Authors Sergio Garrido Vallespí and Marc Morros Bo wrote an article titled “Human Rights Due Diligence in the United States and the EU: Differences, Trends, and a Corporate and Dispute Resolution Critique” (“the Article”). The Article has been divided into a series of four blog posts to be published on the blog of the Georgetown Journal of International Law (“GJIL”). This post is the fourth in the series. The first, second, and third posts are accessible on the Georgetown Journal of International Law Blog website. 

Critique: A dispute resolution view continued

The role of arbitration: Investor-State arbitration continued

Both unlawful expropriation (unlawful here because when a State does not adopt HRDD regulations it does not compensate those companies affected by that action (in disregard of due process)) and FET violations are remediated through reparation under Article 34 of the International Law Commission’s Articles on State Responsibility (ILC Articles). In fact, some arbitral tribunals such as the one in Yukos Capital Limited v. Russian Federation permitted moving the valuation date to when the award was made if that benefits the claimant. Thus, as the last paragraph is only an invented example of what could happen with other companies in dissimilar positions of the supply chain (i.e., a manufacturer and a supplier) or in a multiplicity of unalike sectors, it may motivate the United States to act when it knows about the consequences of not doing so portrayed  in the beginning of this paragraph. This is because if such a claims trend was observed in investor-State arbitration, the United States would have an economic reason to begin regulating HRDD more extensively in other areas than conflict minerals, forced labor, and trafficking in persons. In closing, let us say that this incentive system, which has yet to be observed, is similar to the EU strategy of ensuring that EU Member States transpose into their national systems the content of a Directive. Complementing Yvonne van Duyn v Home Office, the Court of Justice of the European Union ruled in Pubblico Ministero v Ratti that if a directive has not been adopted and the deadline for State adoption has passed, its content can still be used by a private EU subject when he, she, or it acts as a claimant against the State that refused the adoption. In fact, this could well happen after the CSDDD enters into force if an EU Member State mirrored the United States’ passivity in regulating—by  not adopting the CSDDD.

All things considered, even with investors seeking investor-State arbitration against the United States on the above reasons, the country would not be accepting losing any dispute it encountered by not making HRDD mandatory. Reparation under Article 34 of the ILC Articles can be limited by Article 39’s proportionally to the “contribution to the injury by wilful or negligent action or omission of the injured […] person or entity.” Nothing in U.S. law prevents companies from implementing HRDD in their supply chains, which is completely different from not being obligated to do so. In consequence, the supply chain actor that has suffered the injury on the grounds of a U.S. failure to comply with Principle 3 of the UNGP could have avoided the injury by putting HRDD in place. We believe that should amount to the contributory fault in Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, where the claimant deliberately took the risk of caducidad (in English, “expiration”) through legislative measures coming from Ecuador, and the tribunal ended up reducing damages against the country by 25% (the dissent, by 50%). Just as Occidental assumed a certain risk, the non-U.S. investor knew that in the United States HRDD is not mandatory, and even knowing that, it went on to do business with a U.S. supply chain actor without subjecting it to HRDD.

Commercial arbitration

Once the CSDDD is put in place, the responsibility of companies to engage in HRDD under Principle 15(b) of the UNGP is converted into a duty. That is what the UNGP demanded of States, or of the EU in its case, and that is what the EU has done. Investor-State arbitration, therefore, is of no interest in this instance. There is nothing else that can be required from the EU. The time has come for commercial arbitration to appear with a different mission from the one that investor-State arbitration adopts in the United States: here, commercial arbitration plays a role in making EU companies comply with a now-activated Pillar II. It would be far from realistic, however, to say that commercial arbitration should be the only dispute resolution mechanism to guarantee compliance. University College Cork Professor John Gaffney said in Business and Human Rights: Arbitration Can Provide Access to Effective Remedies that “the drafters of the Hague Rules [on Business and Human Rights Arbitration (a soft law instrument that applicable in an arbitration procedure if parties do not agree otherwise)] […] accept that those affected by business-related human rights violations would typically have recourse to national courts so long as they are functioning effectively and can provide victims of human rights abuse with a genuine remedy.” This position taken by the drafters is not questionable in our view, but at the same time, commercial arbitration is useful not only to ensure compliance as an appropriate forum to resolve the failure to conduct HRDD (courts could also do that), but also to put pressure on companies to engage in HRDD in two different situations following the same logic.

Contracts are a conditio sine qua non for business operations to occur. That said, and generally speaking, in those contracts the parties can agree to incorporate an arbitration clause for any dispute arising out of that relationship. One of them, if not both, may be especially concerned about human rights protection and expect from the other regular HRDD in accordance with the CSDDD. This could be the case of a business in an advanced position of the supply chain that has a lot to lose if its partners are proven to violate human rights (i.e., because it is a retailer known for its sustainability policies). Conversely, a worker who could suffer him or herself human rights violations would be at least as worried as that company could be. Both of them, thus, could try to negotiate to make arbitration the chosen forum to submit their differences on the supply chain or employment agreement, respectively, an agreement which at the same time could include the obligation to comply with the HREDD in the CSDDD. The business in an initial position in the supply chain or acting as employer, which would in either case intervene here as the counterpart of the agreement, would thus be compelled to respect Principle 15(b) of the UNGP, given the speed with which an arbitration on its compliance with the agreed HREDD is generally conducted (speed in the resolution is largely accepted as one of the commercial arbitration advantages to court litigation). In our view, this reasoning may only encounter one problem. Precisely, as put forward in the U.S. case Michael J. Lewis v. Circuit City Stores, Inc., some jurisdictions may make employment arbitration clauses invalid. That could happen in certain EU Member States, no doubt about it, but, even then, when the employment contract is concluded with an arbitration clause and the dispute arises, the counterpart could perfectly waive its right to object to the arbitration agreement’s enforceability. This is so because of another important advantage of arbitration: if the employee had started arbitration and the EU employer moved to courts refusing any waiver, a ruling that could well affect its reputation by showing that it did not comply with the HREDD in the CSDDD could be made public, and not remain confidential as an award would (confidentiality is another of the commercial arbitration advantages to court litigation).

Conclusion

Internationally, the UNGP have been the foundation of HRDD for more than ten years. A systematic interpretation of its text allows us to say that States have an obligation to regulate HRDD broadly, while the corporate responsibility to conduct it will only become a duty when States abide by its prior obligation. The United States seems not to have done that, having only regulated HRDD for specific fields of human rights at a federal level, as well as on a state basis. As proof of that, the Dodd-Frank (Section 1502) concerns conflict minerals, 19 U.S.C. § 1307, USMCA, UFLPA, and Executive Order 13126 all focus on forced labor, and the Federal Acquisition Regulation Ending Trafficking in Persons touches on trafficking in persons. Regarding the latter, Massachusetts and Rhode Island have laws on human trafficking, forced labor, and sexual exploitation; Illinois and Washington legislation emphasize slavery, human trafficking, and child labor in the supply chains; New Jersey deems relevant drug pricing; and California has the most expansive rules on forced labor and trafficking in supply chains. In contrast, dispersion in the EU does not exist thanks to the recent CSDDD. Nevertheless, the laws of EU Member States approach the enforceability aspect of HRDD with substantial variety, going from a liberal Netherlands to a very pro-human rights holder position in a proposed regulation in Switzerland, with other countries such as Spain and Italy having yet to regulate HRDD, while others like France could be located in a middle ground arena. From this point onwards, the Article moves from the descriptive part to the subjective one.

After the corporate analysis carried out, we have seen how the legislator has opted for active legislative activity and believes that the market itself will not encourage businesses to integrate—in a serious and effective manner—HRDD into their supply chain voluntarily. In other words, the rise of interventionism in recent years and the predictions of even more binding regulations show that authorities do not rely on natural economic forces. In this sense, we can reasonably predict more mandatory texts and stricter obligations for companies. Regarding the associated penalties to future enacted HRDD rules, there is still work to do to establish solid enforcement mechanisms. Albeit with an increasing role, sanctions, which, as we have seen, are also created to be deterrent measures, are still not having the desired effect on enterprises and most large corporations are not fully incorporating environmental protection, non-discrimination procedures, or health, safety, and general labor rights obligations into their daily operations. We will see how it evolves.

Our dispute resolution view draws attention to the aim of the Article, which is to remain in the HRDD field and not to look at human rights protection broadly. Therefore, a dispute resolution section in such a context can only try to answer three questions: i) whether the “duty” of States to make HRDD mandatory according to Principle 3 of the UNGP is observed; ii) how to make States comply with it if they do not; and iii) how to ensure enterprises abide by the legislation on HRDD if the State has observed Principle 3. The objective part of the Article already provides an answer to the first question, and so we should move to the other two. We have considered that an appropriate way to do that would be to look at HRDD from an alternative dispute resolution perspective, without that meaning undermining the role of litigation in courts. Investor-State arbitration could answer the second question and thus put pressure on the United States to regulate HRDD, while commercial arbitration would provide the third question a solid reply both in EU supply chain agreements and employment contracts.

All in all, we are in the initial phase of seeing HRDD become of mainstream legislative interest. The EU is currently the role model, but not that much blame should be directed toward the United States. As we have observed, a few months ago, the EU had regulations as dispersed as the United States’. Noticeably, both jurisdictions centered a great part of their legislative efforts on the regulation of HRDD in mining, likely originating from the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. This reality adds to the idea that a general HRDD regulation in the United States will arrive in the future; having taken that seriously, the OECD directives make evident that, sooner rather than later, the UNGP will be followed as well. In any case, we hope that this becomes a reality—a reality that takes into consideration our corporate and dispute resolution reflections, but overall, one  that prevents tragedies like the Rana Plaza collapse in Bangladesh from ever occurring again. 

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*LL.M. (International Business and Economic Law), Georgetown University Law Center in progress; LL.M. (International Business Law), ESADE Law School and Freie Universität Berlin (2023); LL.B. and B.A. in Global Governance, Economics and Legal Order, ESADE Law School (2022).

**LL.B., ESADE Law School and Columbia Law School in progress.