Editor’s note: Mercedes is a recent graduate of the LL.B. dual-degree programme English and German Law, which is taught jointly by University College London (UCL) and the University of Cologne. She will sit the German state exam in early 2022. In September 2020 she joined the Asser Institute as a research intern for the Doing Business Right project.

My previous blog post depicted how economic asymmetry of power translates into imbalanced contractual relationships. At the moment, supply chain contracts ensure that value is extracted while precarity is outsourced. In other words, supply chains can be described as ‘global poverty chains’. In this blog post, I will present and assess four potential way to alleviate this asymmetry and to better protect the right of the poorest garment workers in the context of the Covid-19 the pandemic.

Solution 1: Voluntary commitments

The first option is a well-travelled one, brands could voluntarily decide not to use their unilateral contractual powers. This approach was adopted by the UK Government in May 2020, when it urged British companies to sit still and employ ‘fair and reasonable’ business behaviour. In s. 14 of the Government’s Guidance paper it says:

“Responsible and fair behaviour is strongly encouraged in performing and enforcing contracts where there has been a material impact from Covid-19. This includes being reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in a spirit of co-operation and aiming to achieve practical, just and equitable contractual outcomes having regard to the impact on the other party (or parties), the availability of financial resources, the protection of public health and the national interest. […] In particular, responsible and fair behaviour is strongly encouraged in relation to the following: […] (c) making, and responding to, force majeure, frustration, change in law, relief event, delay event, compensation event and excusing cause claims; […]”

Many brands, such as Adidas, H&M, Nike, PVH, Inditex and the VF Corporation promised to honour their contractual obligations and to refrain from modifying the payment terms.

H&M stands out, as it took action to mitigate the workers’ plight and promised to accept delivery of already produced garments, to pay for goods in production, and to do so in accordance with previously negotiated payment terms – without taking discounts, and without prolonging payment date. It is not only goodwill that incentivizes brands to act like this. By deciding not to interfere with the contract, brands strengthen their business relationship and ensure the financial stability of a trustworthy business partner. Moreover, brands buttress their reputation and count on the fact that consumers will reward them for supporting their suppliers during times of hardship.

However, there are also many examples showing that these considerations might often not outweigh the economic interest the brand has in terminating the contract. Brands such as Kohl’s Inc. and C&A still decided (see here and here) to trigger force majeure clauses.

This is even more problematic considering the fact that C&A is a member of the UK-based Ethical Trading Initiative and the German Textilbündnis. Thus, by triggering force majeure clauses without prior consultation, the company seem to contravene the guidelines issued by these stakeholders initiatives. Months into the pandemic, the Workers’ Rights Consortium and Penn State Center for Global Workers' Rights exposed such behaviour. C&A responded by promising to honour their obligations – but only with a delay of one year. It is only after immense public pressure in the form of the “#PayUp”-campaign that C&A gave in and decided to pay their suppliers in full and on time.

Other companies, such as Kohl’s, Urban Outfitters, The Children’s Place and many others are still refusing to honour their pre-pandemic obligations. As the new wave of lockdowns rises, Hema, a Dutch company effectively cancelled all orders on 11 January. For goods already delivered to Hema, it promised to pay – but only with a delay of 30 days.  In this context, as in others, voluntary demand-based incentive models have shown to be of limited impact.[1] For example, Urban Outfitters stated:  “Unfortunately, like any business, we are doing our best to navigate these unprecedented circumstances. With our stores closed, we simply don’t have the capacity to accommodate all the stock on order.”

The financial health of a business remains more often than not the only concern of any corporate decision-maker. Yet, because European governments provide millions of euros worth of support to their businesses, European companies are not at particular risk. Thus, NGOs were quick to criticise Kohl’s Inc.’s decision to pay their shareholders an USD 109 million dividend in April.

Solution 2: State initiatives

(Foreign) state initiatives, through the releasing of specific development funding, might help to improve the workers’ welfare. Germany and the UK, for example, have set up an US-$ 6.5 million fund in collaboration with the Ethiopian government. The money is intended to support Ethiopian businesses and workers, which suffered as a result of large-scale order cancellation. Relying on such initiatives seems problematic for a number of reasons. In times were most European economies are facing difficulties, and the European Union struggles to raise enough fund to support the local economy, helping far away business partners is not a political priority. Hence, such foreign aid remains relatively limited in scope and insufficient to cover the cost of the pandemic. US-$6.5 million is merely a drop in the bucket bearing in mind the extent to which Ethipoian factories are affected and that the US-American Children’s Palace cancelled millions of dollars worth of clothing orders alone.

Furthermore, by relying on the support of foreign governments, the external costs of doing business are being socialized. The brands are effectively shifting their economic risk to the German or British taxpayers instead of the Ethiopian workers, while shielding their profits and shareholders.

Solution 3: Due diligence instruments

Human rights due diligence regulation could also provide an avenue to prevent parties from unilaterally exercising contractual rights. The UNGPs and OECD guidelines both stipulate that companies must consult with stakeholders and take into account human rights impacts when exercising their contractual rights. Even though they are not legally binding, these guidelines have been internationally acknowledged and endorsed by states and international organisations. Many companies adopted principles similar or with reference to these guidelines in their internal codes of conduct. As long as they are not legally binding, however, brands can simply choose to ignore these standards.

Compliance on the business side is far behind what the UNGPs and OECD guidelines envisage. This is why recently, European-wide debate on binding due diligence instruments broke out. France has already adopted the loi de vigilance in 2017. Switzerland has just voted against adopting a binding due diligence law. The debate in Germany is still ongoing. In parallel, the European Commission has also begun the process of drafting EU-wide mandatory due diligence legislation. If mandatory human rights due diligence instruments are adopted at the EU level, this will have a number of consequences for businesses. For example, companies will have to take into account adverse human rights impacts of their decisions before abruptly terminating a contract. Businesses will be pushed to engage with relevant stakeholders – and held accountable if they fail to do so. This could lead to a situation in which the interests of the supplier, the workers and the apparel brand are better balanced. 

Solution 4: Towards a relational interpretation of force majeure

Finally, courts could move towards a ‘relational’ interpretation of contractual obligations and force majeure. Orthodox contract law, with party autonomy at its heart, could be re-interpreted in light of the political economy in which global supply chain contracts are embedded. The emphasis on contractual autonomy, especially when it enables such one-sided clauses, is fuelling the economic domination of brands from the Global North in the apparel sector to the detriment of the companies (and workers) of the Global South that produce their clothes. It does not, however, account for the real power relationships and responsibilities in global supply chains.[2]

The consequence would be to move away from a blind deference to force majeure clauses and unilateral cancelling powers. Instead, the parties to the contract should be constrained to bear a fair share of the losses caused by the pandemic, based on their resources and with the objective of mitigating the human rights risks triggered by the cancellation of orders.

In order to achieve such a ‘relational’ interpretation of contractual obligations, party autonomy would have to be interpreted in a way that reflects the imbalance of economic power between the parties to supply chain contracts. While it is true in principle that these cases concern B2B transactions, in practice contracts between global brands and suppliers in the Global South are much more similar to other contractual situations in which the power imbalance calls for special treatment of one of the parties (such as in labour or consumer contracts).

Effectively, the courts could apply a proportionality analysis: Does the economic interest of the apparel brand outweigh the consequences which triggering a force majeure clause could have?

Such a ‘proportionality’ analysis is not alien to the interpretation of force majeure clauses. According to Berger and Behn, where events are so exceptional and extraneous to the contract that, absent a specific risk assumption in the contract, neither party shall bear the full risk emanating from such crisis; instead, the risk should be shared by the parties. Berger and Behn argue that while under “normal circumstances”, a strict application of force majeure reflects the parties’ autonomy, this notion of self-determination loses its justification in the context of a global pandemic.      

Such a re-interpretation of force majeure clauses would serve to ensure that the rights of thousands of garment workers in Bangladesh or elsewhere are duly considered in the economic decision-making of brands. This would go some way to publicizing supply chain contracts by disconnecting them from a simple economic calculus to embed them in their diverse social contexts.[3] Accordingly, a relational, co-operative approach to supply chain contracts would better reflects the collective impact of the pandemic on all interests involved.

Conclusion

The large-scale cancellation of orders has had a devastating effect on suppliers and their workers. Instead of bearing a fair share of the cost of the pandemic, brands managed to shift most of the economic risk to the bottom of the supply chain by invoking discretionary clauses enshrined in unilaterally negotiated contracts.

While some companies have voluntarily committed to supporting their suppliers by refraining from exercising their contractual rights. Many others did not – despite public outcry and government guidance. Thus, voluntary commitments seem insufficient, be it in the form of internal codes of conduct, or in the form of internationally approved non-binding guidelines. Two other options would be available to shift risks onto the brands inside garment supply chains. On the one hand, mandatory human rights due diligence, with the threat of civil liability in case of failure to comply, would force companies to show greater care for the negative impacts of their decisions on their business partners (and their workers). On the other hand, courts could decide to interpret contract law in such a way that would reflect the imbalance of power between parties in supply chain contracts. Thus, moving away from pure party autonomy to a ‘relational’ interpretation of contractual clauses. Consequently, a business would not be allowed to exercise a contractual right at all cost for the weaker party to the supply chain contract.

[1] Locke, Richard and Amengual, Matthew and Mangla, Akshay, Virtue Out of Necessity?: Compliance, Commitment and the Improvement of Labor Conditions in Global Supply Chains (October 3, 2008). MIT Sloan Research Paper No. 4719-08, Available at SSRN: https://ssrn.com/abstract=1286142 or http://dx.doi.org/10.2139/ssrn.1286142.

[2] Cf. A. Claire Cutler and Thomas Dietz, The Politics of Private Transnational Governance by Contract: Introduction and Analytical Framework, in: A. Claire Cutler & Thomas Dietz (eds.), ‘The politics of private transnational governance by contract’, p. 80.

[3] A. Claire Cutler and Thomas Dietz, The Politics of Private Transnational Governance by Contract: Introduction and Analytical Framework, in: A. Claire Cutler & Thomas Dietz (eds.), ‘The politics of private transnational governance by contract’, p. 5.

Editor's note: Mercedes is a recent graduate of the LL.B. dual-degree programme English and German Law, which is taught jointly by University College London (UCL) and the University of Cologne. She will sit the German state exam in early 2022. Alongside her studies, she is working as student research assistant at the Institute for International and Foreign Private Law in Cologne. Since September 2020, she joined the Asser Institute as a research intern for the Doing Business Right project

On 25 September 2020, the final hearings in the Kiobel case took place before the Dutch District Court in The Hague. This case dates back to 25 years ago; and the claimants embarked on a judicial journey that led them from the US to the Netherlands. On 16 October 2020, the TMC Asser Institute hosted an online roundtable discussion to present and discuss the arguments raised before the Dutch court. The three panelists, Tara Van Ho from Essex University, Tom de Boer from Prakken d’Oliveira, and Lucas Roorda from Utrecht University each provided their stance on the case and analyzed the past, the present and the main issues of the proceedings.

Depending on the outcome of the case, Kiobel could pave the way for further business human rights litigation in Europe. It raises questions ranging from jurisdiction, applicable law, parent company liability and fee arrangements to state sovereignty and the responsibility of former colonial states vis à vis countries that emerged from colonial rule. Below you will find the highlights of our discussion, you can also watch the full video on the Asser Institute’s YouTube channel.

I. The Nigerian government, the Ogoni Nine and Shell

The factual basis of this case was discussed in a previous post. To summarize briefly (for much longer and comprehensive takes on the case see Amnesty International reports here and here): The courts are concerned with the liability of Royal Dutch Shell, an Anglo-Dutch company, for aiding and abetting various human rights abuses committed by the Nigerian Government against the ‘Ogoni Nine’ in 1995. At that time, Shell was involved in the large-scale extraction of oil in the Niger Delta. This activity caused immense environmental harm to the area, which led the local community to protest against Shell. A protest group, the Movement for the Survival of the Ogoni People (MOSOP), was formed; its leaders, the Ogoni Nine, were subsequently detained and prosecuted for murder. After a sham trial, the Ogoni Nine were sentenced to death and executed. It is the deceased’s widows, Esther Kiobel, Victoria Bera, Blessing Ken Nordu, Charity Levula, who now bring the claim against Shell; first before the US, and now before the Dutch courts.

II. The Kiobel case before the US Supreme Court

The Dutch case is inextricably linked to the prior case before the US courts, which was brought in 2006. As Van Ho pointed out, fearing the partiality of Nigerian courts, and without Brussels Ia to clearly establish jurisdiction in a European court, the claimants searched for another appropriate forum to begin proceedings.

Generally, US courts can dismiss proceedings on the basis of forum non conveniens, if the courts of another country are better suited to hear the case for practical reasons. This exception, however, does not apply to cases brought on the basis of the Alien Tort Statute, a statute which dates back to 1789, and that allows claimants to claim compensation on the basis of human rights violations committed abroad. The Alien Tort Statute began to be invoked in the 1980s; Kiobel was one of the first cases in which it was invoked against a corporation. In order for a claim on the basis of the Alien Tort Statute to succeed, claimants need to argue that Shell breached customary international law. As Van Ho pointed out, this is a very high bar to meet. Without touching upon the merits, the US Supreme Court dismissed the case in 2013 due to lack of jurisdiction – therefore, severely restricting the application of the Alien Tort Statute.

The US Supreme Court found that the presumption against extraterritorial application of US laws applies to claims under the Alien Tort Statute and that neither its wording nor its purpose rebuts that presumption. Since the events giving rise to a potential claim all occurred in Nigeria, the US Supreme Court held that it could not have jurisdiction to hear the case. Chief Justice Roberts, in delivering the opinion of the Court, stated that the facts of a case must ‘touch and concern’ the territory of the United States with such a force that the presumption against extraterritoriality is displaced. Without specifying this test any further, Chief Justice Roberts held that mere corporate presence does not suffice.

III. Kiobel before the Dutch Courts

1. The claimants’ main argument

The claimants are represented by Channa Samkalden, Tom de Boer and Elles ten Vergert from Prakken d’Oliveira. They accused Shell of violating the African Charter on Human and Peoples Rights and the Nigerian Constitution of 1979. Crucially, the arguments were neither brought on the basis of tort, nor based on the doctrine of ‘piercing the corporate veil’. This is because human rights are capable of having horizontal direct effect under Nigerian law applicable as lex loci delicti. The claimants argued that the defendant corporate bodies were accessories to human rights violations, which they committed jointly and severally with the government at the time. The four defendants were Royal Dutch Shell, Shell Petroleum NV, Shell Transport and Trading Company, and the Shell Petroleum Development Company of Nigeria Ltd (SPDC). SPDC is the Nigerian subsidiary, which conducted Shell’s business in Nigeria during the relevant period.

De Boer summarized the argument for Shell’s liability. It rests on four pillars: Firstly, Shell invited the regime to violently suppress the Ogoni protests, to eliminate MOSOP and its leadership (the ‘Ogoni Nine’). Secondly, Shell supported the regime during the ‘Operation Restore Order in Ogoniland’; Shell allegedly provided financial support to the military, procured arms and, together with government officials, ran an intelligence network. Shell incited the government to drastically push back against the protests; the company repeatedly stressed the importance of ‘restoring order’ for Nigeria’s economy. Thirdly, the lawyers argued that Shell had an interest in the outcome of the Ogoni Nine trial and was instrumental to its outcome. This claim is founded on evidence which shows that Shell’s lawyers held a so-called ‘watching brief’, a report on court proceedings produced by a third party representative where third party interests might be at stake. As De Boer points out, Shell’s interest in holding a watching brief for a murder trial was quite questionable. Van Ho stressed that Shell’s lawyers were present for the whole duration of the trial, whereas international media were not. Crucially, the claimants were able to produce evidence that two witnesses were bribed to issue incriminating statements. Lastly, it appeared from official documents that Shell deemed itself able to determine the outcome of the procedure. Shell offered to influence the outcome of the proceedings under the condition that MOSOP would stop their protests.

2. Issues raised by the case

Kiobel is a case of ‘foreign direct liability’ involving transnational civil claims with corporate defendants. As such, as pointed out by Van Ho and Roorda, it faces many hurdles, in particular: jurisdiction, applicable law, merits, and difficult practical issues.

a. Jurisdict

The Hague District Court accepted jurisdiction on the basis of art.4(1) Brussels Ia (domicile) art.8(1) Brussels Ia (plurality of defendants/connected claims) and art. 7(1) RV (Rechtsvordering = Dutch Civil Procedure Rules), which is analogous to art.8(1) Brussels Ia.

Roorda provided a comparative analysis of the approaches taken by different courts to jurisdiction. With regards to ‘connected claims’, in English cases such as Lungowe, Okpabi and AAA, courts employ a more in-depth analysis of the substance of the claims, particularly the relationship between the different ‘compartments’ within the corporate defendants. Dutch courts – as seen in Akpan – apply a more marginal test: The defendant has to show that the claimants are abusing the rule of ‘connected claims’ – which has proven to be quite a high bar. Business and human rights cases bear a potential for the revival of forum necessitatis, a doctrine that is enshrined in art.9(c) RV. Kiobel is one of the first cases in which forum necessitatis is argued; academics repeatedly demand a forum necessitatis provision to be included in Brussels Ia.

b. Limitation period

Short limitation periods of two to five years pose often an unsurmountable barrier to business and human rights cases. As seen in Kiobel, and KiK, it takes years to bring such a case before the appropriate forum. In Kiobel, the lawyers circumvented this problem by framing the case as a human rights case instead of tort action. Under Nigerian law, human rights violations would have to be brought in a sui generis action before the Nigerian Federal High Court according to the Fundamental Rights Enforcement Procedure Rules (FREP). The Fundamental Rights Enforcement Procedure Rules of 2009 abrogated statutory limitations to bring these cases. When the events giving rise to the claim occurred in 1995, the FREP 1979 was still in place, which included a statutory limitation period of one year. The defendants argued that the procedural limitation period of one year must be applied. However, the court concluded that according to Nigerian case law, the FREP statutory limitation period does not attach to the events causing the harm, but to the initiation of proceedings, i.e. the moment when the human rights were invoked.

Roorda also touched upon the idea that art.26 Rome II Regulation (ordre public) could be utilized to circumvent short limitation period, an avenue that no judgement to date has explored.

c. Shell’s liability

In its judgment, the District Court very much focused on the evidence of Shell being directly involved in bribery and invited the claimants to produce further evidence on this claim. This is particularly regrettable because the case poses an opportunity to assess Shell’s broader, large scale involvement in committing the human rights atrocities the Ogoni Nine suffered.

On 8 and 9 October 2019, and on 25 September 2020, four witnesses were heard. Irrespective of the outcome, this was the first time that the claimants could publicly hear the confessions of the men that issued incriminating statements against their deceased husbands.

The District Court decided against the claimants in certain crucial aspects. Firstly, it held that the ‘watching brief’ did not constitute any involvement in the trial. Secondly, the Court held that there was no proof that the Commander of the Rivers State Internal Security Task Force had in any way been influenced by the SPDC. Lastly, the claimants failed to establish that SPDC tried to influence the trial on the condition that the MOSOP agreed to end their protests. The claimants had argued that Shell should have been more vocal about their concerns regarding the issue of a fair trial. Where necessary Shell should have retreated from its business operation in the Niger Delta. The District Court held that Shell sufficiently raised the issue of a fair trial with the Nigerian government and that it would have been unreasonable to expect Shell to cease their explorations in the area.

Roorda elaborated on the fact that these cases are repeatedly framed in terms of domestic tort law issues. But domestic tort law is often not suitable for complex transnational activities that affect human rights. This is why the Alien Tort Statute was a particularly attractive avenue for these cases –like for Kiobel, as it was then possible to frame the case as one of international human rights. Roorda further argued that parental duties of care, which hinge upon company structures, make one lose sight of the broader international dimension these cases are situated in. The fundamental interests are stake are hardly comparable to standard (national) tort law cases. The goal of a business and human rights case, at the end of the day, is not only to compensate the victim, but also to exert constructive influence on a corporate actor, who to date seems to fall outside the reach of the law.

d. Practical issues

Van Ho pointed to the fact that countries have a duty to provide remediation. Nevertheless, there are immense practical hurdles to achieving this goal.

Costs

Hiring a foreign lawyer is the first obstacle that needs to be overcome in business and human rights cases. De Boer pointed out that Dutch national law is fairly rigid when it comes to lawyers’ remuneration. Unlike the US, Dutch law does not provide for alternative fee arrangements, for example ‘success fees’. This is why commencing costly proceedings depends on the support of NGOs; their importance can barely be overstated. In Kiobel, Amnesty International did not only select Prakken d’Oliveira but continued to support the case financially.

Evidence

The issue of evidence was at the core of the discussion. Claimants are obliged to substantiate the claim they are putting forward; however, it is the inherent nature of global supply chains that evidence is buried in companies’ documentations. Claimants generally do not have access to these documents. Under Dutch national law, like in most continental legal systems, there is no provision that allows claimants to obtain incriminating documents from the defendants. It can be attributed to the claimants’ good luck that in 2013, Shell had to provide the claimants with documents pursuant to US discovery rules.

IV. Residual questions and outlook

The legal issues elaborated above evidence the inaptness of national legal systems to deal with transnational cases involving corporate defendants. The panelists explained that claimants find themselves in a race against time: not only with regards to limitation periods, but also concerning practical issues – evidence disappears, witnesses die. Business and human rights cases stand or fail with the capacities of national courts to accommodate these cases in a quick and efficient manner.

Kiobel also raises wider issues regarding the responsibility of former colonial states vis-à-vis countries that emerged from colonial rule. When following the Kiobel proceedings, it must be borne in mind that, as Van Ho pointed out, Shell was granted the drilling and extraction license in 1936, when Nigeria was still a British colony. Cases such as Kiobel could also bear political ramifications, such as a diplomatic fallout.

Concluding her contribution to the panel, Van Ho shared her hope for future NAP negotiations: national procedural law must be amended to accommodate complex transnational cases; when drafting NAPs, governments and legislators ought to regulate for  the hurdles claimants such as Esther Kiobel face: the difficulty of finding and paying a lawyer and producing evidence. This is the only way for countries to fulfil their duty to provide remediation for human rights violations.

 Watch the full video of the discussion:

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