Business and Human Rights – A pirate’s life for companies?

As we have mentioned on a few occasions, in October 2013 the UK became the first country, followed by the Netherlands, to develop an action plan for the implementation of the UN Guiding Principles on Business and Human Rights (“UNGP”). I recently attended an event held at Clifford Chance LLP in which the speakers considered the potential for voluntary frameworks to result in liability. More specifically, the discussion centred around the idea that declaring commitment to voluntary frameworks, such as the UNGP, the UN Global Compact, and the Equator Principles, could give rise to legal liability for financial institutions.

National action plans may indeed be paving the way for greater legal obligations being imposed on the private sector for human right abuses globally. Governments are themselves unlikely to be able to meet some of their commitments without some degree of legislative change.

From a legal perspective, it may at first instance seem erroneous that a financial institution providing capital for a project, and perhaps even owning a nominal percentage of shares in the project, could be made responsible for what happens further down the supply chain. Surely the chain of causation would be broken?

The truth is that in terms of the victim – there is little hope of a successful claim against a financial institution. In the US the decision in Filartiga during the 1980s under the Alien Tort Act opened the floodgates, and US courts were holding US companies responsible for alleged abuses, even where involvement was indirect, taken place outside the jurisdiction. However, the recent decision of Kiobel has reigned in this tendency significantly. Amongst reasons for this was the widespread criticism that the courts were engaging in foreign policy making. It has now been decided that only the international law obligations which existed at the time of passing the statute are recognised as being subject to the law. Seeing as the law dates back to 1789, it’s unclear who could fall subject to it under the most recent interpretation…unless, of course, you’re a pirate!

The risk of liability in the US has thus diminished, and is changing shape. The latest regimes emerging there are very specific – particularly targeting issues such as human trafficking, the importation of conflict minerals and other issues of supply chain transparency.

In Europe and the UK, along with growing developments in policy and regulation in this area, the scope for litigation in this sphere is just beginning to surface. Certainly, our own founder and director, Colleen Theron, has made similar representations on previous occasions and spoken extensively about evolving Directors’ liabilities. For a presentation on CSR – a legal perspective and potential liabilities click here.

Particularly from the perspective of an investor, vague disclosures and commitments regarding human rights could generate a hook and be relied on in a claim for loss of income should an asset manager, for example, run into trouble for failing to look into the human rights credentials of a project. Or there may even be contractual requirements involves, in which case a soft obligation will have converted into a hard obligation.

Voluntary commitments could thus turn into a liability for financial institutions as a result of the following:
1. Breach of contract
2. Breach of investment mandate
3. Breach of fiduciary duty
There is also scope for NGOs to begin instigating claims. If they are looking at targeting issues in the extractive sector, in particular, this could lead to an elevated focus on who is financing such projects.

For the most part, regimes continue to be of a soft nature, or in other words, voluntary. Even under the OECD guidelines for multinationals, there is only so much the national contact point (NCP), to whom complaints can be submitted in every signatory state, can do beyond carry out an investigation. This does not mean to say that financial institutions shouldn’t be prepared for likely change. Being prepared, or minimising risk, means:
• having a human rights policy in place,
• training of staff to raise awareness and understanding of these emerging issues,
• carrying out due diligence,
• leveraging influence effectively,
• addressing these risks in contracts,
• conditioning and staggering payments

Watch this space.

For a table providing an overview of existing and incoming or potential human rights legislation affecting business, please download our FREE guide here.