4 June 2014
by Antony Crockett
Antony Crockett is a Senior Associate with international law firm Herbert Smith Freehills, based in Hong Kong. Antony holds a LLB and BSc from the University of Melbourne and an LLM from the London School of Economics and Political Science. He is qualified to practice law in England & Wales and in Victoria, Australia. Antony specialises in public international law and international dispute resolution. He has extensive experience advising private and public sector clients on business and human rights matters. Antony also contributed to the development of the Principles for Responsible Contracts, which were published in 2011 as an addendum to the UN Guiding Principles on Business and Human Rights.
The endorsement of the United Nations Guiding Principles on Business and Human Rights (‘UNGPs’) in 2011, related revisions to key international standards and recent domestic legal reforms in the field of business and human rights mean that business enterprises are under increased pressure to ensure that human rights are respected throughout their operations. One way businesses are responding to this pressure is by introducing human rights provisions into their commercial contracts. This article is intended to very briefly flag some of the legal issues which may arise for lawyers tasked with drafting the relevant clauses.
The UNGPs explain that the responsibility to respect human rights requires that business enterprises should:
(a) avoid causing or contributing to adverse human rights impacts through their own activities, and address such impacts when they occur; and
(b) seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts.
Where a business relationship is based on a contract, it is possible to include provisions in the contract obliging the parties to take steps to identify, avoid and/or mitigate potential adverse impacts on human rights. Parties may also agree processes and standards for the remediation of actual adverse impacts.
As well as providing an opportunity to set out expectations generally with regard to future performance on human rights issues, contracts allow parties to allocate responsibility for human rights risks specific to a transaction or business relationship. This requires the parties (and their lawyers) to first undertake a certain level of due diligence, including to identify risks which may be associated with a particular country, industry, or the historical human rights performance of one of the parties.
The nature and range of potential adverse human rights impacts and the ability of parties to take steps to address the risk of such impacts will vary depending on the context within which a business operates; so there are no one-size-fits-all solutions. While contracts are not the only means by which an enterprise may be able to influence the conduct of its business partners, contractual provisions directed at ensuring respect for human rights are increasingly common.
Provisions relating to workers’ rights and conditions have been used for some years in contracts for the manufacture of consumer goods (such as clothing, footwear and electronics). For example, purchasers may require suppliers to operate in accordance with detailed standards and will often insist on a right to be able to conduct inspections or audits to ensure compliance. Similar provisions may also be found in public sector procurement contracts.
Companies in the extractives sector are also increasingly likely to consider the use of human rights clauses in contracts, particularly in relation to joint ventures. In many extractive sector joint ventures, while the parties share the risks and rewards of the venture, responsibility for operational matters will rest with just one party. In this context, non-operator parties may wish to ensure that the party with operational control takes steps to ensure respect for human rights. Including relevant obligations in the joint venture agreement is one way to achieve this. Another increasingly common feature of contracts in the extractive sector is a provision requiring contractors to ensure that requirements related to health, safety, environment and human rights are “cascaded” down the supply chain.
Similarly, the International Finance Corporation (IFC) and international financial institutions adhering to the Equator Principles require their borrowers, in certain contexts, to give covenants in relation to the management of adverse environmental and social impacts. Typically such covenants will require the borrower to conduct an impact assessment and to prepare an environmental and social management plan which is subject to approval by the lending bank(s). As is also common in supply chain contexts, lenders will often seek a contractual right to conduct periodic audits or inspections of sites and facilities to ensure compliance with environmental and social covenants. Following recent revisions to the Equator Principles and IFC Performance Standards, lenders may also require borrowers to establish grievance mechanisms for certain high risk projects.
Key issues for lawyers
There are a range of issues which lawyers drafting human rights provisions for commercial contracts need to consider, including the following:
1. What will be the consequence if the clause is breached? The primary remedy for non-performance of a contractual obligation is compensation; it is rare for a court or tribunal to order specific performance of the obligation. Assessing the damages payable when there is a breach of an obligation to human rights may be difficult. In addition, damages payments from one contracting party to another where victims do not receive any remedy create obvious reputational risks. Termination is a draconian remedy and may not prevent adverse impacts on human rights. For example, if a purchaser terminates a supplier’s contract due to concerns about labour practices this may cause further adverse impacts if workers are not paid and/or are made redundant. On the other hand, it may be very important that a business is able to terminate a contract with immediate effect if the other party engages in conduct which leads to serious adverse human rights impacts.
2. How can good performance be incentivised? In some cases, the threat of contract termination, or the threat that a business partner will take their business elsewhere, may not be taken seriously. There may also be situations where business partners lack meaningful capacity to comply with human rights performance requirements. A party seeking to impose such requirements might need to assume an obligation to provide training or resources for capacity building in order to incentivise compliance.
3. How will the conditions relating to human rights be defined? Provisions referencing human rights standards (including international human rights law) require caution. Such standards may be inadequately detailed to provide an objective benchmark by which parties’ conduct can be judged. References to international human rights standards are also problematic because such standards (in general) refer to the obligations of States. Translating these standards into conditions which can be applied in the context of a private commercial relationship is not always straightforward. On the other hand, businesses may consider that is important to directly reference international standards such as the UNGPs based on non-legal considerations (for example, a company may wish to be able to say to stakeholders that it requires all of its business partners to adhere to the UNGPs). The danger in this approach, from a legal perspective, is that such provisions are unlikely to be enforceable unless they are further defined.
4. Does including human rights conditions in the contract create any unintended risks for the parties? The parties’ contractual obligations are distinct from their other obligations under applicable domestic laws. It is important for lawyers to carefully consider whether contractual conditions relating to human rights are compatible with other obligations of the parties and that they do not create unintended obligations, such as giving rise to a duty of care which would not otherwise exist. It is also important to consider whether the clause may be enforceable by third parties.
5. Is one of the parties a State or State-owned entity? States have legal obligations to protect, respect and fulfil human rights. States and State-owned entities are also frequently parties to commercial contracts. Lawyers should consider whether the obligations being assumed by the State under a contract are compatible with the States’ human rights obligations. For example, if the State agrees to make land available for an infrastructure project, will the State’s performance of that obligation comply with international standards? If the counterparty is a State-owned entity, it is necessary to carefully consider whether the entity is able to assume obligations relating to human rights matters. For example, if the entity is established by legislation, does that legislation permit the entity to assume the obligation?
This article does not canvass every issue which may arise in connection with the use of human rights clauses in commercial contracts; it is only intended to provide a basic checklist of key issues to be considered by draftspersons. As such clauses become more widespread it is likely that examples of good practice will emerge. Industry groups are also likely to develop model clauses and guidance, both to ensure consistency and to facilitate negotiations.
 The Guiding Principles were developed by the Special Representative of the UN Secretary General on Business and Human Rights from 2005 to 2011, Professor John Ruggie, and were unanimously endorsed by the Human Rights Council in June 2011. See, United Nations Human Rights Council, Seventeenth Session ‘Human rights and transnational corporations and other business enterprises’ (16 June 2011) UN Doc A/HRC/RES/17/4.
 For example, in order ensure alignment with the UNGPs, the responsibility to respect human rights has been emphasised in recent revisions to the OECD Guidelines for Multinational Enterprises, the Equator Principles and the International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability.
 For example, the UK Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 introduced a requirement for companies listed in the UK to include information on human rights in their annual reports.
 Business enterprises’ responsibility to respect human rights is distinct from the legal obligations of States to respect, protect and fulfil human rights in international treaties to which they are signatories. However, just as action (or inaction) by a State may affect human rights, the activities of business enterprises can affect the human rights of workers, customers and communities.
 The UNGPs introduce the concept of ‘leverage’, defined as the ability of an enterprise to ‘effect change in the wrongful practices of an entity that causes a harm.’
 See, for example, the contract performance clauses included in the Norwegian Government Socially Responsible Public Procurement Guide available at www.sustainable-procurement.org
 In the UNGPs, the term ‘grievance mechanism’ is used to refer to processes through which grievances concerning business-related human rights abuse can be raised by affected persons.