REUTERS | Goran Tomasevic

Arbitrating business and human rights disputes: uncharted territory

Last October, we wrote about the proposal by a working group of international law specialists to use arbitration to resolve disputes that arise out of human rights abuses involving businesses. Since then, the proposal has evolved into a project led by The Hague Institute for Global Justice to draft a set of international arbitration rules (The Hague International Business and Human Rights Arbitration Rules) for use in business and human rights disputes. Once drafted, the plan is for the rules to be offered to the Permanent Court of Arbitration and other international arbitration institutions, for use in arbitration proceedings to be administered by these institutions. The rules could also be voluntarily adopted by parties in ad hoc arbitration proceedings.

The support for this project is not surprising: arbitration offers several advantages, including procedural flexibility, expert arbitrators and a neutral forum. However, a number of questions persist about the compatibility (or appropriateness) of arbitration and human rights disputes. How would businesses and victims submit to arbitration disputes not arising out of an existing contract? How would transparency and other public policy concerns be addressed? How would groups of victims be represented and participate in an arbitration? More fundamentally, are business human rights disputes that don’t involve a pre-existing contractual relationship even arbitrable under the New York Convention, which requires a “defined legal relationship” between the parties?

The drafters of The Hague International Business and Human Rights Arbitration Rules will need to tackle these valid and important questions. In the meantime, this post explores how human rights-related arbitrations may manifest in practice. According to the proposal, arbitration could be used to resolve two types of business and human rights disputes:

  • Claims by victims of human rights violations against business.
  • Human rights-related claims between commercial parties.

Scenario 1: human rights claims by affected persons

The prospect of adopting arbitration to resolve the first type of disputes has been received by the arbitration community with a degree of scepticism, given some of the aforementioned challenges, particularly the issue of consent, as there is no existing pre-referral to arbitration. However, the Bangladesh Accord illustrates how creative ways can be devised to get around some of these challenges.

The Bangladesh Accord is an ad hoc agreement, signed in 2013 between a number of global brands/retailers and two global trade unions (IndustriALL Global Union and UNI Global Union), in the aftermath of the Rana Plaza disaster, which saw thousands of people killed and injured as a result of the collapse of a factory building in Dhaka. Its purpose was to improve and ensure a safe working environment for Bangladesh garment industry workers, by committing the signatory companies to requiring suppliers to accept safety inspections and implement remediation measures in their factories. It further provided for the resolution of disputes (for example, as to whether the companies had complied with their obligations) by arbitration; a creative example of how victims and businesses can voluntarily submit to arbitration in respect of a specific human rights issue. Two arbitrations were successfully commenced under the Accord for alleged breaches, by two signatory companies, of their obligations to compel their suppliers to remediate working conditions and negotiate commercial terms to make it financially feasible for their suppliers to cover the costs of remediation. Although the two cases settled, the Accord could serve as a useful model for other industries looking for ways to give victims of human rights issues access to a legal remedy.

Scenario 2: contractual human rights claims

The second type of business and human rights dispute is much more easily understood and accepted. After all, it’s just another contractual dispute.

Such disputes most likely arise out of commercial contracts (such as supply contracts) that incorporate obligations to comply with human rights standards. It is a trend that is rapidly growing and driven by the global hardening of obligations on businesses to conduct human rights due diligence, not only within their direct operations, but also throughout their supply chains or other third party business relationships. Such ‘hard’ obligations include:

  • The French “Duty of Vigilance” law (2017), which requires companies of a certain size to create and implement annual vigilance plans in order to assess and address the risks of serious human rights and environmental violations resulting from their activities.
  • In the UK, the Modern Slavery Act 2015, which requires businesses with a certain turnover to report each year on the steps they have taken during the past year to ensure that slavery and human trafficking are not taking place in their own business or in their supply chains (the Australian Parliament is currently considering a similar bill).
  • Under the California Transparency in Supply Chains Act of 2010, companies must disclose efforts to eradicate slavery and human trafficking within their supply chains.
  • Negotiations are ongoing for a UN treaty on business and human rights, which in its current draft form (published last month) would require state parties to ensure that businesses falling within the scope of the treaty and subject to their jurisdiction or control undertake due diligence throughout their transnational business activities. Notably, the draft treaty requires states to ensure that businesses incorporate these due diligence requirements in “all contractual relationships which involve business activities of transnational character”.

These are hard legal obligations requiring businesses to conduct human rights due diligence. This includes monitoring and assessing potential adverse human rights impacts resulting from their activities (and more widely within their supply chain), and also taking steps to prevent and mitigate any risks identified. Incorporating compliance with human rights standards in commercial contracts is an obvious way by which businesses subject to these obligations can take (and demonstrate) action to prevent and mitigate potential adverse impacts resulting from their activities through their business relationships (with suppliers or other contractual counterparts).

If the contract contains an arbitration clause, any dispute arising from the breach of such a compliance provision would fall to be resolved by arbitration. This is already happening in practice. For example, one ICC arbitration concerned claims brought under an agreement relating to the manufacture of branded products that had been terminated by the buyer, on the basis that certain items had been sourced by the seller via a sub-contractor who used prison labour, in breach of the agreement’s incorporated code of conduct. The tribunal upheld the termination as lawful. We will likely see more such examples as the inclusion of human rights compliance provisions becomes more commonplace in commercial contracts.

The adoption of blockchain technology and smart contracts in supply chain management could also boost the number of contractual human rights disputes. This has been of particular interest in the mining industry, where several initiatives are afoot to use blockchain technology to improve transparency and control over the source of products throughout the supply chain. This enables supply chain members to enforce human rights (and other ethical) compliance down the chain by creating a protocol that conditions the transfer of ownership on the conclusion of a “smart contract” between transferor and transferee, which includes obligations to comply with certain human rights (and other) standards. These smart contracts contain dispute resolution mechanisms, which could include arbitration clauses.

Remaining challenges

Even in such seemingly “standard” contractual disputes, certain challenges lie ahead for parties and arbitral tribunals.

  • Defining and measuring compliance with human rights standards may be difficult. International human rights standards, which usually govern state obligations, cannot simply be inserted into private commercial relationships. The only human rights “obligations” designed for business (like the UN Guiding Principles on Business and Human Rights (UNGPs) or the OECD Guidelines for Multinational Enterprises) are “soft” law that was never designed to be enforced; care should be taken of contractualising them without further definition of what compliance would require.
  • Some businesses are concerned that by incorporating human rights obligations in their commercial contracts they risk creating more responsibility for themselves. If I have a right to terminate my supplier for breach of human rights standards, I then have a duty to exercise that right in certain circumstances; if I don’t have that right in the first place, I cannot be faulted for not terminating the relationship. This goes against the spirit of the UNGPs and other principles on how corporates should respect human rights, which includes the notion that businesses should use what leverage is at their disposal to prevent and mitigate adverse human rights impacts. On one view, this would include negotiating a termination right for breach of human rights in the first place, if your bargaining power allows it.
  • Recent English Court of Appeal case law may also affect business’ willingness to impose human rights obligations on suppliers and other counterparts. In AAA and others v Unilever Plc and Unilever Tea Kenya Limited, the court held that a company could in principle owe a duty of care, not only to persons affected by the operations of its subsidiaries (which it had already held in two other cases earlier this year), but possibly to persons affected by the activities of a third party.
  • Determining the relevant loss and appropriate remedy may pose a challenge in cases involving human rights violations, not to mention that the appropriate remedy in the context of the contractual commercial relationship will not necessarily equate to a remedy for the victims of the underlying human rights impact.

Conclusion

Although we are still some way off from business and human rights disputes becoming a main feature of arbitration, the growing incidence of “human rights clauses” in commercial contracts is paving the way for contractual human rights disputes, some of which will necessarily be resolved by arbitration. Arbitrators should therefore prepare to deal with some of the challenges and seize the opportunity for arbitration to contribute to changing business practices for the better.

Hogan Lovells Julianne Hughes-Jennett Alison Berthet Emily Gidda

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: