All countries need investments to achieve their sustainable development goals. However, not all investments are designed or operate in full compliance with the requirements of sustainable development. Some investment activities are in fundamental breach of these goals, sometimes to the point where human rights are violated. In cases where violations have occurred, access to justice by victims to obtain compensation for these violations is crucial. However, victims are faced with numerous obstacles, particularly where transnational investment is involved.
The difficulties encountered by victims in accessing justice in the host country of the investment or in the home country of the investor call into question the effectiveness of existing legal procedures and the appropriateness of pursuing other alternative avenues. Faced with this situation, the Open-Ended Intergovernmental Working Group was mandated in 2017 by the United Nations Human Rights Council to develop an internationally legally binding instrument on transnational companies and other business enterprises with regard to human rights. These important negotiations are progressing slowly, and finalization is not yet on the horizon. At the same time, a group of experts and practitioners was formed in 2017 to develop rules relating to business and human rights. This group eventually adopted the Hague Rules on Business and Human Rights Arbitration (Hereafter the Hague Rules). These Rules provide a specific mechanism to resolve disputes in the area of business and human rights, arbitration in particular.
This article examines the role that these rules could play in improving access to justice for victims. In order to better evaluate this role, the article begins by presenting the limits of conventional, essentially judicial, avenues. The article then examines whether arbitration under the Hague Rules can provide a solution to these shortcomings and under what circumstances.
Obstacles to accessing justice in conventional judicial remedies
In the process of conducting their investment activities, multinationals sometimes violate the human rights of citizens within the host state. This is the case in certain areas such as work, safety, health, or the environment. As soon as such breaches take place, the victims may file a complaint against these multinationals. To this end, the victims mainly have only the internal legal channels at their disposal. In some instances, they can also approach the national courts of the investor’s home country or the regional courts of human rights. However, all of these channels of recourse often prove rather ineffective for victims because of the obstacles that arise.
Before the domestic courts of the host state, it is frequently the case that the victims’ complaints and their request for compensation for the damage suffered are not successful. This ineffectiveness is due to the existence of a wide variety of constraints that the victims face.
On the one hand, most of the victims who file complaints against companies for violations of their human rights are dealing with the lack of, or insufficient, financial means to secure the services of experts and to be assisted throughout the proceedings by legal counsel. On the other hand, the victims face obstacles linked to the complex structuring of multinational companies, as well as the uncertainty about the possibility of holding the parent companies liable for the violations of subsidiaries or branches. Indeed, multinationals are companies established and active in several countries thanks to the subsidiaries they hold. They have a highly complex organization and mode of operation that is sometimes difficult for victims to understand. As a general rule, a distinction is made between the parent company and the subsidiaries and branches. These do not have the same legal identity, although it is the parent company that coordinates the activities of the latter. For this reason, invoking the liability of a multinational for violation of human rights raises the problem of the type of relationship that exists between the parent company and its subsidiaries or branches.
Due to the absence of effective means of recourse within the host state of the investment, a new approach to liability has been developed to overcome these obstacles. Consequently, some victims have attempted to hold the parent company directly liable before the courts of its own home state for human rights violations that have been committed by its subsidiaries in the host countries. This recourse is based on the fact that the parent company is expected to exercise a certain level of due diligence in the activities of its subsidiaries established in other countries.
This process has been applied for nearly 20 years, particularly in Europe. Two cases illustrate this point. In January 2021, the Court of Appeal in The Hague delivered a judgment in the case of Four Nigerian Farmers and Stichting Milieudefensie v. Shell, in which it recognized the Nigerian subsidiary of Shell (Shell Petroleum Development Company of Nigeria) as being liable for environmental damage caused by oil spills in the Niger Delta. On this occasion, the Court ruled that the parent company of SPDC had breached its duty of care vis-à-vis its subsidiary and should repair the damage inflicted on the victims.
In February 2021, the Supreme Court of the United Kingdom followed the same approach in the case of Okpabi and Others v. Shell. In this case, the Court considered that the plaintiffs could certainly argue that there existed a duty of care on the part of Royal Dutch Shell in relation to its subsidiary. On the basis of this general principle of due diligence of the parent company in relation to its subsidiaries, the Court therefore authorized Nigerian citizens to bring an action against the British parent company for compensation for the environmental damage caused by its subsidiary in Nigeria.
Despite the perspective that this approach offers in regard to parent company liability on behalf of its subsidiaries, the position of victims in terms of justice remains uncertain.
Arbitration under the Hague Rules: An alternative to the shortcomings and limits of conventional judicial remedies?
In view of the theoretical and practical constraints that limit the effectiveness of conventional domestic remedies, it is worthwhile exploring other alternatives that can improve the avenues of access to justice for victims. In this respect, arbitration could be one avenue to pursue. This is, in fact, the challenge that underpinned the development and adoption of the Hague Rules on Arbitration Relating to Business and Human Rights.
Overview of the Hague Rules
The Hague Rules were developed by a diverse team of international practitioners and scholars under the auspices of the Center for International Legal Cooperation. The Rules, officially launched on December 12, 2019, are inspired by the United Nations Guiding Principles on Business and Human Rights and “aim to promote the use of arbitration in the important area of business and human rights.”
As stated in the introductory note to the Rules, the text “provides a set of procedures for the arbitration of disputes related to the impact of business activities on human rights.” Since these were not designed originally to be applied to the contexts of human rights disputes in business, the rules on arbitration must be adjusted to take into account the constraints faced by victims. This is what the group of experts who formulated the Hague Rules attempted to do. Building on the United Nations Commission for International Trade Law’s Arbitration Rules, the Hague Rules introduce modifications to address certain issues likely to arise in the context of disputes relating to business and human rights.
But can the arbitration mechanism established in the Hague Rules bridge the gaps and meet the challenges inherent in the judicial mechanisms of the host state of foreign companies or the home state of the parent company? To answer in the negative is to deny the potential of arbitration as a means of dispute resolution. To answer in the affirmative is to overestimate the potential of this mechanism. Indeed, arbitration also has constraints that sometimes limit its effectiveness.
Constraints linked to consent to arbitration by the two parties to the dispute
The main constraint relates to the fact that both parties need to consent to submit the dispute to arbitration. Since consent is the cornerstone of arbitration, this constraint poses significant obstacles to the victims’ access to justice through this mode of dispute resolution. The obstacles to obtaining this consent are significant, whether it be consent before the dispute arises (arbitration clause) or after it (arbitration agreement).
Therefore, when it comes to obtaining consent from the parties before disputes arise, companies are hesitant. Indeed, they may be afraid of increasing their legal risks by giving their agreement to arbitration of potential disputes that could expose them to greater liability risks.
For the same reasons, they are generally also reluctant to give their consent to arbitration once the dispute has arisen, except in cases where an effective legal remedy is available to victims. In this case, paradoxically, the companies are open to agreeing to arbitration in order to avoid a potentially long legal battle before the national courts. It follows that a mechanism such as arbitration, based on the consent of the parties, may seem less appropriate to improve access to justice for victims of human rights violations.
In some cases, however, arbitration can be a sensible way to resolve disputes stemming from the violation of human rights by companies.
Situations conducive to recourse to arbitration under the Hague Rules
It is certain that arbitration cannot solve all the difficulties confronted by victims of human rights violations in terms of access to justice. However, arbitration can be useful and effective in specific circumstances which, at the same time, offer greater latitude to obtain the consent of the parties. Arbitration will then be all the more effective if it is classified as “commercial” and therefore subject to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
On the one hand, arbitration may be appropriate as a mode of dispute resolution for human rights violations in community development agreements. These agreements are made between companies and local communities to ensure that these communities share in the added value created by large-scale investments. In some sectors, particularly the extractive industries sector, some laws promote or make it mandatory to sign these agreements before the investment is made. These negotiations, therefore, offer an opportunity to insert an arbitration clause, without prejudice to the possibility of recourse to national courts.
On the other hand, arbitration can equally be used in the resolution of commercial disputes between companies and their suppliers or those that may have an issue with the different stakeholders in the value chain. Within the European Union, for example, several member states are undertaking to implement binding laws and regulations relating to human rights, in particular the due diligence requirements in the protection of human rights by companies. Generally speaking, these laws and regulations demand that parent companies ensure respect for human rights not only within their own business activities but also within the activities of their corporate groups or supply chains. These rules impose obligations on parent companies to implement and monitor policies with regard to human rights and to report on the risks of human rights violations identified in their activities: arbitration could play a role in this context.
In practice, the Hague Rules have been adjusted to facilitate this task for arbitral tribunals and to be adapted to the parties involved; whether it involves a dispute between a company and a victim, or between two companies (business-to-business) in the context of due diligence in the supply chain. For example, they broaden the powers of arbitral tribunals to take into consideration the imbalance in power between the parties to the dispute and the protection needs of the witnesses.
Conclusion: Arbitration auxiliary to judicial options and not their substitute
Numerous obstacles prevent victims from accessing justice in an effective manner. Judicial systems in host states must be improved and strengthened since they remain the primary and preferred recourse. For this reason, support for courts and judges, particularly in developing countries, would be useful, as would improving the international recognition and enforcement of foreign awards.
When courts in the host state are not available, the courts of the home state of the parent company play an important role. Recent developments show that courts are more open to accepting jurisdiction in particular regions and that international treaties, such as the Brussels Convention, support these developments. However, the role of home states regarding access to justice should be strengthened through “judicial cooperation” and other tools to ensure the international enforcement of judgments. In this sense, access to justice for victims in home states could be further strengthened through negotiations on the United Nations treaty on business and human rights, as well as in investment treaties that may guarantee access to the courts of the home state and improve judicial cooperation between the parties to the treaty.
Arbitration can only play an auxiliary role to judicial options, as it is based on consent, and consent can only be obtained in limited circumstances. Nevertheless, situations may exist where a company and affected victims or communities choose arbitration to resolve a dispute. In this case, the Hague Rules can be interesting because they are adapted to the specific situation of business and human rights.
Nathalie Bernasconi-Osterwalder is Executive Director of IISD Europe and Senior Director, Economic Law and Policy, IISD.
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