightswill focus, at first, on the potential human rights risks that are most severe (in terms of gravity, scope and lack of remediality) . However, in practice the more severe the risk of adverse human rights impacts, the greater the likelihood and severity of legal, financial, commercial and reputational risk. In other words, if both are done correctly, the human rights risks identified through human rights due diligence processes (on the one hand) and the human rights risks identified in the course of transactional legal due diligence (on the other hand) are likely to be similar. For further useful discussion on the concept of severity see OHCHR, ‘The Corporate Responsibility to Respect Human Rights, an Interpretative Guide’, pp. 83-84.
For both transactional legal due diligence and human rights due diligence, a human rights risk assessment will include a consideration of the likelihood of the relevant risks materialising. This is likely to include a consideration of factors such as:
- sector;
- operating context;
- country of operations;
- capacity of management to address the risk.
  
  However, as the OHCHR Interpretative Guide points out, “a low probability of a severe human rights impact alone cannot justify reducing the priority of efforts to mitigate the risk. Instead, the remediability of the potential impact must be a key factor in determining the legitimacy of delaying such efforts. In sum, in the context of risks to human rights, the severity of actual or potential risks must be the dominant factor.” OHCHR, ‘The Corporate Responsibility to Respect Human Rights, an Interpretative Guide’, p. 83.
In practice, the role of lawyers in due diligence investigations into human rights risks will often be to flag areas of specific concern to the relevant department within the client organisation and/or to seek expert opinion and advice on specific issues such as stakeholder concerns and/or the views of civil society. Lawyers may not necessarily be involved in detailed fact-finding in relation to all of these issues (this may be assigned to appropriately informed and qualified specialists in the salient human rights issues), although lawyers would still take a critical role in analysing the outcomes of these investigations and advising on a practical course of action.

1. What are the similarities and differences between transactional legal due diligence and the human rights due diligence processes described in the UN Guiding Principles on Business and Human Rights?

2. In the context of a proposed (a) long term supply agreement, (d) distribution agreement or (c) franchise agreement, when should (i) transactional legal due diligence and (ii) human rights due diligence be initiated?

3. What legal (and other) developments are having an effect (or might be expected to have an effect) on the way human rights risks are approached in transactional legal due diligence? And why?

4. Are there techniques that have been developed for human rights due diligence that could usefully be adapted to the transactional legal due diligence context? What benefits might human rights due diligence approaches potentially offer to the transactional legal due diligence context? Might there be challenges too? If so, what might these be?

5. What are the potential legal consequences, in your own jurisdiction, of a failure to carry out (a) transactional legal due diligence and (b) human rights due diligence?

UN Guiding Principles on Business and Human Rights, esp. Guiding Principles 17-22.
OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’
Monash University, OHCHR, UN Global Compact, ‘Human Rights Translated 2.0: A Business Reference Guide’ (2017), copy available here http://www.ohchr.org/Documents/Publications/HRT_2_0_EN.pdf
Shift & Mazars, UN Guiding Principles Reporting Framework, February 2015 (see especially p. 17)
United Nations Global Compact, ‘Integrating Concerns for Human Rights into the Mergers & Acquisitions Due Diligence Process': A good practice note endorsed by the UN Global Compact human rights working group on 26^th July 2014
See further the various tools and resources available via the Business and Human Rights Resources Centre

Resources

This section is concerned with the investigation of human rights risks as part of transactional legal due diligence (as distinct from human rights due diligence). (For a discussion of the similarities and differences between transactional legal due diligence and human rights due diligence see the Due Diligence Q&A above)

As a commercial transactions lawyer, the better your understanding of the potential and actual human rights impacts of the business activities in question, the better equipped you will be to work with your client to develop strategies to address the legal, commercial, financial and reputational risks and ethical challenges that can arise from them.

In the sections below you will find some materials aimed at helping you develop an approach to identifying human rights risks as part of transactional legal due diligence prior to entering into:

a long term supply agreement (goods and/or services);
a distribution agreement; or
a franchise agreement.

However, it will be up to you (in conjunction with your client, as appropriate given the nature of your lawyer-client relationship) to choose which resources, and which aspects of those resources, are most relevant to your particular transaction and the approach agreed with your client. In all cases, you will need to take local legal advice.

In practice, you may encounter challenges in obtaining quality information relevant to human rights risks in the course of transactional legal due diligence. In addition to time and resource constraints, you may be constrained by confidentiality agreements between your client and the proposed business partner (e.g. long term supplier of goods and/or services or franchisee). In such cases, you will need to discuss carefully with your client, in light of local legal conditions and any contractual arrangements entered into, alternate ways of investigating areas of potential concern (e.g. through trusted proxies).

Heads of Agreement: proposed long-term agreement for supply of goods and/or services; proposed franchise agreement; proposed distribution agreement

Explanatory notes: In order to provide clarification of the nature and scope of the proposed transaction, and the necessary steps towards completion, it may be convenient and advantageous for the negotiating parties to enter into a “heads of terms” for the proposed transaction at an early stage of negotiations. In light of the human rights issues identified thus far,you should consider the following:

Preconditions:

An important pre-condition to completion is likely to be completion of satisfactory “financial, commercial and legal due diligence”. You should consider whether you may need to explicitly mention due diligence in respect of human rights issues here.

Due diligence:

The heads of terms may specify the kinds of documents, information and personnel that the different parties will have access to in the course of the due diligence process. You should ensure that this wording is sufficiently wide to allow the parties to carry out all of the due diligence investigations of human rights risks likely to be necessary in the circumstances (as agreed with your client). You should consider whether the time scales for completion of the various due diligence activities are sufficient and appropriately sequenced to enable identification of, and a proper understanding of, the different sources of human rights risks, particularly if specialist expertise is required.

Ongoing checks and controls:

For longer term arrangements, such as long-term supply arrangements, or franchise or distribution arrangements, the heads of terms may set out, in outline form, the ongoing human rights related checks and controls that will apply and to which entities, if multiple entities are involved. This may provide an opportunity for early discussion and clarification of the ethical standards (including human rights standards) the various parties will operate on, and the manner in which decisions on such matters will be taken or changes implemented.

Due diligence: proposed long-term agreement for supply of goods and/or services; proposed franchise agreement; proposed distribution agreement: supplementary questions on human rights issues: example checklist

Explanatory notes: The example checklist below is designed to supplement a questionnaire designed for a wider due diligence process in the context of a longer term commercial arrangement, such as a long-term supply arrangement, or franchise or distribution arrangement.

Note, however, that:

(i) this example checklist is illustrative only. It is not exhaustive and will not identify all of the human rights issues that may be relevant to your particular transaction;

(ii) not all of these questions will be relevant in a given context; and those that are relevant will obviously need reviewing and adapting to suit the specific transaction and circumstances;

(iii) to ensure that the due diligence process is comprehensive in relation to human rights issues, you may need to draw on internal and/or independent external human rights expertise, and to consult with potentially affected groups and other relevant stakeholders;

(iv) this example checklist is subject to local legal advice.

Human rights risks and legal compliance

Many potential adverse business-related human rights impacts, such as impacts on environmental, labour or consumer rights, are covered by domestic regulatory regimes. Thus, general due diligence questions about legal compliance are relevant to an understanding of human rights risks.

However, the legal compliance record of a company or business will only ever give a partial picture of its human rights impacts and the different legal, financial and reputational risks that may flow from them. As the hypothetical case scenarios in the previous section illustrate, a company can be fully compliant with domestic law, and yet still face significant legal, commercial, financial and reputational risk arising from its adverse human rights impacts. This is especially likely to be the case in places where legal standards are low, or below internationally recognised standards or unclear and/or regulatory oversight is patchy or weak. An understanding of human rights standards would assist in identifying and managing these risks. For further information about human rights generally, including the sources and status of human rights standards, see the Introductory sections.

Approach of [name of party] to business and human rights generally

Has the management of [name of party] made a public policy commitment in relation to business and human rights?
Does [name of party] operate in accordance with a human rights code of conduct? Where is this documented and how is it conveyed to managers and staff? Is human rights training part of staff induction and/or training? Does [the partner company/business] report on its performance against the code of conduct? If so, are these reports externally verified? If so, is a recognised reporting framework used?
Does [name of party] report publicly on the human rights risks arising from or linked to its business and how it manages those risks? Is the report externally verified or benchmarked? If so, is a recognised reporting framework used? Is this reporting consistent with applicable law on public reporting and other requirements to disclose human rights risks?
What has [name of party] identified as its main sources of human rights related risk? What steps has [the company] taken to assess, address, mitigate and remedy any adverse human rights impacts identified?
Does [name of party] participate in any self-regulatory or sector-specific initiatives (or is it the subject of the same) relating to business and human rights? If so, which? Have any comments been made about [the partner company/business]’s compliance (or non-compliance) with those initiatives? If so, what?
Has the [name of party] been the subject of (a) adverse press comment or (b) public demonstrations or consumer boycotts as a result of adverse human rights impacts arising from its [business activities, products or services]?

Licences:

Have licences and permissions (including development and planning permissions) been awarded in accordance with local law? Were any objections raised to the grant of those licences on human rights or governance grounds, either during the application and grant process or subsequently? If so, what was the nature of those objections? How were they resolved? Does this accord with international standards?

Land/buildings/plant/site:

Were any inhabitants relocated in order for any site to developed? Is the site in the vicinity of habitation by groups with the status of indigenous peoples? Does the location of any plant or operations have the potential to affect negatively access by local inhabitants’ to water or other resources? Could the site or operations cause disruption to local farming or fishing or other sources of livelihood? Does the land have important cultural value to the local community?

Environment:

[Note: The questions below are intended to be supplementary to more general questions relating to compliance with local environmental law]. Do operations have the potential to negatively affect the local environment, for instance through the introduction of contaminants into the local air, soil or water? Have any complaints been made in relation to the environmental impacts or performance of [name of company]? If so, what was the nature of those complaints? How were they resolved?

Employees:

[Note: The questions below are intended to be supplementary to more general questions relating to compliance with local labour law]. Do workers receive training in relation to workplace health and safety? What percentage of the workforce is made up of (a) contract workers and (b) migrant workers? What are the policies of [name of company] in relation to (a) contract workers and (b) migrant workers? What are the policies on (a) freedom of association and (b) collective bargaining? What are the policies on minimum age verification? What policies are in place as regards the involvement of workers under 18 in potentially hazardous work? How are workers recruited? Are sub-contractors used? If so, how are they incentivised, remunerated or monitored? Do workers have possession of and control over their passports and/or other identity documents? What steps does [name of party] take to ensure that workers are properly informed about their labour rights and how they can be enforced? What opportunities are there for workers to raise concerns and grievances about the performance of [name of party] in relation to labour rights?

Supply chain issues:

What steps are taken to ensure that suppliers of [name of party] are compliant with internationally recognised labour standards including international prohibitions on the worst forms of child labour and forced labour? Is compliance with internationally recognised labour standards a standard term of contracts with suppliers? What steps are taken in respect of under-age workers found to be working in the supply chain and other human rights issues more generally?

Stakeholder engagement and community relations:

Does [name of party] engage with or take advice from civil society organisations, non-governmental organisations or community representatives with respect to the human rights impacts of the site/operations? If so, how? What has [name of party] learned from these processes?

Private security arrangements:

Are private security companies used by [name of party] in connection with [the business]? Are their staff and contractors independent of government influence? Are they appropriately regulated? Do they accept international voluntary standards applicable to the sector? Do private security personnel receive sufficient training with respect to the use of force? Have any complaints been received in relation to the performance of any private security providers or their employees? If so, what were the nature of those complaints and how were they resolved?

Government actions and relations:

Have actions by government or State agencies in connection with [name of party] and/or [the business] had (or might they have the potential to have) an adverse impact on the human rights of local inhabitants or others? What is the government’s record with respect to (a) human rights protection generally, (b) labour enforcement and (c) treatment of union representatives? What are [name of party]’s policies with respect to engagement with governments and State agencies? What are [name of party]’s policies with respect to supply of goods and services to governments and State agencies?

Further reading

Shift & Mazars, UN Guiding Principles Reporting Framework, February 2015

Contract checklists

In this section you will find information and suggestions as to different ways you may be able to address, through contractual means, the human rights related risks you have identified as part of any due diligence processes.These are presented in a generic way, for you to consider alongside your usual standard templates and precedents.

For ease of reference, the resources in this section have been divided by reference to four main types of transaction:

long-term supply contract (goods);
long-term supply contract (services);
distribution agreement;
franchise agreement

Further notes:

(i) In practice, commercial transactions may not fall neatly in the above categories. Your transaction may be a “hybrid” arrangement in the sense that it may contain elements of some of all of these. It will be up to you (in conjunction with your client) to choose which resources, and which aspects of those resources, are most relevant to your particular transaction and your client’s needs. Obviously, in each case, these resources must be tailored to the transaction in question, and specifically in light of the human rights risks identified in the course of any due diligence investigations and your client’s instructions and circumstances.

(ii) The checklists and drafting notes below are intended to be illustrative, not exhaustive. All of the suggestions below are subject to local legal advice.

Representations, warranties and covenants: long-term supply agreement (goods): potential human rights issues to consider

Explanatory notes: As part of a long-term supply agreement, the parties may provide each other with warranties with respect to a range of matters relating to the contracting entities, and their status, performance and, in some limited cases, prospects. A warranty in this context is a statement from one party to an agreement to another, designed to give assurance that certain facts are true, or that certain things will happen. Together with indemnities (see below) they are an important way of allocating risk between the parties. The inclusion of representations and warranties with respect to human rights risks can be a useful way of eliciting information about human rights risks, and clarifying the nature and scope of human rights risks identified in the course of due diligence investigations. However, they will usually be pared back in the course of a negotiation and, in any event, are no guarantee that losses arising from human rights risks that were undisclosed or which crystallise post-completion will be recoverable by one party from another (e.g. in the event of insolvency, etc). You will need to discuss carefully with your client, in light of the relevant circumstances, the scope of the warranties, their limitations in specific circumstances and the resources that may be needed to ensure that subsequent liabilities arising from adverse human rights impacts can be met.

Representations and warranties (supplier):

In order to help identify and address human rights risks in its supply chain, the purchaser may require certain assurances from the supplier with respect to supplier’s human rights-related performance and practices. These assurances, which are given in the representation and warranties sections of the agreement, could cover matters including:

certification of compliance with required management standards and/or quality marks (e.g. for environmental management, workplace health and safety management, etc);
compliance with voluntary codes of conduct (e.g. codes of conduct aimed at ensuring fair and decent working conditions in the supply chain);
compliance with applicable regulatory schemes.

If you are acting for the purchaser, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , what human rights-related matters may need to be specifically covered in the warranties to ensure that responsibilities for addressing those risks, and any liabilities that arise in respect of them, are allocated in an appropriate manner. Some human rights risks may be covered by general warranties (e.g. relating to the receipt of certain licences, and/or the number and status of any regulatory complaints or legal claims). Some human rights risks may be covered in warranties relating to environmental and/or labour standards and performance. However, in some transactions a more tailored approach may be needed. Areas identified as high risk (because of the scale, scope and/or irremediable character of the adverse human rights impacts) may require a specific set of warranties. Risks that may need to be addressed explicitly in warranties include:

risks associated with the use of private security providers;
risks of serious environmental harm;
risks of serious privacy breaches;
risks arising from poor supply chain management; and
risks of “complicity” in government action that could amount to abuses of human rights.

Covenants (supplier):

If acting for the purchaser, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , the kinds of ongoing commitments that would be reasonable and appropriate to seek from the services provider in relation to monitoring, management and mitigation of adverse human rights impacts arising from, or linked to, the long-term supply arrangement. These could include commitments:

to maintain certain licences;
to maintain certain certifications and/or management standards and/or quality marks for the duration of the supply agreement;
to notify the purchaser promptly of any compliance issues or problems in relation to those licences, certifications, standards or quality marks;
to ensure proper access by the purchaser’s representatives for the purpose of inspections of relevant premises (including ad hoc inspections). (Note: in light of the human rights risks involved, consider whether access may be required to the premises of sub-contractors of supplier as well as the supplier’s own premises);
to report regularly (and/or to respond promptly to purchaser’s requests for information) regarding the management of specific human right risks (e.g. use of child labour, workplace health and safety etc). (See further 8.3 “Access to information and reporting” below);
to secure appropriate representations, warranties and other commitments regarding human rights performance from all suppliers and subcontractors, and to monitor and secure compliance with such provisions;
to carry out periodic human rights due diligence
to use reasonable endeavours, in cooperation with the purchaser as needed from time to time, to address the human rights risks which may arise.

Covenants (purchaser)

If you are acting for a supplier of goods, the use of which may pose human rights risks (whether directly or indirectly; see, for example, discussion exercise 2 above) you should discuss carefully with your client the kinds of covenants and undertakings that will be needed from the purchaser in order to minimise these risks. These could include covenants:

not to use the goods for certain prohibited purposes (and to take reasonable steps to ensure that the goods are not used for the same prohibited purposes by third parties); or
not to sell the goods onwards (either directly or in adapted form) to certain classes of third party buyers or clients (e.g. certain State agencies, or companies involved in certain high risk sectors or operational contexts) without prior consent, without compliance with certain pre-agreed precautions, or at all.

Indemnities: long-term supply agreement (goods): potential human rights issues to consider

If you are acting for the purchaser, you should discuss with your client whether it would be appropriate to seek an indemnity from the supplier in respect of any costs or losses incurred by the purchaser as a result of:

a breach of any of the warranties given by the supplier with respect to its human rights-related performance or policies. (See 5.1 “Representations and Warranties (supplier)” above);
a breach of any of the covenants given by the supplier with respect to its human rights related performance or policies. (See 5.2 “Covenants (supplier)” above);
the failure of ongoing obligations the supplier under the contract to abide by minimum human rights standards (e.g. internationally recognised labour rights standards) in the production of the relevant goods (See 8.1 “Ongoing obligations of supplier with respect to compliance with minimum human rights standards”); or
a breach of human rights-related product specifications (See 8.2 “Specification of goods”, below).

If the goods in question may themselves pose human rights risks (whether directly or indirectly; see, for example, discussion exercise 2), and you are acting for the supplier, you may wish to discuss with your client (depending on the risks involved) whether it would be appropriate to seek an indemnity from the buyer in respect of any costs or losses incurred by the supplier as a result of any breach of any undertakings made with respect to the subsequent sale or use of goods (see 5.3 “Covenants (purchaser)” above).

Financial liabilities arising from human rights risks:

If you are acting for the purchaser, you should discuss carefully with your client whether there are any human rights risks identified in the course of due diligence for which specific indemnities should be sought from the supplier, in order to allow the purchaser to recoup certain costs that it may incur as a result of the materialisation of such risks during the course of the agreement or subsequently. Depending on nature of the risks involved and the outcome of negotiations, these losses could include not only fines and damages awards (and associated legal costs), but also clean-up costs, costs of fact finding and investigative efforts, costs of technical consultants, costs of remediation programmes, costs of implementation of compliance or prevention orders and/or improvement of systems and controls, costs of training programmes, costs of restoration of cultural property and costs of subsequent stakeholder and community engagement efforts.

Termination: long-term supply agreement (goods): potential human rights issues to consider

You should consider carefully with your client whether there are any events relevant to, or connected with, human rights risks that should trigger the review and/or termination of the long-term supply agreement. Potential termination events could include:

a breach of any of the warranties given by the supplier with respect to its human rights related performance or policies. (See 5.1 “Representations and Warranties (supplier)” above);
a breach of any of the covenants given by the supplier with respect to its human rights related performance or policies. (See 5.2 “Covenants (supplier)” above);
the failure of ongoing obligations the supplier under the contract to abide by minimum human rights standards (e.g. internationally recognised labour rights standards) in the production of the relevant goods (See 8.1 “Ongoing obligations of supplier with respect to compliance with minimum human rights standards”);
a breach by a purchaser of its obligations with respect to pricing policies and/or purchasing practice (e.g. under a “purchasing code of conduct”). (See further 8.4“Purchasing procedures and protocols”, below); and
a breach of human rights-related product specifications (See 8.2 “Specification of goods”, below).

Note: You should be aware, however, that termination of a supply agreement can, itself, have adverse human rights impacts (e.g. in the event that it leads to a factory shutdown and/or insolvency of the supplier, resulting in a loss of livelihood for workers and financial support for those who rely on their incomes). These adverse impacts will need to be taken into account in any decision whether to terminate because of concerns about human rights risks.

Miscellaneous: long-term supply agreement (goods): potential human rights issues to consider

Ongoing obligations of supplier with respect to compliance with minimum human rights standards:

Where there is a risk of adverse human rights impacts arising from the methods of production or working practices of the supplier (or sub-contractors of the supplier), the purchaser is likely to require ongoing commitments from the supplier with respect to the management of those risks. If acting for the purchaser, you will want to discuss with your client the minimum contractual requirements that should apply, in order for your client to be able to identify and manage human rights risks within its supply chain, in light of any domestic legal requirements and the UN Guiding Principles on Business and Human Rights.

Specification of goods:

If there are adverse human rights impacts associated with the production of goods (or components of goods) you should discuss with your client whether it is possible to address or mitigate these risks through contractual provisions relation to product specifications. For instance, it may be possible for product specifications to exclude:

certain raw materials; or
components or products
- produced using certain methods; or
- originating from certain sources.

Access to information, rights of audit and reporting:

Whether you are acting for the supplier or the purchaser, you will need to discuss carefully with your client the access to information, rights of audit, and reporting provisions that will be needed as between the parties in light of:

the types and severity of human rights related risks identified in the course of due diligence processes; and
the purchaser’s own reporting obligations under;
- any applicable domestic regimes on the reporting of social, environmental and/or human rights-related risks; and/or
- any applicable voluntary reporting schemes or intiatives to which it is party.

Purchasing procedures and protocols:

Whether you are acting for a supplier or a buyer, you should be aware that the pricing policies and purchasing practices of a purchaser under a long-term supply agreement can lead to adverse human rights impacts on workers further down the supply chain. Tight pricing policies and very short lead times or frequent changes at short notice can put pressures on suppliers which can result in abuses of the labour rights of the supplier’s employees, casual workers and subcontractors. You should be aware of these risks when drafting and negotiating clauses relating to purchasing protocols and lead times. A full understanding of the risks will be needed for you to draft and negotiate a purchasing regime that allows the commercial needs of the purchaser to be met without infringing on the rights of workers under both applicable domestic law and internationally recognised labour standards. To address these risks, you could consider consulting on and drawing up a purchasing code of conduct, which could then form part of the contractual obligations of the purchaser towards the supplier.

Representations, warranties and covenants: long-term supply agreement (services): potential human rights issues to consider

Explanatory notes: As part of a long-term agreement for the supply of services, the parties may provide each other with warranties with respect to a range of matters relating to the contracting entities, and their status, performance and, in some limited cases, prospects. A warranty in this context is a statement from one party to an agreement to another, designed to give assurance that certain facts are true, or that certain things will happen. Together with indemnities (see below) they are an important way of allocating risk between the parties. The inclusion of representations and warranties with respect to human rights risks can be a useful way of eliciting information about human rights risks, and clarifying the nature and scope of human rights risks identified in the course of due diligence investigations. However, they will usually be pared back in the course of a negotiation and, in any event, are no guarantee that losses arising from human rights risks that were undisclosed or which crystallise post-completion will be recoverable by one party from another (e.g. in the event of insolvency etc). You will need to discuss carefully with your client, in light of the relevant circumstances, the scope of the warranties, their limitations in specific circumstances and the resources that may be needed to ensure that subsequent liabilities arising from adverse human rights impacts can be met.

Representations and warranties (service provider):

In order to help identify and address human rights risks in its supply chain, the buyer of services (the “customer”) may require certain assurances from the service provider with respect to human rights-related performance and practices. These assurances, which are given in the representation and warranties sections of the agreement, could cover matters including:

certification of compliance with required management standards and/or quality marks (e.g. for environmental management, workplace health and safety management etc);
compliance with voluntary codes of conduct (e.g. codes of conduct aimed at ensuring fair and decent working conditions in the supply chain);
compliance with applicable regulatory schemes.

If you are acting for the customer, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , what human rights-related matters may need to be specifically covered in the warranties to ensure that responsibilities for addressing those risks, and any liabilities that arise in respect of them, are allocated in an appropriate manner. Some human rights risks may be covered by general warranties (e.g. relating to the receipt of certain licences, and/or the number and status of any regulatory complaints or legal claims). Some human rights risks may be covered in warranties relating to environmental and/or labour standards and performance. However, in some transactions a more tailored approach may be needed. Areas identified as high risk (because of the scale, scope and/or irremediable character of the adverse human rights impacts) may require a specific set of warranties. Risks that may need to be addressed explicitly in warranties include:

risks associated with the use of private security providers;
risks of serious environmental harm;
risks of serious privacy breaches;
risks arising from poor supply chain management; and
risks of “complicity” in government action that could amount to abuses of human rights.

Covenants (service provider):

If acting for the customer, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , the kinds of ongoing commitments that would be reasonable and appropriate to seek from the service provider in relation to monitoring, management and mitigation of adverse human rights impacts arising from, or linked to, the services agreement. These could include commitments:

to maintain certain licences;
to maintain certain certifications and/or management standards and/or quality marks for the duration of the supply agreement;
to notify the customer promptly of any compliance issues or problems in relation to those licences, certifications, standards or quality marks;
to ensure proper access by the customer’s representatives for the purpose of inspections of relevant premises (including ad hoc inspections). (Note: in light of the human rights risks involved, consider whether access may be required to premises of sub-contractors of service provider as well as the service provider’s own premises);
to report regularly (and/or to respond promptly to customer’s requests for information) regarding the management of specific human right-related risks. (See further 12.2 “Access to information and reporting” below);
to secure appropriate representations, warranties and other commitments regarding human rights performance from all suppliers and subcontractors, and to monitor and secure compliance with such provisions;
to carry out periodic human rights due diligence
to use reasonable endeavours, in cooperation with the customer, as needed from time to time, to address human rights risks which may arise.

Covenants (customer)

If you are acting for a service provider in relation to a contract to provide services to a project or undertaking where the outcome of those services (or the project or undertaking) could be applied or used in way that potentially has adverse human rights impacts (see, for example, discussion exercise 2), you should discuss carefully with your client the kinds of covenants and undertakings that will be needed from the customer in order to minimise these risks. These could include covenants:

not to use the services outcomes (e.g. products or technology developed under the services agreement) for certain prohibited purposes (and to take reasonable steps to ensure that the services outcomes are not used for the same prohibited purposes by third parties); or
not to sell the services outcomes (e.g. products or technology developed under the services agreement) onwards (either directly or in adapted form) to certain classes of third party buyers or clients (e.g. certain State agencies, or companies involved in high risk sectors or operational contexts) without prior consent, without compliance with certain pre-agreed precautions, or at all.

Indemnities: long-term supply agreement (services): potential human rights issues to consider

If acting for the customer, you should consider whether it would be appropriate to seek an indemnity from the services provider in respect of any costs or losses incurred by the customer as a result of:

a breach of any of the warranties given by the services provider with respect to its human rights related performance or policies. (See 9.1 “Representations and Warranties (services provider)” above); or
a breach of any of the covenants given by the services provider with respect to its human rights related performance or policies. (See 9.2 “Covenants (services provider)” above); or
a breach of any specific terms relating to compliance with specific human rights related standards or terms in the provision of the services (See 12.1 “Minimum human rights standards applicable to provision of services”, below).

If you are acting for the services provider, you may wish to discuss with your client (depending on the risks involved) whether it would be appropriate to seek an indemnity from the customer in respect of any costs or losses incurred by the services provider as a result of any breach of any undertakings made with respect to the use of services outcomes (see 9.3 “Covenants (customer)” above).

Financial liabilities arising from human rights risks:

If you are acting for the customer, you should discuss carefully with your client whether there are any human rights risks identified in the course of due diligence for which specific indemnities should be sought from the service provider, in order to allow the purchaser to recover certain financial liabilities that it may incur as a result of the materialisation of such risks during the course of the agreement or subsequently. Depending on nature of the risks involved and the outcome of negotiations, these losses could include not only fines and damages awards (and associated legal costs), but also clean-up costs, costs of fact finding and investigative efforts, costs of technical consultants, costs of remediation programmes, costs of implementation of compliance or prevention orders and/or improvement of systems and controls, costs of training programmes, costs of restoration of cultural property and costs of subsequent stakeholder and community engagement efforts.

Termination: long-term supply agreement (services): potential human rights issues to consider

You should consider carefully with your client whether there are any events relevant to, or connected with, human rights risks that should trigger the review and/or termination of the long-term services agreement. Possible termination events could include:

a breach of any of the warranties given by the services provider with respect to its human rights related performance or policies. (See 9.1 “Representations and Warranties (services provider)” above);
a breach of any of the covenants given by the services provider with respect to its human rights related performance or policies. (See 9.2 “Covenants (services provider)” above); and
a breach of any specific terms relating to compliance with specific human rights related standards or terms in the provision of the services (See 12.1 “Minimum human rights standards applicable to provision of services”, below).

Note: You should be aware, however, that termination of a services agreement can, itself, have adverse human rights impacts (e.g. in the event that it leads to workplace shutdowns and/or insolvency of the services provider, resulting in a loss of livelihood for workers and financial support for those who rely on their incomes). These adverse impacts will need to be taken into account in any decision whether to terminate because of concerns about human rights risks.

Miscellaneous: long-term supply agreement (services): potential human rights issues to consider

Minimum human rights standards applicable to provision of services:

Where the services in question pose a risk of adverse human rights impacts (whether directly, see for example discussion exercise 4 above, or indirectly, see for example discussion exercise 2 above), the customer is likely to require ongoing commitments from the service provider with respect to the management of those risks. If acting for the customer, you will want to discuss with your client the minimum contractual requirements that should apply, in order for your client to be able to identify and manage its own human rights-related risks, in light of any domestic legal requirements and the UN Guiding Principles on Business and Human Rights.

Scope of services:

If acting for the service provider, you may wish to discuss with your client whether there may be a need for human rights standards to be written into the scope of services. For example, in the context of a contract for services that carry risks of adverse impacts on human rights (see, for example discussion exercise 4 above), you may wish to discuss with your client, depending on the risks involved, contractual protections to make it clear that requests from the customer that do not conform with certain minimum human right standards will never come within the scope of services (and therefore that the service provider is entitled to refuse to carry out such requests, and that such a refusal will not place the service provider in breach of contract). This clause could provide, if necessary and appropriate, for an ability to seek an independent view as to the reasonableness of such a position if this cannot be agreed.

Access to information, rights of audit, and reporting:

Whether you are acting for the services provider or the customer, you will need to discuss carefully with your client the access to information, rights of audit and reporting provisions that will be needed as between the parties in light of:

the types and severity of human rights related risks identified in the course of due diligence processes; and
the customer’s own reporting obligations under;
- any applicable domestic regimes on the reporting of social, environmental and/or human rights-related risks and/or
- any applicable voluntary reporting schemes or initiatives to which it is party.

Representations, warranties and covenants: distribution agreement: potential human rights issues to consider

Explanatory notes: As part of a distribution agreement, the parties may provide each other with warranties with respect to a range of matters relating to the contracting entities, and their status, performance and, in some limited cases, prospects. A warranty in this context is a statement from one party to an agreement to another, designed to give assurance that certain facts are true, or that certain things will happen. Together with indemnities (see below) they are an important way of allocating risk between the parties. The inclusion of representations and warranties with respect to human rights risks can be a useful way of eliciting information about human rights risks, and clarifying the nature and scope of human rights risks identified in the course of due diligence investigations. However, they will usually be pared back in the course of a negotiation and, in any event, are no guarantee that losses arising from human rights risks that were undisclosed or which crystallise post-completion will be recoverable by one party from another (e.g. in the event of insolvency etc). You will need to discuss carefully with your client, in light of the relevant circumstances, the scope of the warranties, their limitations in specific circumstances and the resources that may be needed to ensure that subsequent liabilities arising from adverse human rights impacts can be met.

Representations and warranties (distributor):

In order to help identify and address human rights risks in its supply and distribution chains, the company contracting for distribution services (the “company”) may require certain assurances from the distributor with respect to human rights-related performance and practices. These assurances, which are given in the representation and warranties sections of the agreement, could cover matters including:

certification of compliance with required management standards and/or quality marks (e.g. for environmental management, workplace health and safety management etc);
compliance with voluntary codes of conduct (e.g. codes of conduct aimed at ensuring fair and decent working conditions in the supply chain);
compliance with applicable regulatory schemes.

If you are acting for the company contracting for distribution services, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , what human rights-related matters may need to be specifically covered in the warranties to ensure that responsibilities for addressing those risks, and any liabilities that arise in respect of them, are allocated in an appropriate manner. Some human rights risks may be covered by general warranties (e.g. relating to the receipt of certain licences, and/or the number and status of any regulatory complaints or legal claims). Some human rights risks may be covered in warranties relating to environmental and/or labour standards and performance. However, in some transactions a more tailored approach may be needed. Areas identified as high risk (because of the scale, scope and/or irremediable character of the adverse human rights impacts) may require a specific set of warranties. Risks that may need to be addressed explicitly in warranties include:

risks associated with the use of private security providers;
risks of serious environmental harm;
risks of serious privacy breaches;
risks arising from poor supply chain management; and
risks of “complicity” in government action that could amount to abuses of human rights.

Representations and warranties (company):

If you act for the distributor you may, depending on the risks involved, wish to give consideration to possible need for warranties from the company with respect to the human rights conditions in which the relevant goods were produced (e.g. that they were not produced using child labour, or, in the case of wood products, that they conform to forestry management standards), or the qualities of the goods themselves (e.g. in the case of print or film media, that they do not constitute a breach of any person’s rights to privacy).

Covenants (distributor):

If acting for the company, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , the kinds of ongoing commitments that would be reasonable and appropriate to seek from the distributor in relation to on going monitoring, management and mitigation of adverse human rights impacts arising from, or linked to, the distribution agreement. These could include commitments:

to maintain certain licences;
to maintain certain certifications and/or management standards and/or quality marks for the duration of the distribution agreement;
to abide by the company’s standards and/or guidance with respect to matters such as community and stakeholder relations and/or sales practices (e.g. sales practices in relation to vulnerable people);
to notify the company promptly of any compliance issues or problems in relation to those licences, certifications, standards, guidance or quality marks;
to report regularly (and/or to respond promptly to company’s requests for information) regarding the management of specific human right-related risks. (See further 16.2 “Access to information and reporting” below);
to carry out periodic human rights due diligence;
to use reasonable endeavours, in cooperation with the company, as needed from time to time, to address human rights risks which may arise.

Covenants (company)

If acting for the distributor, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , the kinds of ongoing commitments that would be reasonable and appropriate to seek from the company in relation to on going monitoring, management and mitigation of adverse human rights impacts arising from, or linked to, the distribution agreement. These could include commitments:

to maintain certain licences;
to maintain certain certifications and/or management standards and/or quality marks for the duration of the distribution agreement;
to notify the distributor promptly of any compliance issues or problems in relation to those licences, certifications, standards, guidance or quality marks.

Indemnities: distribution agreement: potential human rights issues to consider

If acting for the company, you should consider and discuss with your client whether it would be appropriate to seek an indemnity from the distributor in respect of any costs or losses incurred by the customer as a result of:

a breach of any of the warranties given by the distributor with respect to its human rights related performance or policies. (See 13.1 “Representations and Warranties (distributor)” above); or
a breach of any of the covenants given by the distributor with respect to its human rights related performance or policies. (See 13.2 “Covenants (distributor)” above).

If acting for the distributor, you should consider and discuss with your client whether it would be appropriate to seek an indemnity from the company in respect of any costs or losses incurred by the customer as a result of:

a breach of any of the warranties given by the company with respect to the human rights conditions in which the relevant goods were produced or the quality of the goods themselves. (See 13.2 “Representations and Warranties (company)” above);
a breach of any of the covenants given by the company with respect to its human rights related performance or policies. (See 13.4 “Covenants (company)” above).

Financial liabilities arising from human rights risks:

Whether you are acting for the company or the distributor, you should discuss carefully with your client whether there are any human rights risks identified in the course of due diligence for which specific indemnities should be sought from the other party, in order to allow your client to recover certain financial liabilities that it may incur as a result of the materialisation of such risks. Depending on nature of the risks involved and the outcome of negotiations, these losses could include not only fines and damages awards (and associated legal costs), but also clean-up costs, costs of fact finding and investigative efforts, costs of technical consultants, costs of remediation programmes, costs of implementation of compliance or prevention orders and/or improvement of systems and controls, costs of training programmes, costs of restoration of cultural property and costs of subsequent stakeholder and community engagement efforts.

Termination: distribution agreement: potential human rights issues to consider

You should consider carefully with your client whether there are any events relevant to, or connected with, human rights risks that should trigger the review and/or termination of the distribution agreement. Possible termination events could include:

a breach of any of the warranties given by the distributor with respect to its human rights related performance or policies. (See 13.1 “Representations and Warranties (distributor)” above); or
a breach of any of the covenants given by the distributor with respect to its human rights related performance or policies. (See 14.2 “Covenants (distributor)” above).

Note: You should be aware, however, that termination of a distribution agreement can, itself, have adverse human rights impacts (e.g. in the event that it leads to insolvency of the distributor, resulting in a loss of livelihood for workers and financial support for those who rely on their incomes). These adverse impacts will need to be taken into account in any decision whether to terminate because of concerns about human rights risks.

Miscellaneous: distribution agreement: potential human rights issues to consider

Scope of distribution obligations:

The distribution agreement should give the distributor the right to suspend distribution obligations in relation to products where the distribution of those products may contravene legal requirements. If acting for the distributor, you may wish to discuss with your client whether there may also be a need for human rights standards to be written into the scope of distribution obligations. For example, in the context of a contract for to distribute products that carry risks of adverse impacts on human rights (either in their manufacture or their subsequent use), you may wish to discuss with your client, depending on the risks involved, contractual protections to make it clear that all products will conform to certain human rights standards (and therefore that a refusal by the distributor to distribute goods that do not conform to the relevant standards will not place the distributor in breach of contract).

Access to information, rights of audit and reporting:

Whether you are acting for the distributor or the company, you will need to discuss carefully with your client the access to information, rights of audit and reporting provisions that will be needed as between the parties in light of:

the types and severity of human rights related risks identified in the course of due diligence processes; and
each party’s own reporting obligations under:
- any applicable domestic regimes on the reporting of social, environmental and/or human rights-related (see below) risks; and/or
- any applicable voluntary reporting schemes or initiatives to which it is party.

Representations, warranties and covenants: franchise agreement: potential human rights issues to consider

Explanatory notes: As part of a franchise agreement, the parties may provide each other with warranties with respect to a range of matters relating to the contracting entities, and their status, performance and, in some limited cases, prospects. A warranty in this context is a statement from one party to an agreement to another, designed to give assurance that certain facts are true, or that certain things will happen. Together with indemnities (see below) they are an important way of allocating risk between the parties. The inclusion of representations and warranties with respect to human rights risks can be a useful way of eliciting information about human rights risks, and clarifying the nature and scope of human rights risks identified in the course of due diligence investigations. However, they will usually be pared back in the course of a negotiation and, in any event, are no guarantee that losses arising from human rights risks that were undisclosed or which crystallise post-completion will be recoverable by one party from another (e.g. in the event of insolvency etc). You will need to discuss carefully with your client, in light of the relevant circumstances, the scope of the warranties, their limitations in specific circumstances and the resources that may be needed to ensure that subsequent liabilities arising from adverse human rights impacts can be met.

Representations and warranties (franchisee):

In order to help identify and address human rights risks in its supply and distribution chains, the franchisor may require certain assurances from the franchisee with respect to human rights-related performance and practices. These assurances, which are given in the representation and warranties sections of the agreement, could cover matters including:

certification of compliance with required management standards and/or quality marks (e.g. for environmental management, workplace health and safety management etc);
compliance with voluntary codes of conduct (e.g. codes of conduct aimed at ensuring fair and decent working conditions in the supply chain);
compliance with applicable regulatory schemes.

If you are acting for the franchisor, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , what human rights-related matters may need to be specifically covered in the warranties to ensure that responsibilities for addressing those risks, and any liabilities that arise in respect of them, are allocated in an appropriate manner. Some human rights risks may be covered by general warranties (e.g. relating to the receipt of certain licences, and/or the number and status of any regulatory complaints or legal claims). Some human rights risks may be covered in warranties relating to environmental and/or labour standards and performance. However, in some transactions a more tailored approach may be needed. Areas identified as high risk (because of the scale, scope and/or irremediable character of the adverse human rights impacts) may require a specific set of warranties. Risks that may need to be addressed explicitly in warranties include:

risks associated with the use of private security providers;
risks of serious environmental harm;
risks of serious privacy breaches;
risks arising from poor supply chain management; and
risks of “complicity” in government action that could amount to abuses of human rights.

Representations and warranties (franchisor):

If you act for the franchisee you may, depending on the risks involved, wish to give consideration to possible need for representations and warranties from the franchisor with respect to human rights issues or standards connected to the operation of the franchise business, for instance representations and warranties that may be relevant to the assessment of human rights risks arising from the conditions in which any goods (or components of goods) supplied to the franchisee for the purpose of operating the franchise were produced (e.g. in the case of a restaurant franchise, that the supply chain for food and/or packaging products is free from child labour).

Covenants (franchisee):

If acting for the franchisor, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence , the kinds of ongoing commitments that would be reasonable and appropriate to seek from the franchisee in relation to monitoring, management and mitigation of adverse human rights impacts arising from, or linked to, the franchised business. These could include commitments:

to maintain certain licences;
to maintain certain certifications and/or management standards and/or quality marks for the duration of the supply agreement;
to notify the franchisor promptly of any compliance issues or problems in relation to those licences, certifications, standards, guidance or quality marks;
to abide by the franchisor’s standards and/or guidance with respect to matters such as community and stakeholder relations and/or sales practices (e.g. sales practices in relation to vulnerable people) (See further 20.1 “Franchise operating manual: minimum human rights standards applicable to the operation of the franchise”, below);
to engage in prescribed training programmes with respect to the management of different human rights risks connected with the operation of the franchise business;
to report regularly (and/or to respond promptly to franchisor’s requests for information) regarding the management of specific human right-related risks. (See further 20.2 “Access to information and reporting” below) and
to carry out periodic human rights due diligence;
to use reasonable endeavours, in cooperation with the franchisor, as needed from time to time, to address human rights risks which may arise.

Indemnities: franchise agreement: potential human rights issues to consider

If acting for the franchisor, you should consider whether it would be appropriate to seek an indemnity from the franchisee in respect of any costs or losses incurred by the franchisee as a result of:

a breach of any of the warranties given by the franchisee with respect to its human rights related performance or policies. (See 17.1 “Representations and Warranties (franchisee)” above);
a breach of any of the covenants given by the franchisee with respect to its human rights related performance or policies. (See 13.2 “Covenants (franchisee)” above); or
a breach of any specific terms relating to compliance with specific human rights related standards or terms in the provision of the services (See 16.1 “Minimum human rights standards applicable to operation of the franchise”, below).

If you are acting for the franchisee, you may wish to discuss with your client (depending on the risks involved) whether it would be appropriate to seek an indemnity from the franchisor in respect of any costs or losses incurred by the franchisee as a result of any breach of any representations or warranties made by the franchisor in relation to any human rights issues or standards connected to the operation of the franchise business(see 17.2 “Representations and warranties (franchisor)” above).

Financial liabilities arising from human rights risks:

Whether you are acting for the franchisor or the franchisee, you should discuss carefully with your client whether there are any human rights risks identified in the course of due diligence for which specific indemnities should be sought from the other party, in order to allow your client to recover certain financial liabilities that it may incur as a result of the materialisation of such risks. Depending on nature of the risks involved and the outcome of negotiations, these losses could include not only fines and damages awards (and associated legal costs), but also clean-up costs, costs of fact finding and investigative efforts, costs of technical consultants, costs of remediation programmes, costs of implementation of compliance or prevention orders and/or improvement of systems and controls, costs of training programmes, costs of restoration of cultural property and costs of subsequent stakeholder and community engagement efforts.

Termination: franchise agreement: potential human rights issues to consider

You should consider carefully with your client whether there are any events relevant to, or connected with, adverse human rights impacts that should trigger the review and/or termination of the franchise agreement. Possible termination events could include:

a breach of any of the warranties given by the franchisee with respect to its human rights related performance or policies. (See 17.1 “Representations and Warranties (franchisee)” above);
a breach of any of the warranties given by the franchisor with respect to human rights issues or standards connected to the operation of the franchise business. (See 17.2 “Representations and Warranties (franchisor)” above);
a breach of any of the covenants given by the franchisee with respect to its human rights related performance or policies. (See 18.2 “Covenants (franchisee)” above);
a breach by the franchisee of certain human rights risk management provisions of the Franchise Operating Manual (See 20.1 “Franchise operating manual: minimum human rights standards applicable to the operation of the franchise”, below).

Note: You should be aware, however, that termination of a franchise agreement may, itself, have adverse human rights impacts (e.g. in the event that it leads to factory shutdowns and/or the insolvency of the franchisee, resulting in a loss of livelihood for workers and financial support for those who rely on their incomes). These adverse impacts will need to be taken into account in any decision whether to terminate because of concerns about human rights risks.

Miscellaneous: distribution agreement: potential human rights issues to consider

Franchise operating manual: minimum human rights standards applicable to the operation of the franchise:

Where the operation of the franchise business poses risks of adverse human rights impacts, (see, for example, discussion exercise 3 above) the franchisor is likely to require ongoing commitments from the franchisee with respect to the management of those risks. If acting for the franchisor, you will want to discuss with your client the minimum contractual requirements that should apply (e.g. by way of explicit requirements in the franchise operating manual), in order for your client to be able to continue to identify and manage its own human rights risks, in light of any domestic legal requirements and the UN Guiding Principles on Business and Human Rights.

Access to information, rights of audit and reporting:

Whether you are acting for the franchisor or the franchisee, you will need to discuss carefully with your client the access to information, rights of audit and reporting provisions that will be needed as between the parties in light of:

the types and severity of human rights related risks identified in the course of due diligence processes; and
each party’s own reporting obligations under;
- any applicable domestic regimes on the reporting of social, environmental and/or human rights-related risks and/or
- any applicable voluntary reporting schemes or initiatives to which it is party.

Follow up and supplemental legal services

I am an in-house lawyer
I work as external legal counsel

In-house lawyers perform a key role in the fulfilment of the Corporate Responsibility to Respect Human Rights. The kinds of business and human rights-related activities in which you may be involved as in-house counsel include:

providing training and current awareness briefings to management and staff on human rights-related issues;
providing updates to the board and management teams on human rights risks affecting the business;
analysis of human rights risks in the supply chain and opportunities for leverage to increase opportunities for prevention and mitigation of adverse human rights impacts;
advising on and providing legal support in connection with human rights-related issues arising in the negotiation and implementation of a range of transactions e.g. joint venture agreements, supply agreements
legal support and advice in connection with the establishment and maintenance human rights policies and/or due diligence processes, including advice on the management of human rights risks identified in the course of those due diligence processes and any remediation that might be necessary;
advising on, and providing legal support in relation to, whistle-blower policies and related mechanisms, approaches or processes;
advising on, and providing legal support in relation to, the maintenance of an ethical risk log or integration of human rights into a holistic company risk reporting framework (including review of internal and supply chain performance against “best practice” and/or company standards);
advising on, and providing legal support in relation to, a supplier code of conduct;
advising on, and providing legal support in connection with, policies in respect of identification, assessment, supervision and monitoring of human rights risk management (including but not limited to legal compliance) by suppliers, service providers and other contractors and business partners;
advising on, and providing legal support in relation to, the establishment and maintenance of company-level, site-level and/or operational grievance mechanisms;
advising on, and providing legal support in connection with, engagement with those identified by the business enterprise as having an interest in its performance with respect to human rights issues and its management of human rights-related risks, such as employees, suppliers, consumers, and local communities.

Further reading

OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’

Benjamin W. Heineman, The Inside Counsel Revolution: Resolving the Partner-Guardian Tension (Ankerwycke, 2016).

There are a number of supplemental follow up services, related to business and human rights issues, that you could discuss with your client following completion of a transaction. These will depend on the nature of your client’s business activities and your on-going solicitor-client relationship, but could include:

training and current awareness briefings on human rights-related issues and developments;
the inclusion of human rights as a regular agenda item in lawyer-client relationship discussions and meetings;
legal support and advice in connection with human rights-related issues arising in the negotiation an implementation of further transaction agreements;
legal support and advice in connection with on-going human rights policies and/or due diligence processes;
legal support and advice in connection with the establishment and maintenance of company-level, site-level and/or operational grievance mechanisms;
legal support and advice in connection with engagement with those identified by the business enterprise as having an interest in its performance with respect to human rights issues and its management of human rights risks, such as employees, suppliers, consumers, and local communities or other business partners.

Further reading

OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’

Handbook for lawyers: Chapter 2

Chapter 2 - Commercial transactions

How can commercial transactions lawyers work in a way that is consistent with the UN Guiding Principles on Business and Human Rights?

Orientation

How to use this chapter

Using the 'Getting Started' section

Using the 'Practical Resources' section

Using the 'Further reading and resources' section

Getting started

Preamble

Q. Why do I, as a commercial transactions lawyer, need to know about human rights?

A. Because, whether you work as an in-house lawyer or for a law firm as external legal counsel, your employer has a responsibility, along with all business enterprises, to respect human rights.

A. Because human rights risks can create legal, commercial, financial and reputational risk for companies.

A. Because, from the perspective of the UN Guiding Principles on Human Rights, the human rights responsibilities of a company are not able to be transferred by contractual means.

Q. What kinds of human rights risks am I likely to have to advise on in the context of commercial transactions work?

A. As a commercial transactions lawyer, you are likely already to have encountered and advised on a range of human rights risks in your work, even if those issues were not framed in human rights terms.

Q. I work as an in-house lawyer: is there anything special I need to know?

A. As an in-house lawyer, you are likely to be involved in drafting and negotiating commercial contracts, including the kinds of commercial transactions covered by this chapter, i.e long-term supply agreements (goods and services), distribution agreements and franchise agreements.

Discussion exercises

Q. Introduction to discussion exercises

Q1. Can you identify the human rights that may have been adversely impacted in this scenario?

Q2. Have the business enterprises mentioned in this scenario been involved in any adverse human rights impacts by virtue of their activities and/or business relationships? If so, how?

Q3. What kinds of legal, commercial, financial and reputational risks might MCC now face as a result of the adverse human rights impacts you have identified (see Qu. 1 above)?

Q4. What kinds of legal, commercial, financial and reputational risks might RCS now face as a result of the adverse human rights risks you have identified (see Qu. 1 above)?

Q5. What do the UN Guiding Principles on Business and Human Rights say about the responsibilities of MCC and RCS to address the potential and actual adverse human rights impacts you have identified (see your answers to Qu. 1 and Qu. 2)

Q6. If you had been engaged by MCC as legal counsel in relation to the negotiation and conclusion of the clothing supply contract with RCS...

Q1. Can you identify the human rights that may have been adversely impacted in this scenario?

Q2. Have the business enterprises mentioned in this scenario been involved in any adverse human rights impacts by virtue of their activities and/or business relationships? If so, how?

Q3. What kinds of legal, commercial, financial and reputational risks might TC now face as a result of the adverse human rights impacts you have identified (see Qu. 1 above)?

Q4. What do the UN Guiding Principles on Business and Human Rights say about the responsibilities of TC to address the potential and actual adverse human rights impacts you have identified (see your answers to Qu. 1 and Qu. 2).

Q5. If you had been engaged as legal counsel to TC with respect to the negotiation and conclusion of an agreement to supply products and services...

Q1. Can you identify the human rights that may have been adversely impacted in this scenario?

Q2. Have the business enterprises mentioned in this scenario been involved in any adverse human rights impacts by virtue of their activities and/or business relationships? If so, how?

Q3. What kinds of legal, commercial, financial and reputational risks might BDC now face as a result of the adverse human rights impacts that you have identified?

Q4. What do the UN Guiding Principles on Business and Human Rights say about the responsibilities of BDC and NOD to address the potential and actual adverse human rights impacts you have identified (see your answers to Qu. 1 and Qu. 2).

Q5. If you had been engaged as legal counsel to NOD with respect to the negotiation and conclusion of a franchise agreement with BDC to produce NOD branded products...

Q1. Can you identify the human rights that may have been adversely impacted in this scenario?

Q2. Have the business enterprises mentioned in this scenario been involved in any adverse human rights impacts by virtue of their activities and/or business relationships? If so, how?

Q3. What kinds of legal, commercial, financial and reputational risks might DMC now face as a result of the adverse human rights impacts you have identified?

Q4. What kinds of legal, commercial, financial and reputational risks might UPC now face as a result of the adverse human rights impacts you have identified?

Q5. What do the UN Guiding Principles on Business and Human Rights say about the responsibilities of DMC and UPC to address the potential and actual adverse human rights impacts you have identified (see your answers to Qu. 1 and Qu. 2).

Q6. If you had been engaged as legal counsel to DMC with respect to the negotiation and conclusion of an agreement with UPC to provide security services to DMC facilities, what steps might you have recommended...

Practical resources for commercial transactions lawyers

Pre-engagement checks and screening

Introduction

Resources

Pre-transaction human rights screening: commercial transactions: general: example checklist

Prospective client’s approach to business and human rights generally

Agreement for legal services (also referred to as an “engagement letter” or “retainer” agreement): business and human rights: key provisions potentially relevant to business and human rights

Scope of work:

Responsibilities of client:

Integrity and ethics:

Due diligence

Preamble

Introduction

Q: What is the purpose of due diligence investigations into human rights risks?

Q: What is involved in practice?

Q: What kinds of human rights risks should lawyers focus on?

Further notes on due diligence investigations into human rights risks

Discussion questions

Further reading on human rights due diligence

Resources

Notes for users

Heads of terms: long term commercial relationship

Heads of Agreement: proposed long-term agreement for supply of goods and/or services; proposed franchise agreement; proposed distribution agreement

Preconditions:

Due diligence:

Ongoing checks and controls:

Due diligence checklist: long term commercial relationship

Due diligence: proposed long-term agreement for supply of goods and/or services; proposed franchise agreement; proposed distribution agreement: supplementary questions on human rights issues: example checklist

Human rights risks and legal compliance

Approach of [name of party] to business and human rights generally

Licences:

Land/buildings/plant/site:

Environment:

Employees:

Supply chain issues:

Stakeholder engagement and community relations:

Private security arrangements:

Government actions and relations: