The Use of Human Rights Clauses by Transnational Corporations

In May 2009, Human Rights Watch published a report on the exploitation of migrant workers constructing Saadiyat Island, a massive project of the Abu Dhabi Emirate designed to turn the city into a premier tourism and cultural centre.[1] New York University (NYU), who plans to open a campus on the island, responded to the report with a pledge to incorporate a wide range of labor rights into all its contracts for the construction and operation of the campus.[2] NYU’s move drew attention to the use of human rights clauses by transnational corporations in their international contracts with contractors and suppliers (hereinafter, referred to as ‘business partners’). While we should welcome these clauses, there are multiple reasons to doubt whether they will in fact result in significant improvements in the human rights of those adversely affected by the activities of transnational corporations and their business partners.

Human rights clauses are an important and unique form of corporate self-regulation in that they represent a move away from soft law norms towards hard law.[3] Corporate self-regulation is dominated by several voluntary initiatives, such as codes of conduct or social charters, which generally involve a corporation publicly committing to uphold certain human right standards in its operations and sometimes those of its partners. Though they may lead to some indirect benefits, these initiatives are ineffective because they do not create legally enforceable standards.[4] Human rights clauses are distinct and admirable in that the transnational corporation legally binds its business partners to uphold human rights standards, instead of simply encouraging them to do so. Thus, the transnational corporation effectively establishes a form of private human rights regulation where it may otherwise be inexistent.

However, there are multiple ways that a corporation can take advantage of the freedom and flexibility of contract to ensure that a human rights clause has a limited effect, or amounts to no more than a symbolic gesture. Firstly, corporations can select the human rights that their business partners are obliged to uphold. For example, NYU’s Abu Dhabi contracts do not include internationally recognized rights to a guaranteed minimum wage, to collective bargaining, or to strike.[5] Moreover, a corporation can also opt for a lower standard for each human right covered by the clause. For example, instead of providing a ‘living wage’, a company can stipulate that employees will obtain only the ‘legally prescribed minimum wage’ or a ‘wage customary in the industry’.[6]

Secondly, companies can also set up the clause so that ‘national law’ or ‘local practice’ has primacy over the human rights standards. For example, GlaxoSmithKline’s clause posits that the human rights standards contained therein are upheld “unless otherwise required or prohibited by law”.[7] Seeing that corporations commonly defer to national law in corporate codes of conduct, they most likely do so in human rights clauses as well.[8] This tendency is problematic because national standards often provide individuals with less protection than international human rights standards. Finally, corporations can also explicitly prevent third parties to the contract (i.e. employees and persons adversely affected by it) from enforcing the human rights clause. In her analysis of German corporations, Eva Kocher found that the majority of corporations do not intend to create rights for third parties.[9] Thus, there are several contractual manoeuvres that companies can employ to ensure that these clauses do not in fact create substantial human rights obligations.

Despite these options to reduce the significance of a human right clause, it is clearly possible that a well-intentioned corporation will create a substantial human rights clause. Nonetheless, due to privity of contract, the business partner will most often be solely answerable to the transnational corporation. Unless the contract creates an exception to privity of contract, the power to sanction the business partner for breaching the human rights standards will belong exclusively to the transnational corporation because the victims of the breach are third parties to the contract. Privity of contracts means that a contract does not create rights or obligations for third parties to the contract.[10] However, in theory, a human rights clause involves a stipulation for the benefit of a third party, a broadly recognized exception to the privity of contract.[11]

In a human rights clause scenario, the corporation is imposing a human rights obligation on its business partner in favour of either the employees of that partner, or those adversely affected by that partner’s conduct. Thus, even if employees are not mentioned in the human rights clause, we can certainly imply that the contracting parties intended to confer a benefit to them when they agreed to the clause. That said, as discussed above, a corporation can always avoid this situation by expressly stipulating that the contract does not create any rights or benefits for third parties. Such a limitation of third party rights would create a strange situation where the business partner must uphold human rights obligations, but those adversely affected by the breach of those obligations have no legally recognized means of seeking redress or exacting performance of the promised obligation.

A second problem arising from privity of contracts is that the reach of a human rights clause may be limited where the business partner employs sub-contractors to fulfil its contractual obligations. Where a sub-contractor is the source of the human rights violation, even if a transnational corporation wants to act, it has no direct contractual relationship with the sub-contractor, and thus, may not enforce the human rights clause in the original contract against it. At present, there is no broadly recognized exception in such a situation, whereby the terms of the original contract are extended to the sub-contractors. Thus, the privity of the contract containing the human rights clause can produce several gaps in human rights accountability.

The private nature of contractual ordering means that companies are free to structure their contracts and word their contractual clauses in the manner that is most beneficial to them. On the one hand, a transnational corporation can use its contract to champion human rights by transforming soft law norms into hard law. On the other hand, the freedom and flexibility of contract provides transnational corporations with multiple opportunities to employ human rights clauses to improve their image as a responsible global citizen, without actually significantly enhancing the human rights of those adversely affected by their operations. Thus, before applauding the use of a human rights clause, we should closely examine the exact content of the guarantees in the contract, and determine whether those guarantees are limited by the wording of the clause or other provisions in the contract.

[2] NYU Abu Dhabi, Additional Information on the Construction and Operation of NYU Abu Dhabi (February 3, 2010), online: NYU Abu Dhabi, <http://nyuad.nyu.edu/news.events/additional.labor.info.html>.

[3] Eva Kocher, “Private Standards between Soft Law and Hard Law: the German Case” (2002) 18/3 The International Journal of Comparative Labour Law and Industrial Relations 265 at 266 [Kocher, Private Standards].

[4] Kocher, Private Standards at 265; and Eva Kocher, “Codes of Conduct and Framework Agreements on Social Minimum Standards – Private Regulation?” in Olaf Dilling, Martin Herberg, and Gerd Winter, eds. Responsible Business – Self-Governance and Law in Transnational Economic Transations (Portland: Hart Publishing, 2008), 67 at 76 [Kocher, Codes of Conduct].

[5] Human Rights Watch, UAE: NYU’s Labor Rights Provisions Break New Ground (February 3, 2010), online: Human Rights Watch, <http://www.hrw.org/en/news/2010/02/03/uae-nyu-s-labor-rights-provisions-break-new-ground>.

[6] Kocher, Codes of Conduct, supra note 4 at 72.

[7] GlaxoSmithKline, Human Rights Clause, online: GlaxoSmithKline, <http://www.gsk.com/responsibility/supply-chain/human-rights-clause.htm>.

[8] Kocher, Codes of Conduct, supra note 4 at 73.

[9] Ibid. at 71.

[10] See article 1440 of the Civil Code of Québec; Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., [1999] S.C.J. No. 48, at para. 22 [Fraser River].

[11] See article 1444 of the Civil Code of Québec; Fraser River, ibid. at para. para. 32.

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