Earlier this year, the Commissioner for Justice of the European Union announced that next year the Commission will present a legislative initiative compelling companies to conduct human rights due diligence throughout their operations and supply chains, with accompanying enforcement and civil liability provisions. Because the jurisdictional breadth of the initiative is likely to be expansive, including companies doing business in the EU regardless of where they are domiciled, the impact will have global repercussions. As we have written previously, an EU mandatory human rights due diligence requirement – at least as it appears to be contemplated - is likely to have vast implications, catapulting global human rights due diligence to a business imperative akin to anti-corruption diligence. See https://www.paulhastings.com/publications-items/details/?id=d962706f-2334-6428-811c-ff00004cbded.
As the substance of the EU initiative is being developed, however, the Commissioner further announced a public consultation on the terms that will be included. In support of that consultation, a variety of inputs recently been provided, including papers from the UN Office of the High Commissioner on Human Rights, and a proposal from a consortium of global NGOs. One important source that has not been extensively cited in the comments to date, however, is the most recent draft of a “Legally Binding Instrument to Regulate, in International Human Rights Law, the Activities of Transnational Corporations and Other Business Enterprises” – colloquially known as the Draft Business and Human Rights Treaty (the draft “Treaty”) - negotiated within the UN.
While the draft Treaty no doubt will continue to undergo extensive revisions and debate – indeed, even this second revised draft still includes several typos – and is years away from ratification, it is informative for several reasons. First, the vast intergovernmental working group involved in creating and debating the draft Treaty includes more than 75 countries, and the EU itself. Second, it can be predicted that the EU’s legislative initiative – which should proceed more quickly than the treaty – will be influenced by the text of the draft Treaty, but also sway the draft Treaty’s outcome so that the two instruments are in sync. Third, the draft Treaty addresses several of the more contentious aspects of a mandatory due diligence legal requirement, perhaps providing some guidance into a starting point for a discussion on those topics.
More specifically, the draft Treaty addresses mandatory human rights diligence in Article 6, titled “Prevention,” broadly requiring that States take necessary measures to ensure that business enterprises “respect all internationally recognized human rights and prevent and mitigate human rights abuses throughout their operations” as well as their supply chains. As to mandatory diligence, Section 2 of Article 6 provides that States must “require business enterprises … to undertake human rights due diligence proportionate to their size, risk of severe human rights impacts and the nature and context of their operations.” The draft Treaty states that the four, well-accepted steps associated with that exercise should be:
- Identify and assess any actual or potential human rights abuses that may arise from their own business activities, or from their business relationships;
- Take appropriate measures to prevent and mitigate effectively the identified actual or potential human rights abuses, including in their business relationships;
- Monitor the effectiveness of their measures to prevent and mitigate human rights abuses, including in their business relationships;
- Communicate regularly and in an accessible manner to stakeholders, particularly to affected or potentially affected persons, to account for how they address through their policies and measures any actual or potential human rights abuses that may arise from their activities including in their business relationships.
Section 3 of Article 6 further provides certain specific due diligence measures that must be included within those four general steps, including regular impact assessments, integrating a gender perspective in all stages of the process, conducting meaningful consultations with potentially affected individuals or communities and in particular vulnerable populations, ensuring consultations with indigenous peoples are consistent with free, prior, informed consent, integrating human rights diligence requirements into contracts, and reporting publicly on group structures, suppliers, policies, risks, outcomes and relevant indicators.
While the terms of Sections 2 and 3 are likely to generally align with the EU initiative, among these and other requirements, the draft Treaty answers four material and challenging questions that assuredly will debated in the context of the EU discussions.
- First, there is a question as to the substantive scope of the EU initiative, and what exactly must be diligenced. The draft Treaty provides a maximalist approach. It is not limited to human rights recognized in the most widely accepted international instruments, such as the International Bill of Human Rights and ILO core conventions. Nor is it defined as human rights recognized in those instruments, along with additional conventions focusing on protecting vulnerable populations, as has been suggested. Instead, it includes “environmental rights” and mandates that assessments include environmental impacts, and encompasses all “internationally recognized human rights and fundamental freedoms” without regard to codification by specific treaties or conventions or reference to specific sources.
- Second, while the EU initiative almost certainly will include companies that do business in the EU, there is some question as to requirements for smaller companies (SMEs) who may face hardships in conducting the envisioned global diligence. The draft treaty includes SMEs, providing in Article 6.4, “States Parties may provide incentives and adopt other measures to facilitate compliance with requirements under this Article by small and medium sized business enterprises conducting business activities.” In a related vein, while some have questioned whether the EU initiative would encompass state-owned entities, it seems difficult to imagine it will not, and, in fact, the draft Treaty includes state-owned entities within its scope. Other related questions
- Third, a key question in the EU initiative concerns penalties and enforcement mechanisms. In particular, whether the initiative should contemplate sanctions for companies that fail to conduct “adequate” diligence – a penalty for a procedural deficiency alone – or whether punishment should only occur if a negative human rights impact occurs or at least is likely to occur. The draft treaty provides in Article 6.6 that a failure to follow the steps in Sections 6.2 and 6.3 by themselves “shall result in commensurate sanctions, including corrective action where applicable,” divorced from actual or potential impacts.
- Fourth, there has been some suggestion that where companies conduct reasonable due diligence, it should be a defense in a human rights-based legal action. While the draft treaty does not rule out the possibility that reasonable diligence could be a defense, it leaves the question open to individual courts to evaluate. It states in Article 8.7, “Human rights due diligence shall not automatically absolve” a company “from liability for causing or contributing to human rights abuses or failing to prevent such abuses,” but a “court or other competent authority will decide the liability … after an examination of compliance with applicable human rights due diligence standards.” Thus, perhaps “compliance with applicable human rights due diligence standards” will be a defense, or perhaps not, but it is not “automatic.” In making that evaluation, it can be assumed that a court would closely examine the processes the company followed, whether the processes were adequate, reasonable or appropriate in the particular circumstances, taking into account the relevant context and the risks (including what the company ought to have known), whether the process was implemented as designed, and how effective it was in practice – all measured against “applicable” diligence standards.
Finally, while the draft Treaty provides some insight into these four questions, there is also some uncertainty as to whether diligence should extend beyond first tier suppliers - which, for companies with substantial supply chains, will be a substantial undertaking in itself. The draft treaty does not provide much insight into that issue. In Article 1.5, it defines “business relationship” broadly, including “any relationship between natural or legal persons to conduct business activities,” and any “structure or contractual relationship as provided under the domestic law of the State.” While it is possible that the definition is limited to direct suppliers – although the term “direct” is not used in the definition – it seems more likely that that no such limit will be imposed, and the issue will be assessed on a risk-tiered basis.
Other substantial questions also remain, including how companies who do business with EU companies will be treated, and whether a GDPR approach will be followed. And to be clear, the fact that the draft treaty takes certain positions does not necessarily mean that the EU will follow suit. In fact, it is not even clear how “legally binding” the EU initiative will be. But it in all the scenarios it is hard to imagine that the draft Treaty it will not have at least some influence, and as the saying goes, “The race is not always to the swift, nor the battle to the strong; but that is the way to bet.”