Handbook for lawyers - 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:

Orientation

Getting started

Preamble

Discussion exercises

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.

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, 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?

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.

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 (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?

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.

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, 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?

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.

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, 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?

Practical resources for commercial transactions lawyers

Pre-engagement checks and screening

Due diligence

Preamble

Resources

Contract checklists

Follow up and supplemental legal services

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

Further reading and resources

In this section you will find a list of further reading and resources prepared by external sources that are relevant to the issues discussed in this chapter. This list will be updated from time to time. If you have any suggestions as to further materials that would be of interest to lawyers working in the corporate/M&A field please contact us.