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In the business and human rights firing line: how to manage litigation risk and protect your investment when operating in developing economies

December 2018  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

December 2018 Issue


Transnational businesses that operate in developing economies are often perceived to have great influence on society and governance. Many view them as having power either to help or to hinder the fulfillment of human rights for local populations. Many transnational businesses large and small around the world have embraced the potential to make positive contributions to the communities they work or interact with as part of a broader commitment to corporate social responsibility (CSR).

In addition to CSR, the last decade has seen the development of a set of legal norms focused on the obligations of businesses in relation to human rights in their workplaces and in communities in which they operate. These norms are collectively referred to as business and human rights.

What is business and human rights (BHR)?

The set of legal norms now known as BHR grew out of efforts by the United Nations to consider the scope of corporate human rights responsibility and to explore ways for corporate actors to be held accountable for the human rights impact of their activities. These efforts ultimately resulted in the creation of the United Nations Guiding Principles on Business and Human Rights (UNGPs), finalised in 2011 after many years’ extensive consultation with governments, civil society and the corporate sector and ultimately endorsed unanimously by the United Nations Human Rights Council.

Notably, the UNGPs do not of themselves create new law. At the same time, the UNGPs are more than merely voluntary CSR. They authoritatively set out the implications of existing standards and practices for both states and businesses. As ever, legal responsibility for the protection and fulfilment of human rights remain with the obligation-holders: states. However, the UNGPs identify and give shape to the existing responsibility of all businesses to respect human rights – both by avoiding infringing upon human rights and by addressing any adverse impacts on human rights with which they are involved.

What are the BHR risks to which businesses investing and operating in developing economies are exposed?

Investors in developing economies almost inevitably face a wide range of BHR risks. Many of these will stem from uncertain governance, disrespect for the rule of law, lax regulation and disparity of resources in the communities in which businesses operate. Particularly in economies with weak rule of law, proactive and strategic engagement by foreign investors with local BHR issues can be critical to the success of a business.

For example, a business that contacts or works with local police to address endemic security problems with theft or trespass may find itself associated with or blamed for alleged police brutality.

If the disparity in resources between the business and local police forces (or the local court system) is pronounced, injured individuals are likely to look to the business to assume moral and legal responsibility for police misconduct. In doing so, the claimants typically bypass any attempt to seek a direct remedy from the police or state (whose actions in fact gave rise to the human rights breach), perhaps out of fear of retribution, or because the option of legal proceedings in the local court system, which may be known to be corrupt, ineffective or biased, appears futile.

Instead, such BHR claims – whether involving police brutality, environmental harm or injuries to health – have increasingly been brought on behalf of local communities by non-governmental organisations (NGOs) and specialist plaintiff lawyers experienced in transnational litigation in jurisdictions, such as the US, Canada or the courts of England and Wales in the UK. Very quickly, BHR issues such as these can transform from local grievances against police or other government authorities into damaging, costly and time-consuming transnational litigation against businesses in the BHR firing line. Even without the initiation of formal litigation, allegations of human rights wrongdoing carry major reputational risks for businesses, ranging from consumer backlash to costly withdrawal of government support for current or future operations – far too often while overlooking the obvious imperative to address underlying human rights harms perpetrated by local police forces or a poorly functioning local court system.

Businesses investing and operating in developing economies are increasingly in the BHR firing line, as communities and activist groups target transnational businesses to address and resolve human rights issues neglected (or even created) by host-state authorities. In the globalised world of today, few businesses can afford to ignore these BHR risks, particularly when headquartered or operating in home jurisdictions where courts are taking increasingly engaged and innovative approaches to transnational human rights lawsuits. Just this year, for example, an English High Court judge took the unprecedented decision to travel to Sierra Leone to hold hearings against a British mining firm for alleged complicity in police brutality by local Sierra Leonean forces.

Can BHR risks be avoided or mitigated?

Yes, they can. Businesses operating in developing economies can and should undertake precautionary measures to protect their investment and to ensure that they are litigation-ready for both formal and informal BHR disputes.

While the importance of good corporate citizenship remains, BHR entails much more than voluntary CSR – especially where transnational businesses are active in developing economies. Rather, BHR contains legal norms that are currently evolving and hardening. Thus, conducting BHR audits prior to making an investment overseas and prior to exiting the investment are becoming part of standard investment due diligence. Best BHR practice likewise calls for regular and ongoing BHR ‘health-checks’. These due diligence exercises can help both to ensure that BHR issues do not arise in the first place and to ensure that any BHR issues that arise are adequately and efficiently addressed.

Prudent BHR risk management is a necessary first step to avoid and prevent BHR-related litigation. It also reduces or even eliminates the risk of businesses being targeted or scapegoated by opportunistic local governments, for whom targeting wealthy foreign businesses is often an easy means of political point-scoring. Moreover, good BHR practice is also crucial litigation-proofing – to ensure that, if any litigation or scapegoating does take place, businesses can properly defend themselves by pointing to a demonstrable track record of BHR ‘best practice’.

Last but not least, maintaining world-standard BHR practices can provide transnational businesses significant leverage to negotiate and improve the underlying human rights compliance of local authorities in the host-state itself, with a view to better protecting the interests of local communities facing weak institutions and disregard for the rule of law.

Key precautions that businesses can take

Transnational businesses active in developing economies therefore need to consider a number of key precautions to manage their BHR litigation risk and to protect their investment. In addition to the BHR due diligence audits noted above, key practical precautions to manage litigation risk and protect investments in developing economies include the following.

First, ensure that each business has in place practical and targeted policies to address BHR risks specific to the business, with responsibility for implementation resting at the subsidiary level. That is, multinational companies need to ensure that BHR policies and commitments are not merely expressed at the parent company or headquarters level, but are appropriately reflected in the specific policies of downstream subsidiaries. Operating companies which are active on the ground need not only to have appropriate, tailored BHR policies in place – they also need the resources, training and personnel necessary to ensure that these policies can be properly implemented.

Second, ensure that each business has assessed (and regularly continues to reassess) its own business relationships to identify and mitigate the risk of being linked to human rights breaches – not only in terms of formal legal liability, but also in terms of reputational damage. For example, a transnational corporation should ensure that its contracts with suppliers operating in lax regulatory environments clearly set out the corporation’s own BHR expectations. This may include, for example, inserting contractual clauses demanding higher standards than required by local law in respect of workplace safety, minimum age of employment and anti-discrimination policies.

Third, in addition to contractual language embedding these expectations, businesses should consider putting in place reporting, auditing or other monitoring frameworks to ensure ongoing compliance by its suppliers and business partners. This may include, for example, linking adherence to human rights standards to appropriate financial incentives or penalties.

Finally, BHR risks cannot be independently addressed without local government action and support. However, it is crucial that transnational businesses undertake appropriate dialogue with local governments. To take the earlier example of alleged police brutality, businesses that foresee potential security risks must ensure that they have taken proactive and rigorous steps to seek to hold local police forces (and equally, any private security contractors) to the highest standards of human rights compliance (e.g., by insisting upon mandatory training or certification).

If human rights breaches are suspected despite these precautions, businesses should ensure that they continue to follow up with government counterparts using carefully crafted language (with legal markers relevant to international law or other rights and obligations). Such communications are a critical part of litigation-proofing by ensuring a demonstrable track record of opposing and seeking to remedy suspected human rights breaches by third parties with which the business’s activities may be linked.

By taking these and similar prudent BHR precautions, businesses in the BHR firing line – which is every business – can protect their own investments and the interests of the communities in which they operate, ensuring better protection of human rights for local communities, as well as litigation-proofing their investment by developing a demonstrable track record of the business’s own proactive BHR engagement.

In a time of increased and increasingly innovative BHR litigation, these steps are more than a mere question of voluntary CSR. BHR engagement today is far from optional, but has become a crucial means of managing business, litigation and reputational risk – particularly to ensure the longevity of investments in developing economies – that few transnational businesses can afford to ignore.

 

Robert G. Volterra is a partner and Angela Ha is an associate at Volterra Fietta. Mr Volterra can be contacted on +44 (0)20 7380 3898 or by email: robert.volterra@volterrafietta.com. Ms Ha can be contacted on +44 (0)20 7380 4398 or by email: angela.ha@volterrafietta.com.

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