Don’t Overlook Human Rights Risks When Negotiating and Drafting International Commercial Transaction Agreements

Vol. 42 No. 3

By

Corinne Lewis (clewis@lexjusti.com) is a partner in Lex Justi, a specialist law firm based in Brussels that provides legal consulting services to multinational companies in the areas of international human rights and project management, financing, and mergers and acquisitions.

Lawyers should take into account a newly emerging issue when handling international commercial transactions for goods and services—managing human rights risks. Disregarding these risks can have serious financial and reputational consequences for the client, as a number of major corporations have experienced.

Last September, Apple experienced severe media criticism and production delays as a result of working conditions at its Chinese supplier Foxconn, which assembles iPhones. The Swedish retail giant H&M has been pressured to cease using Uzbek cotton due to allegations of forced labor in Uzbekistan’s cotton fields. At the end of April, the collapse of a Bangladeshi garment factory, with a death toll of over 1100, drew the world’s attention to treatment of workers manufacturing clothing for European and American markets in that country.

Lawyers working on international commercial transactions are already seeing new legislative and regulatory measures that address human rights concerns in a company’s supply chain. In 2010, California adopted the California Transparency in Supply Chains Act, which requires companies to disclose information concerning steps taken to ensure the supply chain is free of slavery and human trafficking. The U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), specifically section 1502, requires companies to carry out due diligence on their supply chains to ensure that they are not sourcing “conflict minerals” from the Democratic Republic of Congo.

Businesses, as well as the lawyers who advise them, will likely witness the increasing predominance of human rights as a part of businesses’ risk management and corporate responsibility strategies in coming years. Consequently, lawyers advising purchasers and suppliers of goods and services need to understand the relevance of human rights to international transactions. This article is intended to provide some initial guidance in a rapidly developing and evolving area.

What Are Human Rights?

The term “human rights” may initially appear to be a somewhat foreign term to commercial lawyers, as it comes from the realm of public international law, but lawyers are certainly familiar with national laws protecting the health and safety of workers, mandating minimum wages and limits on overtime, and prohibiting discrimination. These national laws secure human rights. However, some countries may not have national laws that protect these and other basic rights; these include, for example, countries with nondemocratic governments or a long history of internal conflict. Other countries have such laws but do not enforce them.

International human rights standards, applicable to all persons worldwide, are found in international treaties and customary international law and are binding on states. While these do not generally impose legal obligations on businesses, they have become the basis for businesses’ responsibility with respect to human rights.

Businesses’ Responsibility Regarding Human Rights

What is the standard that businesses are being held to with respect to human rights? The United Nations Guiding Principles on Business and Human Rights, www.ohchr.org/ Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf (Guiding Principles), which is the key starting point in the area of business and human rights, states that businesses have the responsibility to respect human rights. The Guiding Principles, unanimously endorsed by the UN Human Rights Council in 2011, also state that this responsibility is a “global standard of expected conduct for all business enterprises wherever they operate.”

Thousands of businesses have already taken steps to integrate the principle of respect for human rights into their policies and their day-to-day operations. Prominent industry organizations, such as the International Council on Mining and Minerals and IPIECA, the global oil and gas industry association for environmental and social issues, are encouraging businesses to implement the principle. Moreover, governments are expressing support for the principle; for example, the European Commission issued a new corporate social responsibility policy in 2011 that expresses the expectation that European companies will “meet the corporate responsibility to respect human rights, as defined in the UN Guiding Principles.” A Renewed EU Strategy 2011–2014 for Corporate Social Responsibility, European Commission (2011), http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010.

Also, the Organisation for Economic Co-operation and Development included the principle of corporate respect for human rights in its 2011 updated Guidelines for Multinational Enterprises, www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/1922428.pdf.

The responsibility to respect human rights means that businesses should not infringe on human rights, whether through their own operations or their business relationships, and that they should address any infringements of human rights in which they are involved, according to Guiding Principle 11. In order to embed this responsibility, businesses should express their commitment to respect human rights in a statement of policy and carry out human rights “due diligence” (Guiding Principles 16, 17). “Due diligence,” as used in the Guiding Principles, does not just refer to an investigation of actual and potential human rights impacts, but also includes four other aspects: (i) integrating what the business has learned about its human rights impact across relevant internal functions and processes, (ii) taking appropriate action, (iii) tracking the effectiveness of its response, and (iv) communicating how it addresses its human rights impacts.

Human Rights Applicable to Businesses

The internationally recognized human rights that business enterprises should respect include, at a minimum, those expressed in what is termed the International Bill of Human Rights, which includes the Universal Declaration of Human Rights and the two main international conventions that codify those rights, the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights. Human rights also encompass the four categories of principles and rights contained in eight core conventions of the International Labour Organization. In sum, human rights law standards exist over and above compliance with national laws.

Businesses can potentially affect nearly all internationally recognized human rights, but common forms of adverse impact on human rights related to work include those associated with forced or compulsory labor, child labor, low wages, excessive hours, and inadequate periods of rest. Other human rights risks related to the workplace that may be of concern in international commercial transactions include discrimination, whether during hiring, on the job, or when leaving a job; freedom of association that permits workers and employers to form and join organizations of their own choosing and workers to bargain freely with their employers; and an unhealthy workplace. In addition, a company’s treatment of migrant workers, its local hiring programs, and its relationship with the local community may be relevant.

Understanding the Human Rights Risks Associated with a Transaction

An initial question for lawyers drafting agreements or providing advice on an international transaction for goods or services is, how might the client be associated with adverse human rights impacts. The Guiding Principles articulate three basic ways a business can be involved in an adverse human rights impact.

First, the business may cause the impact through its own activities. An example would be where a company employee conducting an audit of working conditions meets only with male employees of the supplier to obtain information about labor practices and thus acts in a discriminatory manner toward female employees. Second, the business may contribute to the impact, as, for example, where it sets an unreasonable deadline for the manufacture of a component by a supplier and the supplier then requires its workers to work an excessive number of overtime hours in order to meet the company’s deadline for the component. The third way in which the business may be involved in adverse human rights is on the basis of its business relationship with another enterprise where the impact is linked to the business’s own operations, products, or services. A company that purchases carpets from a supplier that utilizes primary school children to weave the carpets in violation of the terms of the contract would be linked to the human rights infringements because of its relationship with the supplier.

Advising the Client on Human Rights Risks Associated with the Transaction

The role of the lawyer in advising a client on human rights risks associated with a given transaction will vary depending on the specific circumstances of the transaction and the extent to which the client has implemented policies and practices to ensure its respect for human rights. In particular, the client’s knowledge of the specific human rights risks of the other party to the proposed transaction will affect the lawyer’s advice. For example, the client may already, through its risk management strategies, have identified the general types of risks within the industry sector or country from which the supplier will source the goods or services, or it may have discovered the particular human rights risks associated with the supplier through a pre-qualification assessment. In addition, where the client is aware of its own potential and actual adverse human rights impacts through an ongoing human rights due diligence process, the client will likely be a more attractive supplier or purchaser in an international commercial transaction to other parties that are committed to respecting human rights.

A small or medium-sized business client, however, may not have internal policies or processes in place to identify its own adverse human rights impacts or those of a potential supplier or purchaser. In this case, the lawyer may need to provide more extensive general advice on human rights risks or suggest that the client seek outside expert advice.

Where it appears that the transaction may result in an adverse human rights impact to which the client would contribute, then pursuant to the Guiding Principles, the client should make the necessary changes in order to prevent or mitigate the chance of the impact occurring. For example, where the client’s fluctuating demands could result in the supplier requiring employees to work excessive overtime and providing inadequate rest periods during peak demand periods in order to fill the client’s order, then the client should discuss scheduling production to avoid infringements of the human rights of the supplier’s employees.

However, where the client discovers that the supplier is already demanding excessive hours from its employees, in addition to preventing its own contribution to the infringement of workers’ rights, the client should use its leverage to effect changes in the inappropriate working conditions of employees of the supplier. The ability of the client to change the supplier’s harmful practice would likely depend upon how much leverage the client has with the supplier. Leverage will vary depending upon factors such as whether the client’s business is crucial to the supplier and whether the payments to the supplier are sufficient to allow the supplier to invest in training and safety equipment.

Even where the client would not contribute to a potential or actual adverse human rights impact of the other party, the transaction could still result in the client being directly linked to the adverse human rights impact based on the business relationship through the contract. In this case, according to Guiding Principle 13, the client should use its leverage to encourage the party to prevent or mitigate the impact. For example, where the supplier has monogramming done by hand on sweatshirts in a section of the factory with inadequate lighting that severely affects the sight of the workers, but the production of the sweatshirts is carried out in a more modern section of the factory with good lighting and the client’s products do not have monogramming, then the client could use its leverage to encourage the supplier to improve lighting in the area for monogramming.

In this case, the client may need to consider whether it should turn to another business for the transaction. This determination will likely be affected by how crucial the product or service is to the client, whether alternative suppliers or purchasers exist, the severity of the impact, and the influence the client has in ensuring that the other party ceases its adverse human rights impacts.

In either situation, the client’s contribution to an adverse human rights impact or its involvement in the impact because of its business relationship with the other party, the contract could be drafted so as to include a reference to the particular negative human rights impacts and the steps that the other party is to take to prevent or mitigate such impacts. The contract could also provide for termination where the other party to the transaction fails to take steps to prevent the identified human risks or to take action to remedy specified rights.

Where the client requires suppliers to sign a code of conduct, it could be modified to incorporate human rights. Monitoring of the supplier, either by the contracting company or an independent third party, could also include compliance with human rights. However, in the case of an existing severe abuse, such as child labor, the client would likely wish to see the abuse addressed before signing the contract.

However, not all human rights risks can be identified during discussions and negotiations with the other party to the transaction. Actual human rights infringements or additional potential risks may be identified during the course of the arrangement. A change in ownership or management of the other party or even a modification of the purchaser’s demands could result in an increase in adverse human rights risks. Thus, the lawyer and the client need to be aware that the process of ascertaining human rights risks is an ongoing process that requires awareness, periodic monitoring, and appropriate follow-up.

The Challenges of an Evolving Area

Many businesses are in the initial stages of formulating and adopting processes that implement the Guiding Principles, while others have yet to take such steps. Lawyers should, therefore, be aware that not all businesses will have neither the internal knowledge about human rights nor the resources or procedures and policies in place to ensure that they are not causing or contributing to adverse human rights impacts through their own actions and are not involved in such impacts through their business relationships. More time and experience will be needed for greater human rights awareness and implementation of best practices.

In addition, numerous issues still require further thought and clarification. These include how businesses with thousands of suppliers, both core and non-core, can practically identify human rights risks for their suppliers and how medium and small businesses can conduct due diligence in a cost-effective and time-efficient manner.

Finally, lawyers are just beginning to take note of the Guiding Principles. Most law firms still need to determine how they should factor human rights considerations into their advice and representation of clients, not only with respect to international commercial transactions, but also in other practice areas.

Therefore, lawyers will want to remain attuned to developments in this area to help their clients avoid involvement in, and deal with, adverse human rights impacts.

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