Principles for responsible contracts: Integrating the management of human rights risks into State-investor contract negotiations
The UN shines a spotlight on business and human rights
In July 2005, the then United Nations Secretary-General Kofi Annan appointed John Ruggie as his Special Representative on Business and Human Rights. Ban Ki-Moon continued the appointment, and this June Ruggie delivered his final report to the Human Rights Council. Ruggie’s mandate is highly significant for States and companies because it led to the first-ever policy statements by the UN Human Rights Council regarding the responsibilities of business to respect human rights. In 2008 the Council unanimously endorsed the “Protect, Respect and Remedy” framework outlining States’ and companies’ respective duties and responsibilities with respect to human rights. And this June, in an unprecedented move, the UN Human Rights Council unanimously endorsed the Guiding Principles presented by Ruggie on how to implement the framework. Together these mark the foundations of what the most authoritative human rights body in the world views as the responsibility of companies and the duties of States to protect human rights in the context of business activity.
But beyond providing these foundational documents, Ruggie also produced a document holding direct significance for investment projects and the international contracts between investors and host States that underpin them. Along with his final report, Ruggie submitted “Principles for responsible contracts: integrating the management of human rights risks into State-investor contract negotiations: guidance for negotiators”. These Principles, specific to the negotiation of investor-State contracts, are the fruit of four years of research and detailed policy discussions with commercial and State representatives, lenders, banks, union representatives, non-governmental organizations, academics and other stakeholders from all over the globe.
While the impact of these Principles on how investment contracts are shaped in the future is hard to predict, they offer a contribution to building a better understanding of the relationship between international investment contracts and human rights.
Ruggie’s research on investment contracts and human rights
As Legal Advisor to John Ruggie, I was charged with leading the work on investment contracts. His work in this area stemmed from a heated debate about stabilization clauses and human rights among participants to a consultation on the financial sector. The allegations made at the consultation included that stabilization clauses allow companies to legally exempt themselves from laws and policies aimed at protecting human rights, such as environmental and labour laws. Subsequent to this consultation, Ruggie and the International Finance Corporation (IFC) agreed to cooperate in a joint research project on stabilization clauses and human rights to foster an informed debate on the issue based on empirical findings.
The study examined the question of whether stabilization clauses used in modern investment contracts between investors and host states can either limit the application of new social and environmental regulations to investment activities over the life of the investment, or can be used to shift the costs of compliance to host States.
The findings of the study were published first in a consultation draft in March 2008, and then in a final report in May 2009 called “Stabilization Clauses and Human Rights”.
Some of the key empirical findings include the following:
a. Contracts examined from the most developed economies (OECD countries) included stabilization clauses, but none of them provided exemptions from future laws. Fifteen percent (two of thirteen) of such contracts offered an opportunity for compensation for compliance with new laws, including social and environmental laws, during the long-term project.
b. In lesser developed economies (non-OECD countries), 59% of the contracts reviewed (or forty-four of seventy-five) allowed exemptions or the opportunity for compensation for any new law applied to the investment project—including environmental and social laws—irrespective of purpose.
c. The most prevalent inclusion of exemptions from all future laws was in the contracts for extractive industries from Sub-Saharan Africa. One such contract contained the most sweeping set of exemptions. It provided for exemptions from all new laws for the duration of the contract (fifty years, renewable at the investor’s choice for another fifty years).
These and other empirical findings led to the conclusion that “investors and governments continue to conclude investment contracts in which they agree to exempt the investor from—or compensate the investor for the costs of—the application of new laws even when they are designed to promote environmental, social, or human rights goals.” Importantly, the data indicate that the formulation of the stabilization clause is much more relevant to its potential to interfere with human rights protection than whether or not such a clause exists.
With these findings, and with a series of unanswered questions stemming from the research, we set out to test the conclusions of the study and to gain further insights into the findings. We organized a series of our own consultations and actively sought out opportunities to engage with those directly involved in negotiating and drafting investment contracts and civil society organizations that monitor human rights issues in the context of investment.
Ruggie’s consultations on investment contracts and human rights
We presented the research and discussed the findings to a wide range of stakeholders including large international law firms, investment negotiators from developing countries, relevant representatives of the World Bank Group and of other public institutions supporting investment, international and domestic NGOs, trade unions and academics involved in monitoring investment projects. Consultations were carried out in large multi-stakeholder meetings, single stakeholder meetings, one-to-one settings and small workshops.
Consultations allowed us to confirm that our findings were consistent with the experience of practitioners and to reflect on how our work on stabilization clauses could result in useful guidance for States, business and others. Perhaps most importantly, what emerged from our discussions was that an isolated guidance document on stabilization clauses would not offer the best ideas on how to get to the heart of the issue: ensuring rights are respected in the context of investment projects. In June 2009, we convened an expert meeting to discuss how best Ruggie’s mandate could use its research and consultations to create something useful.
There were at least two significant findings from the expert meeting that guided Ruggie’s work to accomplish the Principles for responsible contracts: (1) that the relationship between human rights and investment contracts is not well-understood among practitioners or even among human rights professionals; and (2) that human rights risks can be best avoided and mitigated if identified and managed from the earliest stages of investment projects. It was proposed that Ruggie provide a basic awareness tool on a whole set of issues related to contracting and human rights. The tool’s main aim would be to assist State and commercial negotiators in thinking about human rights implications early on in projects, and specifically as the parties’ obligations and risks are being negotiated. The tool could also be useful to other institutions that support investment projects and civil society organizations or others interested in reviewing and monitoring contracts.
The Principles for Responsible Contracts
The 10 Principles represent a set of key areas where human rights should be considered at the negotiation stage of investment projects. The range of subjects covered includes operating standards, stabilization clauses, compliance and monitoring, transparency and grievance mechanisms for third parties. Each Principle is supported by a brief explanation, a list of key implications of the Principle, and a negotiator’s checklist.
The Principles are based on the premise that respect for human rights in the context of investment projects requires early identification and management of potential negative human rights impacts; the establishment of clear roles and responsibilities for the prevention and mitigation of potential impacts and the remediation of impacts when they occur; appropriate assessments and cost allocations for the prevention, mitigation and remedy of negative human rights impacts; and agreed procedures for managing human rights issues as they arise throughout the life-cycle of the project.
With the publication of these Principles, Ruggie has offered States, commercial investors, lawyers, industry groups, banks, lenders, NGOs and others a guide that should inform how they consider human rights in the context of investment deals. These Principles should also contribute to efforts to foster positive impacts of investment while minimizing any negative impacts on people and societies.
Principles for responsible contracts
1. Project negotiations preparation and planning: The parties should be adequately prepared and have the capacity to address the human rights implications of projects during negotiations.
2. Management of potential adverse human rights impacts: Responsibilities for the prevention and mitigation of human rights risks associated with the project and its activities should be clarified and agreed before the contract is finalized.
3. Project operating standards: The laws, regulations and standards governing the execution of the project should facilitate the prevention, mitigation and remediation of any negative human rights impacts throughout the life cycle of the project.
4. Stabilization clauses: Contractual stabilization clauses, if used, should be carefully drafted so that any protections for investors against future changes in law do not interfere with the State’s bona fide efforts to implement laws, regulations or policies in a non-discriminatory manner in order to meet its human rights obligations.
5. “Additional goods or service provision”: Where the contract envisages that investors will provide additional services beyond the scope of the project, this should be carried out in a manner compatible with the State’s human rights obligations and the investor’s human rights responsibilities.
6. Physical security for the project: Physical security for the project’s facilities, installations or personnel should be provided in a manner consistent with human rights principles and standards.
7. Community engagement: The project should have an effective community engagement plan through its life cycle, starting at the earliest stages.
8. Project monitoring and compliance: The State should be able to monitor the project’s compliance with relevant standards to protect human rights while providing necessary assurances for business investors against arbitrary interference in the project.
9. Grievance mechanisms for non-contractual harms to third parties: Individuals and communities that are impacted by project activities, but not party to the contract, should have access to an effective non-judicial grievance mechanism.
10. Transparency/Disclosure of contract terms: The contract’s terms should be disclosed, and the scope and duration of exceptions to such disclosure should be based on compelling justifications.
Author: Andrea Shemberg, is a former Legal Adviser to the SRSG for Business and Human Rights. This paper is written in her personal capacity and none of the views expressed in this article should be attributed to John Ruggie or to the Mandate of the SRSG.
 Protect, Respect and Remedy: a Framework for Business and Human Rights, Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, 7 April 2011, http://www.business-humanrights.org/Links/Repository/965591
 Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie: Principles for responsible contracts: integrating the management of human rights risks into State-investor contract negotiations: guidance for negotiators, 25 May 2011, http://www.business-humanrights.org/media/documents/ruggie/report-principles-for-responsible-contracts-25-may-2011.pdf
 Shemberg, Andrea “Stabilization Clauses and Human Rights”, 11 March 2008, http://www.ifc.org/ifcext/enviro.nsf/AttachmentsByTitle/p_StabilizationClausesandHumanRights/$FILE/Stabilization+Paper.pdf
 The contract data used in this research came from a sample of then-current investment contracts and model contracts. (The contracts represent actual agreements between government parties and investors. The models represent government starting places for negotiation and may change significantly before actual agreements are reached.)1 These contracts and models came principally from private international law firms that responded to a request from IFC to participate in the study. These law firms provided a sample of contracts from the year 2000 forward, spanning a broad range of industries and regions of the world including infrastructure, extractives and energy projects.