Editor's Note: Catherine Dunmore is an experienced international lawyer who practised international arbitration for multinational law firms in London and Paris. She recently received her LL.M. from the University of Toronto and her main fields of interest include international criminal law and human rights. Since October 2017, she is part of the team of the Doing Business Right project at the Asser Institute.

Background

At the United Nations Forum on Business and Human Rights from 27-29 November 2017 in Geneva, discussions focused on the central theme of Realizing Access to Effective Remedy. With an increasing focus on this third pillar of the United Nations Guiding Principles on Business and Human Rights, a working group of international law, human rights and conflict management specialists (Claes Cronstedt, Jan Eijsbouts, Adrienne Margolis, Steven Ratner, Martijn Scheltema and Robert C. Thompson) has spent several years exploring the use of arbitration to resolve business and human rights disputes. This culminated in the publication on 13 February 2017 of a proposal for International Business and Human Rights Arbitration. On 17 August 2017, a follow-up Questions and Answers document was published by the working group to address the principal questions raised about the proposal during the three-year consultation with stakeholders. Now, a drafting team is being assembled, chaired by Bruno Simma, to prepare a set of rules designed specifically for international business and human rights arbitration (the Hague International Business and Human Rights Arbitration Rules) in consultation with a wide range of business and human rights stakeholders. Once drafted, the rules will be offered to the Permanent Court of Arbitration and other international arbitration institutions and could be used in arbitration proceedings managed by parties on an ad hoc basis.

Introduction

Part 1 of this three-part blog series gave an overview introduction to the proposal for international business and human rights arbitration. This Part 2 focuses on (1) the potential advantages of using international arbitration to resolve such disputes, as well as (2) the substantial challenges the proposal will face in practice. Part 3 will then provide a case study of the Accord on Fire and Building Safety in Bangladesh’s binding arbitration process.

1.     The potential advantages of international business and human rights arbitration

The working group’s proposal to use international arbitration for the resolution of business and human rights disputes offers many potential advantages. As alluded to in Part 1 of this blog series, international arbitration can undoubtedly provide a more neutral forum, whereas domestic or international courts may face political pressure or judicial corruption. Arbitration would allow both parties to a dispute to select their own judges, who could, in theory, be impartial experts in business and human rights law and practice and accordingly more sensitive to the often complex issues at stake. This may particularly be welcomed in politically or emotionally charged human rights disputes. Additionally, international arbitration would allow for greater procedural flexibility and efficiency, as compared particularly to domestic court systems. Proceedings could be more tailor-made to fit both parties’ locations, means and resources, and resolved more swiftly than might otherwise be the case in business and human rights disputes. Other potential advantages include (a) the universal recognition of the arbitral award, and (b) an increase in supply chain responsibility.

a.     Universal recognition of the arbitral award

Final awards rendered in international business and human rights law arbitrations could include monetary damages, injunctive relief and close monitoring of future compliance. As the working group’s Questions and Answers document confirms, such awards could have the advantage of being enforceable under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The New York Convention provides for the recognition and enforcement of foreign arbitral awards within its 157 State parties. The courts of each member nation must recognise foreign arbitral awards as binding and enforce them, unless the party against whom the award is being invoked can prove that there is reason to refuse enforcement. The limited grounds for refusing this universal recognition are outlined in Article 5 of the New York Convention, notably that:

• The parties to the agreement to arbitrate were under some incapacity or the agreement to arbitrate is not valid under the governing law or the law of the country where the award was made.
• The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present its case.
• The award contains decisions on matters beyond the scope or terms of the submission to arbitration.
• The arbitral authority’s composition or arbitral procedure was not in accordance with the parties’ agreement or, failing such agreement, the law of the country where the arbitration took place.
• The award is not yet binding, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made.
• The dispute’s subject matter is not capable of settlement by arbitration under the law of the country in which enforcement is sought.
• The recognition or enforcement of the award would be contrary to the public policy of the country in which enforcement is sought.

Accordingly, parties have an established means by which to achieve the recognition and enforcement of final awards handed down by tribunals in business and human rights arbitrations.

Although this could provide a clear route by which parties can receive any monetary damages, it may however be found lacking when it comes to potential long term monitoring and supervision requirements of any business and human rights arbitration award. Business and human rights arbitration tribunals might well require in the award that a party’s actions to remedy a particular human rights breach are supervised, and that its future compliance with human rights obligations is closely monitored. In this vein, additional mechanisms of enforcement and monitoring may need to be developed, perhaps along the lines of the Permanent Court of Arbitration’s Optional Rules for Conciliation of Disputes Relating to Natural Resources and/or the Environment.

b.    Increase in supply chain responsibility

As the working group explains, international business and human rights arbitration has the potential to “reinforce global governance” and might encourage and assist businesses to better manage their supply chains in order to avoid rights abuses. Businesses are increasingly altering their supply chain contracts to observe human rights norms, particularly in line with the United Nations Guiding Principles on Business and Human Rights. In this manner, international arbitration for the resolution of any human rights disputes could be inserted into the contractual terms and conditions between companies and their immediate business partners.

Precedent contracts between parent companies, subsidiaries, suppliers and contractors could simply be amended to include business and human rights commitments along with a business and human rights arbitration clause. They might include clauses requiring business partners to observe specific norms or to refrain from particular practices which might lead to human rights abuses. They could also include clauses granting potential victims, workers or members of affected communities the right to enforce the human rights clauses. Parent companies might use perpetual clauses to ensure effective supply chain responsibility, meaning that parties throughout their entire chain of subsidiaries, suppliers, contractors and subcontractors are required to insert the same provisions into their own contracts. As the working group’s Questions and Answers document explains, any defaulting party could then be subject to a binding business and human rights arbitration process brought by any party empowered under the contract to invoke proceedings.

These steps would create a chain of contracts that protect victims from human rights abuses and provide businesses with an avenue to reduce or eliminate the risk of abuse for which they may share a degree of responsibility (see previous blog: Lungowe v Vedanta and the loi relative au devoir de vigilance: Reassessing parent company liability for human rights violations). The availability of international arbitration could allow businesses to better manage their supply chains and facilitate responsible conflict management in the event of any human rights abuses.

2.     The challenges facing international business and human rights arbitration

The working group’s proposal to use international arbitration for the resolution of business and human rights disputes also raises many potential challenges. Careful consideration must be given to the existing limitations of international arbitration. For instance, compared to domestic court systems, arbitration offers limited options for the summary dismissal of spurious claims. The recourse mechanisms available to defendant corporations must be reassessed when developing business and human rights arbitration to enable the early dismissal of unfounded allegations. Another key area for debate, is which norms or laws would be applied by the arbitral tribunal in business and human rights disputes, and indeed whether they would recognise corporate liability for human rights violations. As evidenced through Kiobel v Royal Dutch Petroleum, Jesner v Arab Bank and Lungowe v Vedanta, the question of corporate liability for human rights violations under international and domestic law remains open in many jurisdictions. As for the possibility of incorporating voluntary guidelines such as the United Nations Guiding Principles on Business and Human Rights, attention must be paid to the potential implications of making soft law a binding and contractually enforceable obligation. A successful business and human rights arbitration mechanism must also work to overcome the existing criticisms of international arbitration, often focusing on cost and efficiency. Moreover, in contemplating whether party appointed arbitrators or a permanent standing arbitral tribunal is more appropriate, the working group must consider issues such as the role of arbitrator bias and experience, as well as the feasibility of having multiple decentralised offices if a Court of Arbitration for Sport model were to be followed. As briefly mentioned in Part 1 of this blog series, other potential challenges include (a) an inequality of arms between parties, and (b) the transparency of arbitration proceedings.

a.     Inequality of arms between parties

As the working group’s Questions and Answers document explains, often victims of businesses’ human rights abuses are poor and accordingly cannot compete on equal terms in disputes against well-resourced business opponents. Unfortunately, this inequality of arms issue might be compounded through the use of international arbitration, as its high party and common costs, alongside procedural complexity, could place victims at a significant disadvantage.

International arbitration has been described as a “rich man’s game, best left to large companies, insurers and organs of sovereign states”. Both parties to international arbitral proceedings generally incur:

• Administrative charges by the arbitral tribunal.
• Fees and expenses of the tribunal, external counsel, experts and specialist services, such as transcribers and interpreters.
• Hiring fees for hearing room(s) and facilities.
• Expenses of testifying witnesses.
• Significant costs for legal representation.

Accordingly, in promoting the international arbitration of business and human rights disputes, efforts must be made to deal with the inequality of arms that victims of rights violations may face when attempting to assert their rights, and how they might afford the costs associated with arbitration proceedings.

Indeed, the working group’s proposal explicitly recognises that victims may need assistance to help defray their arbitration costs and legal fees. Proposals for cost reduction in future international business and human rights arbitrations include:

• Facilitating representation of victims by human rights non-governmental organisations, labour unions and pro bono lawyers.
• Supporting arbitration proceedings in the same way as domestic litigation, through legal aid or the provision of third-party funding.
• The establishment of dedicated grants or the advance of funds (to be repaid from the proceeds of final settlements or arbitral awards) for the arbitration of business and human rights disputes. For instance:
• Private corporations, individuals, foundations and States could contribute to the establishment of a dedicated private trust fund. This would promote better access to justice for victims whilst also contributing to businesses’ corporate social responsibility objectives.
• A dedicated fund could be established by arbitral institutions which adopt the Hague International Business and Human Rights Arbitration Rules. One funding model would be the Financial Assistance Fund established by the Permanent Court of Arbitration, which aims at helping developing countries meet part of the costs involved in international arbitration.
• Centralised funds could be created, for instance within the European Union, by which access to common markets is contingent upon fixed contributions to support victims of businesses’ human rights violations.

In terms of costs and legal expenses allocation, a number of proposals have been put forward to ensure a greater equality of arms. These include:

• Contractual requirements in business and human rights arbitration clauses mandating that a losing company pay the arbitration costs and legal fees of winning victims.
• The granting of additional powers to international business and human rights arbitrators, allowing them to allocate costs and legal fees to winning victims or with consideration of the degree of fault demonstrated.
• Examining the use of fee-shifting arrangements. Traditionally this could mean that the loser pays the winner’s legal fees and costs, which may reduce initial hurdles for victims seeking to litigate but also increases their potential risk and exposure post-judgment. Another idea would be implementing reverse fee shifting, whereby successful victims are awarded their legal fees and costs without winning businesses being afforded the same luxury. The concept has previously been implemented in environmental suits bought by citizens in the United States to help overcome often prohibitive litigation costs.

Given the widespread interest in access to justice for business and human rights victims, there is certainly the potential for means of reducing and reallocating the costs involved in international arbitration proceedings. However, more thought must be given by the working group, the drafters of new arbitration rules and the business and human rights community as a whole to overcome the inequality of arms between well-resourced business corporations and their potential victims.

b.    Transparency of arbitration proceedings

One key factor behind the success of international commercial arbitration is confidentiality. The potential privacy of arbitral proceedings is a distinct motivator for business parties to resort to this means of dispute resolution over more public domestic litigation proceedings. However, when considering the arbitration of business and human rights disputes, the expedient element of arbitral confidentiality is challenged by an inconsistent concern for ensuring transparency in human rights cases. When adjudicating on disputes involving human rights violations of international concern, the public interest lies in having open, transparent proceedings. Additionally, as Justice Scalia recognised in AT&T Mobility LLC v Concepcion, 131 S. Ct. 1740 (2011), confidentiality “becomes more difficult” with class action arbitrations involving absent parties and potentially higher stakes. Accordingly, any rules for arbitrating business and human rights disputes must rethink standard arbitration provisions dictating party privacy, and take account of a need for greater transparency. Indeed, the working group’s proposal identifies as an issue for drafters of new arbitration rules, how “transparent the proceedings and awards should be and how to accommodate any confidentiality concerns that either side might have”.

The working group’s Questions and Answers document identifies greater transparency as a prerequisite for business and human rights arbitration, including the possibility of open proceedings for disputes as well as the potential for publication of human rights arbitral awards. When reassessing arbitral confidentiality, it is suggested that drafters of new arbitration rules will turn to the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules and the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration. These rules recognise “the need for provisions on transparency in the settlement of such treaty-based investor-State disputes to take account of the public interest involved in such arbitrations”, in a similar vein to the public interest in human rights litigation. They also explain that “that rules on transparency in treaty-based investor-State arbitration would contribute significantly to the establishment of a harmonized legal framework for a fair and efficient settlement of international investment disputes, increase transparency and accountability and promote good governance”. Such harmonisation in a legal framework for business and human rights arbitration would similarly augment accountability and promote good governance in the resolution of disputes.

The UNCITRAL Rules increase the public transparency of investor-state arbitration proceedings, notably authorising arbitrators to protect confidential business information and permitting the submission of amicus curiae briefs by third parties. They also require that repositories make all documents, including exhibits and expert reports, available in a timely manner, in the form and language in which they are received. Future rules governing business and human rights disputes might incorporate these principles, as well as considering public entry to, and online streaming of, arbitration hearings and the publication of pleadings and arbitral awards. This will necessitate consultations with international arbitration institutions, which do not routinely create public venues for observation of their proceedings and often decline to publically state the number and kinds of claims with which they deal. It will also be critical that arbitrators are fully informed of the legal and policy issues surrounding confidentiality in business and human rights cases, in order to appropriately resolve disputes arising between parties about privacy provisions.

As Judith Resnik has highlighted, publicity in courts can discipline businesses and governments by making visible how they treat judicial procedures and the claimants against them. Only through such “public processes, one learns whether individuals of all kinds [...] are understood to be persons equally entitled to the forms of procedure offered others to mark their dignity and to accord them respect and fairness”. Public access to the resolution of business and human rights disputes is paramount, and great attention must be paid by drafters to balancing the protection of sensitive business information with the need for transparent arbitral proceedings.

Conclusions

The working group’s proposal for international business and human rights arbitration is not intended to replace any existing means of redress. Its desire is to offer a potentially more effective alternative to current means of dispute resolution, rather than remove access to any existing remedies. Providing parties with a greater range of options to resolve business and human rights disputes will undoubtedly improve their ability to select a method most appropriate to their cause. The availability of international business and human rights arbitration would bring with it many potential advantages, including the universal recognition of arbitral awards, an increase in supply chain responsibility and responsible conflict management. However, the concept still has some way to go before it could succeed in practice. International arbitration proceedings must be heavily adapted, accounting for, amongst other factors, a likely inequality of arms between parties and the need for transparency in human rights proceedings, whilst the existing limitations of international arbitration must be reconsidered. Commentators from business, human rights and arbitration communities have reacted to the proposal with questions and concerns, and the working group, drafters of new arbitration rules and the business and human rights community as a whole face substantial challenges moving from concept to reality. Part 3 of this blog series will further discuss the arbitration of business and human rights disputes through a case study of the Accord on Fire and Building Safety in Bangladesh’s binding arbitration process.

Editor’s note: Shamistha Selvaratnam is a LLM Candidate of the Advanced Masters of European and International Human Rights Law at Leiden University in the Netherlands. Prior to commencing the LLM, she worked as a business and human rights solicitor in Australia where she specialised in promoting business respect for human rights through engagement with policy, law and practice.

By resolution, on 26 June 2014 the UN Human Rights Council adopted Ecuador’s proposal to establish an inter-governmental working group mandated ‘to elaborate an international legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises’. The proposal was adopted by 20 to 14 votes, with 13 abstentions, and four years later, in July this year, the working group published the first draft of the treaty (from herein referred to as the ‘treaty’). Shortly after, the draft Optional Protocol to the draft treaty was released. The Optional Protocol focuses on access to remedy for victims of human rights abuses by businesses.

This first blog of a series of articles dedicated to the proposed BHR Treaty provides an overview of the main elements of the draft. It will be followed by a review of the reactions to the Draft, and a final piece outlining some recommendations for the upcoming negotiations.

Key Provisions of the Treaty

Preamble (Treaty, Article 1)

The preamble of the treaty makes it clear that it is the primary responsibility of the States to ‘promote, respect and fulfill human rights and fundamental freedoms’, including human rights abuses committed by businesses. Accordingly, the treaty seeks to indirectly impose obligations on businesses by calling on State Parties to adopt legislation that is consistent with the treaty requirements.

Purpose (Treaty, Article 2)

The purpose of the treaty is to ‘strengthen the respect, promotion, protection and fulfillment of human rights’ and to ‘ensure effective access to justice and remedy to victims of human rights violations’ in the context of business activities of transnational character, and to ‘advance international cooperation’ so that States fulfill their obligations under international human rights law.

Scope and jurisdiction (Treaty, Articles 3 to 5)

The treaty will apply to ‘human rights violations in the context of any business activities of a transnational character’. ‘Business activities of a transnational character’ is defined to mean ‘any for-profit economic activity … undertaken by a natural or legal person … that take place or involve actions, persons or impact in two or more natural jurisdictions’. Accordingly, unlike the UN Guiding Principles on Business and Human Rights, the treaty does not apply to and bind businesses that only have domestic activities.

Jurisdiction for acts or omissions arising under the treaty vests in the court of the State where the acts or omissions occurred or where the alleged perpetrator (whether a natural or legal person) is domiciled. The alleged person is considered to be domiciled at the place where it has its: ‘(a) statutory seat; (b) central administration; (c) substantial business interest; or (d) subsidiary, agency, instrumentality, branch, representative office or the like.’

Rights of victims (Treaty, Article 8)

‘Victims’ are defined to mean persons who individually or collectively alleged to have suffered harm, including physical or mental injury. The treaty recognises that victims have the right to ‘fair, effective and prompt access to justice and remedies in accordance with international law’, including restitution, compensation and environmental remediation. It also imposes a number of obligations on State Parties to the treaty, namely, State Parties must:

• Guarantee the rights of victims to present claims to their court.
• Investigate all human rights violations effectively, promptly, thoroughly and impartially and take action against alleged perpetrators.
• Ensure their laws do not unduly limit the right of victims to appropriate access to information relevant to the pursuit of remedies.
• Provide proper and effective legal assistance to victims throughout the legal process (for example, by informing victims of their procedural rights).
• Assist victims in overcoming financial barriers to commencing proceedings.
• Establish an International Fund for Victims to provide legal and financial aid to victims.
• Provide effective mechanisms for the enforcement of remedies.
• Protect victims, their representatives, families and witnesses from unlawful interference with their privacy, and from intimidation and retaliation.

The treaty also provides that in no case will victims be required to pay the legal expenses of the other party to a claim.

Human rights due diligence (Treaty, Article 9)

A key article of the treaty requires State Parties to ensure that their domestic legislation requires all businesses to which the treaty applies to undertake due diligence throughout their business activities. The due diligence must take into account ‘the potential impact of human rights resulting from the size, nature, context of and risk associated with the business activities’ (including the activities of its subsidiaries and controlled entities).

The due diligence undertaken by businesses must include:

a)     Preventing human rights violations within the context of its business activities.

b)     Monitoring the human rights impact of its business activities.

c)     Identifying and assessing any actual or potential human rights violations that may arise through its activities.

d)     Reporting publicly and periodically on non-financial matters (for example, environmental and human rights matters).

e)     Undertaking pre and post-environmental and human rights impact assessments covering its activities.

f)      Reflecting the requirements set out in a) to e) above in its contractual relationships.

g)     Carrying out ‘meaningful consultations with groups whose human rights are potentially affected by the business activities and other relevant stakeholders’.

h)     Establishing and maintaining financial security, if required.

Failure to comply with the above requirements will result in commensurate liability and compensation. However, the treaty provides that State Parties can exempt certain small and medium-sized businesses from selected due diligence obligations to avoid imposing undue administrative burdens on those businesses.

Legal liability (Treaty, Article 10)

The treaty requires State Parties to ensure that both natural and legal persons can be held criminally, civilly or administratively liable for human rights violations undertaken in the context of business activities through their domestic law.

The treaty also sets out the principles for civil and criminal liability. With respect to civil liability, businesses to which the treaty applies will be liable for harm caused by human rights violations in the context of their business activities in various circumstances, namely:

a.     to the extent it exercises control over the operations; or

b.     to the extent it exhibits a sufficiently close relation with its subsidiary or entity in its supply chain and where there is strong and direct connection between its conduct and the wrong suffered by the victim; or

c.     to the extent risk have been foreseen or should have been foreseen of human rights violations within its chain of economic activity. 

With respect to criminal liability, States are required to ‘provide measures under domestic law to establish criminal liability for all persons with business activities of a transnational character that intentionally, whether directly or through intermediaries, commit human rights violations that amount to a criminal offence’. Where criminal responsibility is not applicable to legal persons in the legal system of a State Party, that Party must ensure that legal persons are subject to ‘effective, proportionate and dissuasive non-criminal sanctions, including monetary sanctions or other administrative sanctions’.

Mutual legal assistance and international cooperation (Treaty, Articles 11 and 12)

States Parties must ‘cooperate in good faith to enable the implementation of commitments' under the treaty and the fulfilment of the treaty’s purposes. They must afford one another the widest measure of mutual legal assistance in initiating and carrying out investigations, prosecutions and judicial proceedings’. This includes taking evidence from persons, executing searches and seizures and facilitating the freezing and recovery of assets. However, a narrow exception to mutual legal assistance is also provided.

With respect to international cooperation, State Parties must undertake ‘appropriate and effective measures’ to allow for international cooperation among the States. This may include sharing experiences, good practices and challenges.

Enforcement and remedies (Treaty, Article 14; Optional Protocol, Articles 1, 3 to 8, 10 and 11)

The treaty does not contemplate any international enforcement or complaint mechanism. Instead, it establishes a monitoring and oversight mechanism – a Committee of experts. The Committee will perform a number of functions including making general comments on the treaty, considering and providing concluding observations and recommendations on reports submitted by State Parties and providing support to State Parties in order to allow for the implementation of the treaty.

In contrast, State Parties that ratify the Optional Protocol recognise ‘the competence of the Committee … to receive and consider communications from or on behalf of individuals or groups of individuals’. If the Committee receives a communication, it must bring it to the attention of the State Party concern and the involved person conducting business activities who can then submit written explanations or statements clarifying the matter and the remedy within six months. The Committee can then designate its members to carry out a confidential inquiry into the matter and report to the Committee urgently. The findings of the inquiry will then be provided to the State Party and the involved person conducting business activities, together with comments and suggestions.

Further, pursuant to the Optional Protocol, State Parties are required to establish a National Implementation Mechanism (NIM) ‘to promote compliance with, monitor and implement’ the treaty within two years. The functions of the NIM are to: (a) make the treaty content known to the general public, business and victims; (b) cooperation with other national institutions, foreign NIMs and civil society organisations ‘to raise awareness on the implementation’ of the treaty; and (c) make recommendations to a State Party’s competent authorities.

As such, NIMs will have the power to:

• request necessary information from a State Party in relation to the implementation of the treaty, including financial and non-financial information. It also has the power to request information from other State Parties;
• conduct reviews on the implementation of a State Party’s due diligence obligations when requested by ‘victims, natural or legal persons conducting business activities of a transnational character or all other persons with a legitimate interest’, or where the NIM deems it necessary;
• where non-compliance is identified, provide recommendations to natural or legal persons conducting business activities in order for it ‘to bring its operation into compliance, [or] inform the competent authorities about such conduct or omission’;
• receive, consider and investigate complaints of human rights violations alleged to have been committed by natural or legal persons conducting business activities brought by victims or a group of victims, their representatives or other interested parties’, and assist parties to reach an amicable settlement; and
• monitor the compliance of parties that have reached an amicable settlement, and, in the event of any non-compliance, communicate the non-compliance to the Committee of experts, ‘without prejudice to the right to institute appropriate judicial or administrative procedures against the non-complying party.’

Implementation (Treaty, Article 15)

In order to implement the treaty, State Parties are required to, inter alia, ‘take all necessary legislative, administrative or other action’ to ensure the effective implementation of the treaty. The treaty does not elaborate on how State Parties are to do this in practice.

Next Steps

So where to from here? The working group’s next session is scheduled for 15 to 19 October 2018 in Geneva during which it will discuss the treaty and Optional Protocol. While the treaty and Optional Protocol are a step in the right direction to imposing human rights obligations on businesses there are still gaps that it needs to address, which will be explored in the next blog post.