Max-North-dissertation-on-due-diligence-1-Apr-2010

What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? By Max North, King’s College London April 2010 “If we all discharge our duties, rights will not be far to seek If leaving duties unperformed we run after rights, they will escape us like a will-o'-the-wisp.” – Mohandas Gandhi Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? Chapter I - Introduction Since the Second World War politicians have pursued an agenda of globalisation, involving attempting to break down the barriers to trade and the development of institutions such as the World Bank and the IMF to facilitate a global economy Consequently some of the biggest global economies are now multinational companies This has a negative effect; if such companies then abuse human rights, developing states are either unable to act against the violation or unwilling to so for fear of losing the business altogether As a consequence of the Second World War a second development arose In 1948 the UN General Assembly adopted the UDHR.1 This created a new culture of human rights with the purpose of preventing the emergence of dictatorial and oppressive governments such as those of Nazi Germany and the Great Japanese Empire Due to these origins, human rights were originally vertical rights designed to operate to prevent human rights abuses by states However, such an approach fails to consider the impact that some non-state actors could have on human rights Therefore, if economies are globalising, legal systems must adapt to ensure these companies are properly held to account In 2003, the UN Sub-Commission on Human Rights adopted the UN Norms on the Responsibilities of Transnational Corporations and other Business Enterprises Their aim was to set a framework of human rights standards requiring companies to respect and promote them The general business community’s response noted “the benefits that corporate enterprise bring to all societies”2 and that voluntary self-regulation through codes of conduct and social responsibility policies already existed Despite the Norms setting out useful boundaries for legal standards and responsibilities, the polarised debate surrounding them and the business community’s negative reaction, created a situation now described as a “train wreck.”3 As a consequence the UN Human Rights Commission appointed a special representative on the issue of business and human rights.4 This mandate would develop the issues that had been central to the failure of the Norms and add clarity to a number of problematic areas; his role would address the lack of policy coherence between governments, the difference in aims between the private sector and individual states, governments failing to fulfil their human rights obligations and corporate governance policies which fail to consider human rights John Ruggie5 was appointed to this role, proposing in April 2008 the “Protect, Respect and Remedy”6 framework, which can be summarised in three core principles First, the state duty to protect against human rights abuses by third parties, secondly the http://www.un.org/en/documents/udhr/ [2006] H.L.R.Rev.447 Ruggie, 2006, lecture UN Human Rights Resolution 2005/69, 2005 http://www.hks.harvard.edu/about/faculty-staff-directory/john-ruggie Ruggie, 2008, p7 2 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? corporate responsibility to respect human rights, thirdly the need for more effective access to remedies Further direction was given to this concept in Ruggie’s 2009 report,7 and the work already done has been approved by the UN Human Rights Council with the role of the Special Representative being extended until 2011 It is noteworthy that the work the Special Representative has produced is not law as such; it is merely United Nation’s policy and guidelines There are also the OECD Guidelines, a series of principles and standards adhering states undertake to promote their business From the outset they have been criticised, as “simply an add-on to the inter-governmental Declaration on International Investment and Multinational Enterprises.”9 They ask enterprises to “respect the human rights of those affected by their activities consistent with the host government’s international obligations and commitments.” 10 Government offices known as NCPs are used to implement them Theoretically this system is satisfactory, yet it is undermined by its inability to enforce any of its decisions For example the UK NCP in August 2008 held Afrimex breached the OECD Guidelines due to its mining practices in the Democratic Republic of Congo Despite this Global Witness contend that the government is still deciding how to follow up the recommendations made11 and there is nothing to indicate that it is any progress in this respect This suggests an ineffective and failing system Other international instruments exist such as UN Global Compact, 12 Ethical Trading Initiative,13 Kimberley Process14 and Institute for Business and Human Rights 15 However, these tend to have a limited scope within one particular industry, for example the Kimberley Process focuses solely on the diamond trade There is currently a debate whether the human rights standards afforded by the ECHR extend to a company’s actions in the exterritoriality of the ECHR if it is domiciled within the ECHR;16 greater clarity is required for this to become a possible method of redress Further complications arise in private international law when the state where the company is domiciled intervenes, in terms of which law may the court apply- that of the state enforcing or that of the state where the abuses occur.17 This is clearly an area of the law requiring development; the notion of corporate social responsibility seems to be embedded in the majority of companies today Recent Ruggie, 2009, p3 UN Human Right’s Council, Resolution 8/7, 2008 Clapham, 2005, p201 10 http://www.oecd.org/document/18/0,3343,en_2649_34255_1815186_1_1_1_1,00.ht ml#part2 11 Global Witness, 2009, p4 12 http://www.unglobalcompact.org/ 13 http://www.ethicaltrade.org/ 14 http://ec.europa.eu/external_relations/blood_diamonds/index_en.htm 15 http://www.institutehrb.org/ 16 [2008] J.I.C.J.115 17 International Commission of Jurists, 2008, p51 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? reports of violations by Trafigura18 demonstrate the problems that currently exist due to a lack of proper universal regulation In addition to these soft law measures, it is also important to highlight that in reality the majority of cases in this field are dealt with by hard law under the US Alien Tort Statute This allows non-US citizens to make civil claims even if the harm took place outside the USA It is problematic as: “it is based on a Jefferson-era statute… and began to be used only in recent years as the basis for human rights claims against companies.”19 This has been particularly difficult when attempting to predict what kinds of human rights abuses qualify under the statute in order to give US courts jurisdiction The current jurisprudence of the US Supreme Court is that “federal courts should not recognize claims for violations of any international norm with less definite content and acceptance among civilized nations other than the 18 th century paradigms familiar when… [it] was enacted.”20 The second area where the statute has caused difficulty regards what standard of liability to judge companies on; applying tort law standards or standards derived from another area of law such as international criminal law This issue has not explicitly been dealt with to date, however a body of thought based on US Supreme Court jurisprudence claims that the “tort be committed in violation of international law, not that international law itself recognize a right to sue.”21 The outcome is unsatisfactory; the exigencies of the issue of business and human rights require more clarity than this In this piece I would like to discuss two concepts in an attempt to see how suitable they would be for companies to prevent their involvement in future human rights violations whilst as a consequence reducing their liabilities in law The first, due diligence, is traditionally defined as “the diligence reasonably expected from and ordinarily exercised by a person… to satisfy a legal requirement or discharge an obligation.”22 Ruggie’s 2008 framework has put it into the business and human rights debate Ruggie would like to include it within the second pillar of the corporate responsibility to respect human rights, “to discharge the responsibility to respect requires due diligence.”23 This fact-based process comprises three factors for a company to consider The first is to look at the context of the country they are operating in and highlight any potential human rights challenges they may face The second is what human rights impacts their company's activities may have within that context The third is whether they might contribute to abuse through the relationships connected to their activities such as suppliers or State agencies In effect it imposes a standard for companies to adhere to The second concept for comparison is the tort of negligence, a vast body of law in the UK and in most other common law jurisdictions In order to avoid being held liable in negligence an actor must avoid acts or omissions that it could reasonably foresee 18 http://www.timesonline.co.uk/tol/news/world/africa/article6837795.ece Sherman and Lehr, 2010, p6 20 [2004] 542U.S.692 21 http://www.cmht.com/pdfs/saaclawscholars083005.pdf/ 22 Black’s Law Dictionary, 2006 23 Ibid, p17 19 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? would be likely to injure its neighbour 24 The principle creates a duty of care on an actor provided there is a reasonable foresight of harm being caused to the claimant in the actor’s actions, there is a sufficient proximity between the two and it would be fair, just and reasonable to impose such a duty 25 In order to breach that duty of care, which essentially founds liability, one has to ask whether the defendant has failed to take the degree of care of the reasonable man.26 This forms a minimum standard as to the kind of conduct that can give rise to civil liability For the remainder of this piece I shall outline in detail how these two principles operate and their similarities and differences I shall then analyse whether the process of due diligence can be used in conjunction with the tort of negligence in order to resolve some of the problems raised in this introduction This may be in respect of companies limiting or excluding their negligence liability if they comply with Ruggie’s due diligence Another variant on this possibility may be to see the due diligence standard as the standard a court expects a reasonable company to act when exercising a duty of care Exploration of these two concepts should provide answers to these possibilities throughout the course of this piece Chapter II – What is Due Diligence? The Ruggie Framework As aforementioned, Ruggie proposes using the concept of due diligence as a means of discharging a company’s corporate responsibility under the framework and he outlines three sets of factors to consider Moreover it is important to notice the language used in the 2009 report, which both clarifies and imposes a further burden than the traditional due diligence used in other areas of law; he uses the term in a broader sense describing it as a “proactive attempt… over the entire life cycle of a project.” 27 The important aspect of this for the purposes of this piece is what the due diligence process actually requires a company to One Australian law firm believes a properly implemented due diligence process “may provide a means of incorporating consideration of human rights standards into operational and legal compliance” 28 and “in turn may allow a corporation to decide on an informed basis how to meet a duty to respect human rights, if such a duty is incorporated”29 into law For this to happen I will argue that this places requirements upon a business to perform: to investigate risks, to monitor risks and to deal with the risks However, to establish how exactly this could be done will be difficult due to the lack of precedent for the use of human rights due diligence In this chapter I intend to look first at the use of due diligence in other aspects of law, then to examine the guidance Ruggie has 24 [1932] AC.562 [1990] 2.AC.605 26 [1856] 11.Ex.781 27 Ruggie, 2009, p18 28 Allens Arthur Robinson LLP, 2008, p1 29 Ibid, p1 25 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? provided before finally attempting to make some suggestions on the effectiveness of such a measure Comparisons for other areas of law Due diligence is not a new concept; it first came into use in section 13 of the United States Securities Act of 1933,30 removing liability of brokers if reasonable diligence has been exercised At present accountancy firms perform due diligence exercises when assessing taxation; even in this seemly straightforward and well-defined area of law, “a tax due diligence engagement rarely proceeds exactly as envisaged at its outset.” 31 This emphasizes the difficulties businesses may encounter when performing human rights due diligence By its nature tax due diligence is fairly regimented; the “information for the purposes of tax due diligence is often provided via a data room” 32 and the applicable rules and laws are clearly stated with those making such assessments being professionally trained in the field of taxation Human rights due diligence is not as easily achieved; it is difficult to state how to accurately assess a country context, or the impacts business may have on that context if the company has never operated there before In the field of mergers and acquisitions, under section 123(2) of the Financial Services Act 2000 “it is a defence… that a person took all reasonable precautions and undertook due diligence to avoid committing market abuse.” 33This area of law is a more useful comparison as the variety of different business contexts and problems that they may cause is more comparable to the variety of human rights contexts business may be involved in Peter Howson argues that the merits of due diligence here is that it is good for “unearthing problems no one really knew existed” 34 and that “comparatively due diligence is cheap, litigation is not.”35 Despite these positive elements to the process he also outlines a number of problems that frequently occur He discusses timing where there is often a conflict, the seller wants to reduce time scale whereas the longer the buyer has the more accurate it will be This could be problematic in the field of human rights due diligence too; businesses often want to start operating as soon as possible or the country affected may object to a long and detailed investigation which may unearth serious issues, with the consequence that the due diligence is not adequately performed Furthermore with human rights due diligence being a relatively undeveloped process it would be impossible to quantify an ideal time frame for it 30 United States Securities Act 1933 15 U.S.C.§77a Peppitt, 2009, p27 32 Ibid, p29 33 Kenyon-Slade, 2004, 7.66 34 Howson, 2003, p7 35 Ibid, p7 31 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? Other problems include “the sheer volume of material available” 36 and misrepresentation by the seller leading to vital information and considerations being overlooked This is also a conceivable problem for human rights However, provided that the company acts within a reasonable manner and according to the Ruggie’s guidelines, this is something that may be unavoidable but should not have negative consequences for the company itself Howson believes that “good planning and active management are paramount.” 37 In this regard human rights due diligence is well placed Subject to clearer guidelines from Ruggie, greater government intervention within the scope of the first pillar and companies accepting their human rights obligations, a successful structure for human rights due diligence can emerge In spite of this useful comparison it is important to note the fundamental difference; due diligence in mergers and acquisitions is not a continuous process Whereas the due diligence that Ruggie suggests is a continuous process that needs to be repeated and updated for the duration of the business activity This is a far more stringent requirement which comparative examples cannot help us with Ruggie’s four methods In the 2008 report Ruggie states that a basic human rights due diligence process should include policies, impact assessments, integration and tracking performance By policies he envisages “detailed guidance in specific functional areas.” 38 This would require a company to move beyond the corporate responsibility codes that many presently use, which tend to be based upon ethical or ‘bottom line’ considerations, towards accountable policy requiring compliance, rather than being merely aspirational The fundamental element for a company with impact assessments is Ruggie’s requirement to “take proactive steps to understand how existing and proposed activities may effect human rights.” 39 This is a positive obligation for the company, which despite the suggestion it could “be linked with other processes,” 40 places a responsibility on businesses to try to foresee potential human rights risks For the due diligence element of the framework to work, Ruggie admits: “integration of human rights policies throughout a company may be the biggest challenge.” 41 The reason for this links to David Kinley’s arguments discussed later in the chapter; companies today can be extremely large with very complex and convoluted management structures Thus to discharge their responsibility to respect they need to 36 Ibid, p23 Ibid, p27 38 Ruggie, 2008, p18 39 Ibid, p18 40 Ibid, p18 41 Ibid, p18 37 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? implement systems to prevent inconsistent or contradictory actions by different parts of the company Ruggie emphasizes leadership from the top and adequate training 42 as the means to achieve this This large task may be the hardest for a company to implement and for a court to assess how well this has been done The final aspect of Ruggie’s due diligence process is performing monitoring and auditing, which is “needed to create appropriate incentives and disincentives for employees.”43 He argues that this will lead to “standardisation of metrics” across industries The difficulty that may arise here for companies is that the substantive minimum standard, Ruggie suggests they need to adhere to and by implication monitor their standards by, is in “the international bill of human rights and the core conventions of the ILO.”44 This ambiguity is confusing for companies who need coherent and clear guidelines on how to operate their business 2009 Report Ruggie gives companies direction on how they need to judge their operations, saying their responsibility will vary according to size but how this will happen is not fully understood.45 He provides the useful example that “a bank’s human rights due diligence for a project loan will differ in some respects from that of the company operating the project.”46 This emphasises a new point, that it is crude to merely talk of companies collectively; to address due diligence properly in this field one has to appreciate the complexity and variety of degrees of involvement in the decision making process that different companies have Thus when a company is seeking to discharge the corporate responsibility to respect, the way to this is based on individual industry standards rather than the global human rights agenda When referring to integrating a human rights policy, the 2009 report gives two clear principles to guide a company The first that “human rights are not merely another topic”47 and the second being “oversight of compliance with a company’s human rights policy must have its own direct line of access to corporate leadership.” 48 Although this does not indicate whether due diligence requires a freestanding process to exist within a company, it certainly exerts the importance of due diligence having a prominence within a company’s operations and decisions The 2009 report also discusses the effect performance of due diligence may have on liability; however this is discussed later on in this piece in relation to other commentaries regarding potential liability Potential effectiveness 42 Ibid, p18 Ibid, p18 44 Ibid, p17 45 Ruggie, 2009, p18 46 Ibid, p18 47 Ibid, p19 48 Ibid, p19 43 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? A good comparative example to indicate the potential success of companies implementing policies is the existence of Corporate Responsibility Codes Individual company codes first began in 1991 with Levi-Strauss, such corporate activity has exponentially grown with the World Bank estimating that over 1000 companies use them.49 However the success thus far of these ethical codes has been limited, to the extent that some commentators label them “ineffective.” 50 Additionally this problem would seem to be exacerbated by “a lack of empirical studies”51 about their impact However, Frankel and Scott’s study comparing two suppliers implementing the Adidas-Salomon Code, in China found that the factory implementing the code properly demonstrated better levels of pay, health and safety and lower staff turnovers.52 Furthermore the Schrage Report points out “focusing only on the direct impact of an individual code fails to capture accurately the full range of its impact on the global economy”53 in the sense that it may cause a ‘ripple effect’ to other companies and suppliers Despite some benefits of the present system, Fiona McLeay concludes they are “at best an opaque mechanism.”54 This suggests that in order for the due diligence system to be successful, there needs to be a far greater monitoring system of codes; an example of this at present is the NGO Fédération Internationale des Ligues des Droits de l’Homme and their supervision of Carrefour.55 The Dow Chemical Company Code illustrates how codes are unclear and potentially ineffective This states: “We understand that children may legitimately perform tasks that not interfere with their education… Dow expects the suppliers and contractors with whom we business to embrace similar values and standards.” 56 This is an expressly different and significantly lower standard than simply prohibiting child labour as would be required by due diligence From the lessons learnt from these codes, in order for due diligence polices to be effective they need to be transparent and require enforcement If due diligence became the standard which judges use to assess whether a company has been acting in such a way as to incur liability this may feasibly suggest that this could happen However, if due diligence only imposes a responsibility similar to corporate responsibility it is difficult to envisage how this could be a success 49 de Schutter, 2008, p222 Ibid, p223 51 Ibid, p224 52 Ibid, p231 53 Ibid, p231 54 Ibid, p231 55 http://www.fidh.org/article.php3?id_article=2448 56 http://www.dow.com/PublishedLiterature/dh_004f/0901b8038004f2bd.pdf? filepath=about/pdfs/noreg/473-00001.pdf&fromPage=GetDoc 50 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? David Kinley argues most corporations not knowingly or intentionally violate human rights; he describes them as “corporate transgressions” 57 due to reasons ranging from “unpardonable ignorance (including head-in-the-sand ineptitude and wilful neglect) to sincere practical or policy dilemmas.” 58 This echoes Ruggie in his 2007 report where he argues that issues of business and human rights are made more complicated due to “fundamental institutional misalignment” 59 which “creates the permissive environment”60 for violations to occur Thus impact assessments can be said to bring human rights issues directly to the attention of enterprises; they provide a focus for which companies can then consider when deciding how to operate abroad This logical considered and well researched process removes many of the ambiguities that have existed in the past that would help demonstrate that a corporation is exercising its duty to respect As previously suggested, companies may encounter difficulties when monitoring their performance due to the limited description of the standards they need to adhere to, namely “the international bill of human rights and the core conventions of the ILO.” This unfortunate choice of language is imprecise and subject to various different interpretations, which is indicative that the ‘Protect, Respect, Remedy’ framework is only UN policy rather than law The description ‘Core conventions of the ILO’ is likely to refer to Declaration on Fundamental Principles and Rights at Work adopted at the 86th International Labour Conference, however Ruggie never states this This is significant as there are 187 conventions,61 which is potentially misleading Similarly there is no official international bill of human rights; it is merely a name usually used in diplomatic circles when referring to both the UDHR 1948 and the ICCPR 1966 with its two optional protocols.62 Given the need for proper regulation and monitoring as expressed above, such ambiguous descriptions of the substantive standard to judge company actions are unsatisfactory It leaves companies in the position where they are unclear as to what standards they need to follow and it makes it difficult for a court or a quasi-judicial actor to assess whether a company has met the standard needed to discharge the corporate responsibility to respect It is also important to observe that companies need to know not only which human rights are relevant but the relevant standard a company must adhere to if it is to act reasonably and in accordance with the Ruggie framework Ruggie does not mention any tangible suggestions for this, which leaves companies in a position where they may be unsure how to act Chapter III – What is the Tort of Negligence? 57 Kinley, 2009, p153 Ibid, p153 59 Ruggie, 2007, p3 60 Ibid, p3 61 http://www.ilo.org/ilolex/english/conventions.pdf 62 http://www.ohchr.org/Documents/Publications/FactSheet2Rev.1en.pdf 58 10 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? Cees van Dam states that the tort of negligence in both common law and civil law jurisdictions generally “consists of three elements: a duty of care, a breach of that duty and consequential damage.” 63 Whilst damage to the claimant is necessary for a claim, the essential two features that need to be explained in detail for the purpose of this piece are the duty of care and the breach of duty “The establishment of damage caused by negligent conduct is not sufficient for liability” 64 thereby meaning that the claimant needs to convince a court of the existence of the other two requirements for the tort of negligence to operate Duty of care In order for a defendant to be liable in negligence, the claimant must first establish that a duty of care relationship existed between the defendant and the claimant A duty of care is a legal obligation imposed on an actor, which requires them to act with a reasonable standard of care where they could foreseably cause harm to others Examples of such relationships are “the relationship between employer and employee, driver and passenger, occupier and visitor or parent and child.” 65 This principle was established by Lord Atkin in Donoghue v Stevenson, he held: “you must take reasonable care to avoid acts and omissions which you can reasonably foresee would be likely to injure… persons who are so closely and directly affected by my [the defendant] act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called into question.”66 In effect the duty of care is a control mechanism to determine when liability can and cannot be found For the purposes of business and human rights this raises two important issues: what is the framework for establishing a duty of care for a company directly causing harm to the victim, and can parent companies owe victims a duty of care for acts of their subsidiaries? Duty of care for a company directly causing harm Although tort law does not specifically refer to human rights, it can still call businesses to account in this area in its aim to protect rights such as life, bodily integrity, health and property Therefore in order for a company directly operating in an area to decide whether it owes a duty of care for actions that infringe an individual’s human rights it must ask if there is a practical link between the human right that is affected with an act that causes tortious liability This has been done in cases involving asbestos mine workers who were not protected by their employers in 63 van Dam, 2006, p502 Ibid, p503 65 Ibid, p1702 66 [1932] AC.562 64 11 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? Connelly v RTZ67 and Lubbe v Cape Plc.68 If we apply Donoghue v Stevenson69 to this situation the company would owe a duty of care if it was foreseeable the claimant’s human rights violation would occur Does a parent company owe victims a duty of care for acts of their subsidiary? An obstacle arises here The parent company is legally distinct from its subsidiary which gives rise to a corporate veil situation When advising the Joint Committee on Human Rights on this issue, Richard Hermer QC and Rachel Chambers have argued that the “courts have shown themselves unwilling to lift the corporate veil in order to prevent parent companies taking advantage of limited liability in relation to tort liability.”70 This is certainly an unclear area of law although I would argue parent companies are able to make some presumptions from the case law Connelly v RTZ71 and Lubbe v Cape Plc72 involved such relationships although the issue before the House of Lords in both instances was whether the UK was the correct forum for the cases to be heard and when this was established, out of court settlements were made and consequently the direct issue of the ‘corporate veil’ was not discussed However due to the fact that their Lordships did not rule out the possibility of there being liability from the outset, one can infer that they believed a parent company could be liable in such circumstances Based on the principles in Donoghue v Stevenson discussed earlier in the chapter this would result in the parent company asking two questions in order to decide whether or not it could owe a duty of care The first, does the parent company know the subsidiary is causing the damage and if it does not should it have known? Then the parent company must ask if it could take precautions to prevent the subsidiary causing the harm? This would have the effect of meeting the requirements of foresight of harm and reasonableness Breach of the duty of care Working on the presumption that a duty of care has been established we must also consider the more important question of how to assess a breach of that duty in order to bring liability under the tort of negligence The starting point is Alderson B’s definition: “negligence is the omission to something which a reasonable man… 67 [1997] 3.WLR.373 [2000] 1.WLR.1545 69 [1932] AC.562 70 Hermer and Chambers, 2009, p3 71 [1997] 3.WLR.373 72 [2000] 1.WLR.1545 68 12 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? would or doing something which a prudent and reasonable man would not do.” 73 In essence this is an objective question74 of fact rather than law When assessing whether a breach of duty has occurred the court will take a number of factors into account when making an assessment; I will deal with these factors one by one in order to show the level of negligence required in order for a breach causing liability to occur Establishing the mind of a company Conceptually this is one of the most difficult aspects to approach when looking at a company’s liability under the tort of negligence As the 18 th century Lord Chancellor Baron Thurlow once said “Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?” 75 Today companies operate through numerous chains of commands It is often difficult to pin-point at exactly what stage the company is able to have a mind capable of having foresight of harm and therefore be liable itself opposed to being vicariously liable for the acts of its employees In order to this the law creates a legal fiction that the corporation is acting through the mind of living persons Lord Reid qualifies this to mean: a person “acting as the company… he is not acting as a servant, representative, agent or delegate He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company.”76 This places a requirement of seniority in the decisions, which cause the negligent action, which causes the harm for liability to occur; Denning LJ suggests that it is only “managers and directors who represent the directing mind and will of the company.”77 Timing Denning LJ stated: “we must not look at the 1947 accident with 1954 spectacles,” 78 meaning that the knowledge of the defendant should be assessed the knowledge possessed at the time of the alleged breach rather than the time of the trial Similarly in Smith v P & O Bulk Shipping Ltd79 the reasonable employer was judged to be unable to know that in 1971 asbestos caused a danger to health despite the evidence that was available at trial in 1998 Probability 73 [1856] 11.Ex.781 [1971] 2.QB.691 75 [1981] 79.MichLR.386 76 [1971] 2.WLR.1166 77 [1957] 1.QB.159 78 [1954] 2.QB.66 79 [1998] 2.Lloyd’sRep.81 74 13 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? The leading case in this area is Bolton v Stone.80 The plaintiff was struck by a cricket ball that had been hit out of the ground, which was an extremely rare occurrence; a ball had not been hit out of the ground more than six times in thirty years Lord Porter stated the relevant standard: “there must be sufficient probability to lead a reasonable man to anticipate it The existence of some risk is an ordinary incident of life, even when all due care has been, as it must be, taken.”81 Thus the degree of probability will be a key factor in deciding whether negligence occurred In the Wagon Mound (No 2), Lord Reid interpreted the law as: “If a real risk is one which would occur to the mind of a reasonable man in the position of the defendant’s servant… the criterion is to be what that reasonable man would have done in the circumstances… surely he would not neglect such a risk if action to eliminate it presented no difficulty.”82 We see that there is no particular degree of probability that has to be obtained in order for negligence to be found This is especially relevant if precautions were easy to take or the activity serves no public benefit Gravity of harm In Paris v Stepney Borough Council83 Lord Normand found that the defendant’s duty of care must be tailored to the known or reasonably foreseeable characteristics of the individual claimant Thus the council should have taken more precautions to protect a one-eyed employee than a two-eyed employee as if a spark of metal hits the former employee the blindness that subsequently follows is far graver than the loss of one eye by the two latter Precautionary measures Lord Asquith concluded in Latimer v AEC Ltd84 that after a chemical leak in a factory and the employer’s attempt to combat the problem by placing sawdust on the factory floor, it would not have been the requirement of a reasonably careful employer to suspend all work in the factory Lord Tucker’s reasoning here is that “the common law duty… should not be gradually enlarged until it is barely distinguishable from his absolute statutory obligations.”85 This rule is by no means absolute In the Court of Appeal, Brown LJ stated: “despite the employee's desire to remain at work notwithstanding his recognition of the risk he runs, the employer will nevertheless be under a duty in law to dismiss him for his own good so as to protect him against physical danger.” 86 An interesting comparison is a decision of the High Court of Australia in a claim for stress-induced psychiatric illness, where it was held “insistence upon performance of a contract cannot be in 80 [1951] AC.850 [1951] AC.850 82 [1967] 1.AC.617 83 [1951] AC.367 84 [1953] AC.643 85 Ibid 86 [2003] 1.WLR.536 81 14 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? breach of a duty of care.”87 This suggests the nature of the injury will be balanced against the cost of the precaution in the court’s decision Common industrial practice The seminal case in this area is Morton v William Dixon Lord Dunedine stated that where an employer allegedly commits negligence in the form of an omission to prove this you must show either: “that the thing he did not was a thing commonly done by other persons in like circumstances” 88 or “that it was a thing which was so obviously wanted that it would be folly in anyone to neglect to provide it.”89 Nevertheless this is not an absolute rule; the House of Lords in Brown v Rolls Royce90 decided that failure to take a well-established precaution in an industry may be sufficient evidence to suggest a finding of negligence but it does not definitely connote negligence Medical opinion was split on the effectiveness of the protective cream in question, so despite it being commonly used in the sector because the company had acted with advice from their medical advisor they could not be held liable Yet the principle still stands, as expressed by Swanwick J: “where there is a recognised and general practice which has been followed for a substantial period in similar circumstances without mishap, [the defendant] is entitled to follow it” 91 but not where “in light of common sense or newer knowledge it is clearly bad.” 92 Mustill J even decided where a practice has been used and accidents had occurred, it may be reasonable if the risk is “an inescapable feature of the industry.”93 Authority over subsidiary It is necessary for the claimant to prove that a parent company had a sufficient degree of control over the subsidiary in order for it to be capable of to exercise authority over the subsidiary to prevent the breach Where the parent company has a controlling stake (over 51% of the shares) it would be relatively easy for the claimant to state a case that the parent had de facto authority over the subsidiary Difficulty arises where the parent company owns 50% or less of the shares The onus would then be on the claimant to show that the parent company has a significant material influence on the subsidiary This may be easier to demonstrate when the parent is the largest individual shareholder There is a distinct lack of guidance from the courts in this area This is a significant hurdle for the claimant, given the 87 [2005] 222.CLR.44 [1909] SC.809 89 Ibid 90 [1960] 1.WLR.210 91 [1968] 1.WLR.1776 92 Ibid 93 [1984] QB.405 88 15 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? fundamental starting position of the case law is that “each company in a group of companies… is a separate legal entity.”94 Chapter IV – Comparison At the most fundamental level, the tort of negligence and human rights due diligence differ in their aims and purposes Traditionally regarding an infringement of an individual’s human rights, the concern will be to bring the infringement to an end and compensation will be subordinate to this This is still the UK’s position following Lord Bingham’s judgment in relation to s.8 of the Human Rights Act 1998 and s.41 ECHR.95 By contrast, tort law aims to compensate, placing the claimant back in the position he or she was in before the defendant’s negligent act This is a more intrusive measure and suggests that the standards expected when dealing with human rights should be higher than the threshold for liability in tort However as Cees van Dam argues “carrying out due diligence is akin to acting as a reasonable man… developing Ruggie’s framework may lead to standards of conduct that can also be useful to establish what is legally required.” 96 In fact it has been argued that “it is not inconceivable that human rights due diligence may be standard of care in a negligence case.”97 On this basis I will compare the requirements that businesses must perform when performing due diligence, namely investigating risks, monitoring risks and dealing with risks, with the levels of negligence to amount to a breach of duty in the tort of negligence This in turn should indicate the effect due diligence may have on a company’s liability in tort and may also suggest how effective implementing the Ruggie framework in this area may be Investigating and monitoring risks A company’s investigation of risks translates to having foreseeable knowledge of the risk standard in tort law The examples of due diligence in tax law and in mergers and acquisitions show an inherent feature of due diligence is that it is difficult to achieve and is a method of discovering unexpected issues Howson claims that the only way to deal with these difficulties and the workload such a process entails is through positive management and substantial planning As previously mentioned due to the delicate nature of human rights due diligence these problems are likely to be heightened in this context By contrast the tortious standard is far less imposing; it refers to the ordinary, reasonable man This raises the question of whether a reasonable company would investigate human rights risks in the course of its business? In the traditional context such as that advocated by Milton Friedman the answer would be that: “There is only one social responsibility of business – to use its resources to engage in activities designed to increase its profits so long as it stays within the rules of the game, which 94 [1977] AC.807 [2005] UKHL.14 96 van Dam, 2009, p1 97 Sherman and Lehr, 2010, p9 95 16 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? is to say, engages in open and free competition, without deception or fraud.” 98 Thus a reasonable company would not have an obligation to investigate its human rights impacts However, past litigation suggests tort law has moved on from this position Provided there is a right in tort that covers the human rights violation in question there can be liability I would argue in Lubbe v Cape plc that due to measures taken by the defendant, such as only employing older people so the effects of asbestos poisoning would not occur, there was actual knowledge opposed to reasonable foreseeability On this basis it would seem to be too greater assumption their Lordships would have considered the levels of management and planning that is used in other areas of due diligence to be the threshold required to avoid negligence liability As previously discussed, Ruggie wants detailed and specific company policies to guide the company whilst investigating, monitoring and dealing with risks From the analogy with present company codes if they are to be more effective they would need to be transparent, enforceable and use language that does not leave them susceptible to being construed generously or even ignored We have seen in tort that if there is a commonly accepted and recognised practice in an industry, the defendant is entitled to perform to this standard Given that generally speaking, present company codes are criticised for being opaque and effective, it would be a strong imposition for the common law to move this requirement to a standard as strict as those proposed by Ruggie Negligence has stronger similarities to Ruggie’s requirement to investigate risks changing in accordance with a company’s size and level of involvement in the project The relevant tortious standard is objective but varies in accordance with two important factors: first, the defendant’s level of skill and what it purports itself to be, 99 and secondly the probability and gravity of harm given the context in which they are operating.100 Therefore given that both standards vary according to nature and context, the due diligence standard being higher in the area of investigating risks, if a company is performing due diligence a valid assumption is that it is exceeding the requirements to avoid liability of the tort of negligence The applicable suggestions by Ruggie in this respect are his concepts of performing impact assessments and continuous monitoring and auditing; these again are comparable to the tortious standard of reasonable foresight In terms of impact assessments again we are dealing with a positive obligation This is the most difficult to achieve accuracy in, as many developing countries are very volatile and frequently subject to change Kinley and Ruggie have suggested it is of paramount importance; they have labelled corporate ignorance and institutional misalignment as the reason behind abuse of human rights through business This is 98 Friedman, 1970, p30 [1938] 1.All.ER.566 100 [1967] 1.AC.367/ [1951] AC.367 99 17 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? indeed an arduous and expensive task and it certainly goes beyond the challenges of due diligence in other contexts By contrast, the tort of negligence requires reasonable foresight of harm On this basis, mere performance of impact assessments one can infer would be sufficient to mitigate liability The law of tort at its most imposing is in the field of professional standards; in order to mitigate liability in these circumstances the defendant has to show they acted in accordance with a “responsible, reasonable or respectable” 101 body of opinion This is even a too high standard to impose on companies who are not professionals in the field of human rights Roe v Minister of Health held that the relevant knowledge was the knowledge available at the time opposed to the knowledge gained after the event This provides for the conclusion that performance of Ruggie’s impact assessments would fulfil the requirement that a company had reasonable foresight; thus even if circumstances changed it would be difficult for them to be held liable as the impact assessments are sufficient to show the company is acting reasonably The same argument can be applied to Ruggie’s concept of monitoring and auditing He intends this to involve creating a benchmark of conduct for each industry to adhere to which should be compatible with the international bill of human rights and the ILO’s core conventions This is a very broad substantive standard, which makes the direct comparison with the precisely defined tests and principles of negligence difficult In spite of this it would be logical to conclude that if a company is to consider its operations in light of such wide reaching convention provisions, this will be sufficient to show that it had given a reasonable consideration of the harm the tort of negligence compensates for, in order for it to mitigate liability Therefore performance of both investigating and monitoring risks has the effect of bringing human rights risks to the attention of a company before they occur If properly conducted this should reduce the company’s exposure to litigation in the tort of negligence as if it has been performed the company can easily state that the harm which occurred was not reasonably foreseeable Dealing with risks This is an area where there is a practical link to the case law in the tort of negligence regarding precautionary measures As aforementioned the common law that is quite lenient in this area due to the statutory obligations that often apply to situations where a duty of care has been established However, where there is a risk of physical danger, precautions need to be taken, although this is less clear from cases of psychiatric injury As regards due diligence, we know the responsibility to deal with risks is a company wide requirement and management should be accountable for compliance in this area 101 [1998] AC.232 18 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? At all stages in the process there is a proactive element, which places human rights at the forefront of a decision making process The latter again seems to be a higher standard requiring greater commitment to protection of rights than the tortious standard So in this respect dealing with risks in a manner prescribed by Ruggie, will be sufficient to avoid liability The negative of this for the protection of human rights is that due to the stringent and imposing nature of due diligence and also its undefined and unproven nature, it is too difficult to argue that a court could use it as the objective standard from which to judge a company in the short term future However if there is a move towards human rights due diligence becoming common industrial practice, this could be a future aspiration The effect of due diligence on liability Wachell, Lipton, Rosen and Katz LLP advises their clients that the Ruggie framework would “impose on corporations the obligation to compensate for the various deficiencies of the countries in which they perform their business.” 102 However this focus is only from the perspective of company or corporate law, which requires a company has actual knowledge before liability can be found As Weil, Gotshal & Manges LLP explains to its clients “the Special Representative’s mandate does not… include the ability to impose new binding legal obligations on corporations.”103 Thus performance of due diligence can only have the effect of bringing issues to the attention of businesses, having the effect that a company can avoid liability in the tort of negligence which uses the stricter threshold of reasonable foresight of harm Due diligence prevents litigation rather than act as a trigger for it Ruggie suggests that there are two scenarios where due diligence could bring additional liability Either when “the company gains knowledge of possible human rights violations”104 then “violations occur and the company’s prior knowledge gets out,”105or “the company publicly misrepresents what it finds in due diligence and that fact becomes known.”106 It is important to note this liability is not because of performing due diligence per se In fact it is due to not performing it properly and adequately liability arises This analysis provides one answer: a process of human rights due diligence enables a company to fulfill its duties in law and ensures global business is conducted in an ethical manner This can only be mutually advantageous for business and society 102 Goldhaber, 2008, p1 Weil, Gotshal & Manges LLP, 2008, p? 104 Ruggie, 2009, p20 105 Ibid, p20 106 Ibid, p20 103 19 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? Bibliography Books Philip Alston – “Non-state Actors and Human Rights” 2005 OUP Black’s Law Dictionary, 8th Edition, 2006 Elisabeth Bürg – “Human Rights and International Trade” 2005 OUP Andrew Chapman – “Human Rights Obligations of Non-State Actors” 2006 OUP Cees van Dam – “European Tort Law” 2006 OUP 20 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? George Fletcher – “Tort Liability for Human Rights Abuses” 2008 Hart Publishing Gower & Davies – “Principles of Modern Company Law” 8th Edition 2008 Thomson, Sweet & Maxwell Peter Howson – “Due Diligence: the critical stage in mergers and acquisitions” 2003 Gower Publishing Stephen Kenyon-Slade – “Mergers and Takeovers in the US and UK” 2004 OUP David Kinley – “Civilising Globalisation: Human Rights and the Global Economy” 2009 Cambridge University Press David Kinley – “Human Rights and Corporations (International Library of Essays)” 2009 Ashgate Publishing Mark Lunney & Ken Oliphant – “Tort Law: Text and Materials” 3rd Edition 2008 OUP Mathew Peppitt – “Tax Due Diligence” Spiramus 2009 Olivier De Schutter – “Transnational Corporations and Human Rights” 2008 Hart Publishing Reports Allens Arthur Robinson LLP – “Corporate Duty and Human Rights Under Australian Law,” March 2008 Clifford Chance LLP – “Submission to the Corporate Tools Project – United Kingdom,” September 2009 Corporate Law Tools Project – Summary Report – “Opportunities and Challenges of using Corporate Law to Encourage Corporations to Respect Human Rights,” 6th November 2009 Cees van Dam – “Submission to the Joint Committee on Human Rights: Call for Evidence – Business and Human Rights,” May 2009 Global Witness – “Submission to the Joint Committee on Human Rights: Call for Evidence – Business and Human Rights,” May 2009 Richard Hermer QC and Rachel Chambers – “Submission to the Joint Committee on Human Rights: Inquiry into Business and Human Rights,” 30th April 2009 House of Lords & House of Commons, Joint Committee on Human Rights – “Any of our business? Human Rights and the UK private sector,” 16th December 2009 21 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? Report of the International Commission of Jurists – “Corporate Complicity and Legal Accountability: Volume Civil Remedies,” 16th September 2008 John Ruggie – “Business and Human Rights: Mapping International Standards of Responsibility and Accountability for Corporate Acts,” UN Report of the SRSG on the issue of human rights and transnational corporations and other business enterprises, 19th February 2007 John Ruggie – “Protect, Respect and Remedy: a framework for Business and Human Rights,” UN Report of the SRSG on the issue of human rights and transnational corporations and other business enterprises, 7th April 2008 John Ruggie – “Business and human rights: Towards operationalizing the protect, respect, remedy framework,” UN Report of the SRSG on the issue of human rights and transnational corporations and other business enterprises, 22nd April 2009 TwentyFifty Limited report for the Ministry of Justice – “The Private Sector & Human Rights in the UK” October 2009 Weil, Gotshal & Manges LLP – “Corporate Social Responsibility for Human Rights: Comments on the UN Special Representative Report Entitled ‘Protect, Respect and Remedy: a Framework for Business and Human Rights,” 22nd May 2008 Articles and Journals John Coffee Jr – “No Soul to Damn, No Body to Kick” [1981] Lucien Dhooge – “Lohengrin Revealed: The Implications of Sosa v Alvarez-Machain for Human Rights Litigation Pursuant to the Alien Torts Claims Act” [2006] Loyola of Los Angles International and Comparative Law Review 393 Milton Friedman – “The Social Responsibility of Business is to Increase Profits,” New York Times Magazine, 13th September 1970 Michael Goldhaber – “A Sarbanes-Oxley for Human Rights?” The AM Law Daily nd June 2008 David Kinley & Rachel Chambers – “The UN human rights norms for corporations: the private implications of public international law” [2006] H.R.L Rev 447 Joanna Kyriakaks – “Freeport in West Papua: Bringing Corporations to Account for the International Human Rights Abuses under Australian Criminal and Tort Law” [2005] 31 Monash University Law Review 95 Alex Twanga Magaisa – “Suing Multinational Corporate Groups for Torts in Wake of the Lubbe Case” [2001] L.G.D 22 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? Adam McBeth – “A look at Corporate Codes of Conduct Legislation” [2004] 33 Common Law World Review 222 Campbell McLachlan – “International Litigation and the reworking of the Conflict of Laws” [2004] L.Q.R 580 John F Sherman III & Amy K Lehr – “Human Rights Due Diligence: Is it too Risky?” February 2010, available at: www.hks.harvard.edu/m_rcbg/CSRI/publications/workingpaper_55_shermanlehr.pdf Tobias Thienel – “The ECHR in Iraq: the judgement of the House of Lords in R (AlSkeini) v Secretary of State for Defence” [2008] J.I.C.J 115 Cases Adams and Others v Cape Industries Plc [1990] Ch 433 Arab Banking Corporation v First Union National Bank [2001] WL 239670 Blyth v Birmingham Waterworks Co [1856] 11 Ex 781 Bolton (Engineering) Company v Graham [1957] QB 159 Bolton v Stone [1951] AC 850 Brown v Rolls Royce [1960] WLR 210 Caparo Industries plc v Dickman [1990] AC 605 Connelly v R.T.Z Corporation Plc (No 2) [1997] WLR 373 Connelly v R.T.Z Corporation Plc (No 3) [1999] C.L.C 533 Coxall v Goodyear Great Britain Ltd [2003] WLR 536 Donoghue v Stephenson [1932] AC 562 Koehler v Cerebos (Australia) Ltd [2005] 222 CLR 44 Latimer v AEC Ltd [1953] AC 643 Lubbe and others v Cape Plc [2000] WLR 1545 Morton v William Dixon [1909] SC 809 Nettleship v Weston [1971] QB 691 23 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? Overseas Tankership (UK) Limited v The Miller Steamship Co Pty Ltd, The Wagon Mound (No.2) [1967] AC 617 Paris v Stepney Borough [1951] AC 367 R (Greenfield v Secretary of State for the Home Department) [2005] UKHL 14 Roe v Minister of Health [1954] QB 66 Smith v P & O Shipping Ltd [1998] Lloyd’s Rep 81 Sosa v Alvarez-Machain [2004] 542 U.S 692 Spiliada Maritime Corporation v Cansulex Ltd [1986] WLR 972 Stokes v GKN [1968] WLR 1776 Tesco Supermarket v Nattrass [1971] WLR 1166 The Albazero [1977] AC 807 Thompson v Smith Shiprepairers Ltd [1984] QB 405 Treaties and Legislation Consumer Protection Act 1987, s.4(1)(e) Financial Services Act 2000 s.123(2) OECD Guidelines as revised in 2000 United States Securities Act 1933 15 U.S.C §77a Universal Declaration of Human Rights 1948 Lectures and Transcripts Milan Markovic (Baker Hostetler LLP) – “Vindicating Human Rights Through Civil Litigation,” Global Justice Series King’s College London, 10th March 2010 Richard Meeran (Leigh Day & Co) – “Ethical Dilemmas of a Public Interest Lawyer,” King’s College London Public Lecture, 3rd February 2010 John Ruggie – Corporate Responsibility Forum, Fair Labour Association and the German Network of Business Ethics, 14th June 2006 Websites 24 Max North What are the commonalities and distinctions between ‘due diligence’ and the ‘tort of negligence’? How can they apply to a business and human rights context? http://www.amnesty.org.uk/ http://www.business-humanrights.org/ http://www.cmht.com/ http://www.dow.com/ http://www.ehticaltrade.org/ http://www.europa.eu/ http://www.fidh.org/ http://www.globalwitness.org/ http://www.hks.harvard.edu http://www.ilo.org/ http://www.institutehrb.org/ http://www.nikebiz.com/ http://www.ohchr.org/ http://www.opsi.gov.uk/ http://www.thesullivanfoundation.org/ http://www.timesonline.co.uk/ http://www.umn.edu/ http://www.unglobalcompact.org/ 25