Corporate Abuse: Transnational Corporations and Violation of Human Rights

Corporate Abuse: Transnational Corporations and Violation of Human Rights

On 11th September, 2012, a fire broke out at the Ali Enterprises textile factory located in Pakistan. As a result of the fire, about 262 workers died and many were injured. The reason for the large number of casualties had to do with inadequate safety measures at the factory premises which had led to the spread of fire within minutes, resulting in one of the most catastrophic tragedies in the textile industry worldwide.

Ali Enterprises had been producing most of the products for the German retailer KiK headquartered at Bönen, Germany. This shows that the responsibility to maintain adequate health and safety standards at the factory fell upon KiK. However, KiK was found to have never conducted any thorough and authentic due diligence review of the working conditions and safety measures at Ali Enterprises or any of its supply chains in Pakistan. On the other hand, the Italian social auditors of the factory RINA produced fake safety compliance certificates just a few weeks before the fire had taken place.

Survivors of this inferno and relatives of the deceased are still demanding justice for the loss of their families’ incomes. While the court in Germany has dismissed the legal action against KiK for being time-barred, the suit against RINA to date has also not achieved any positive legal outcome.

The tragedy of Ali Enterprises is just one example where a transnational corporation has been involved in the violation of human rights through its negligence. The collapse of Rana Plaza Building complex in Dhaka, Bangladesh in the year 2013, resulting in deaths of more than 1100 people, has been another tragic incident. Similarly, there have been several examples where transnational corporations are involved in causing environmental harms affecting the health of local people and employees of the corporation.

With an increase in number of such violations of rights at the hands of corporations, several questions arise:

  • Can corporations be held legally accountable for their actions?
  • Is the international legal framework adequate enough to compensate workers and ensure that corporations provide protection to their rights?
  • Is the increasing number of civil and criminal complaints against transnational corporations pushing them to ensure corporate social responsibility in their supply chains or if such complaints are of no vein in the international legal system?

Strategic Litigation against Transnational Corporations

Strategic litigation is one of the tools for holding transnational and multinational corporations liable for the violation of human rights. This involves the filing of legal suits against companies at their ‘origin’ jurisdictions i.e. at the principal place of a company’s business operations, despite the corporate human right violation taking place anywhere else in the world through the company’s subsidiary or branch.

The claim against KiK before the courts in Germany is a rare example of its kind in the textile industry. Workers organized themselves remarkably without any fear of either the corporations or the governments since they had nothing to lose. They went through an exhaustive and continuous process of conducting rallies and protests since the very next day of the fire. Such an organized protest is significant in strengthening legal action against transnational corporations as it pressurizes the corporations and creates awareness against corporate abuses.

However, transnational legal suits are expensive as they entail the traveling costs of victims and witnesses from developing countries to the countries of origin of corporations, as well as the costs of collecting evidence for legal action. Despite these obstacles, even if the victims of corporate abuse somehow manage to bring complaints before the courts in countries of origin, they face several of the following procedural limitations which discourage the success of such complaints:

1. Firstly, if the cases are filed and pending before European courts, the applicable law for the purposes of deciding the case would still be of the country where harm has occurred. The problem arises where European judges are not familiar with the law of the country where the corporate harm has occurred. This only delays access to justice as judges require expert opinions and knowledge of the law from lawyers of the jurisdiction which is different than theirs.

2. Secondly, civil law jurisdictions, with the exception of a few, do not support group claims, which further delays litigation and leads to exorbitant procedural costs and hurdles. In the case of KiK, only four of those affected by the disaster filed the claim before the courts in Germany.

3. Thirdly, the limitation period of tort actions in most common law and developing jurisdictions is very short, often between one and three years, leading to time-barred claims. Any court may refuse to apply a foreign limitation period on the grounds of public policy. However, there is no well-established jurisprudence or case-law literature on it. This eventually leads to undue hardship to the victims and rejection of claims, just like what happened in KiK’s case.

International Legal Framework and Protection of Business Human Rights:

For the purposes of protection of business human rights, three international legal instruments are relevant:

1. Firstly, the United Nations Guiding Principles on Business and Human Rights regulate the activities of transnational corporations and other business enterprises. These Principles include within themselves other international human rights legal instruments such as the International Covenant on Civil and Political Rights (ICCPR), the International Covenant on Economic, Social and Cultural Rights (ICESCR) and the eight International Labour Organization core conventions as set out in the Declaration on Fundamental Principles and Rights at Work. The Guiding Principles place the responsibility upon both state parties and business enterprises to respect, protect and fulfill human rights. States are also required to take additional steps under an obligation to ensure due diligence.

2. Secondly, the OECD Guidelines for Multinational Enterprises provide recommendations to multinational enterprises and corporations to provide principles and standards of good practice. There have been several complaints before the OECD National Contact Points against multinational corporations for corporate abuse and violation of human rights. In some complaints, the OECD has also assisted in mediation between complainants and corporations sometimes leading to successful agreements, and in other specific cases it has provided recommendations to corporations.

3. Another relevant legal instrument in this regard is the Draft Treaty on Business and Human Rights. In 2017, a working group of the United Nation’s Human Rights Council outlined possible elements of a treaty on business and human rights, the idea of which was to bind corporations within international law. The Draft Treaty requires states to respect, promote and protect human rights against violations or abuse within their territories and take all necessary measures for due diligence. The main actors upon whom the Treaty shall be applicable include states, organizations of economic integration, transnational corporations, other business enterprises and natural persons.

The problem with all of the aforementioned international instruments is that these are merely recommendatory and advisory in nature with no mandatory or binding application. The UN Guiding Principles as well as OECD Guidelines have no mandatory power and have established no mechanism to hold corporations liable if found involved in the violation of human rights.

As far as the Draft Treaty on Business and Human Rights is concerned, it cannot directly bind corporations as these corporations cannot be the subject of the international law. At most, what the Treaty can ensure is that state parties bind corporations by passing domestic legislation for corporate accountability. However, this indirect manner of corporate accountability and weak enforcement mechanism under international law does not take into account the liability of transnational corporations which function through their supply chains. Moreover, a lack of political will, as well as a lack of government’s resources, plays a significant role in distracting the interests of developing countries towards fulfilling business human rights.

Global Supply Chains: How to Trace Responsibility in Non-Transparent Chains?

In today’s globalized economy, corporations operate through subsidiaries and suppliers. As a result, it is difficult to trace the liability of a corporation which is responsible for any human right violation. Taking the example of the Pakistani factory fire further, it was essential to establish the influential and managerial role of KiK over Ali Enterprises, to prove that KiK was responsible for maintaining adequate health and safety conditions at the factory workplace. In the same way, it needed to be shown that the social auditor of the factory RINA was responsible for inadequate audits performed by its subsidiary RI&CA.

For this purpose, the case of Chandler v Cape plc ([2012] EWCA Civ 525) is very useful. England’s Court of Appeal held that the employer of a parent corporation owed a duty of care towards an injured employee of its subsidiary company.

The Chandler case highlights four factors that can prove the parent-subsidiary relationship of the two corporations.

  • Firstly, it must be proved that the business of the two corporations is the same.
  • Secondly, the parent company must have or ought to have superior or specialist knowledge compared to the subsidiary.
  • Thirdly, the parent company must have knowledge of the subsidiary’s systems of work.
  • Fourthly, the parent corporation must know or ought to have foreseen that the subsidiary is relying on it to use that superior knowledge.

These factors were also considered in Bodo Community v. Shell Petroleum Company of Nigeria (EWHC 1973 (TCC 2014)), where members of the Bodo community sued Shell to seek compensation for two oil-spills that had occurred in the Niger Delta, caused by one of Shell’s Nigerian subsidiaries, the Shell Petroleum Development Company of Nigeria Limited. The court, however, could not find presence of the determining factors as provided in the Chandler case.

Direct duty of the parent corporation was also established in another case, Connelly v. RTZ Corp plc ([1997] UKHL 30, [1999] CLC 533). In this case, a mining corporation, RTZ, was sued on the basis that one of its employees working in its wholly owned subsidiary had developed cancer due to the subsidiary’s health and safety procedures. The court in this case noted that a parent corporation could owe a duty to safeguard the health of the subsidiary’s employees in appropriate circumstances.

In another case, Lubbe v. Cape plc ([2000] UKHL 41), Lubbe was injured while manufacturing asbestos for a South African subsidiary corporation with its parent company in the United Kingdom. The court noted that it was possible to show a direct duty of the parent corporation which, was a duty established under the law of tort and was owed to anybody injured by a subsidiary company in the corporate group.

These cases indicate that a direct duty of the parent corporation can be established if it exercises a high level of control or supervision on the subsidiary. The direct notion of liability in the supply chain does not depend on shareholding or voting power of the subsidiary, rather it is the sufficient involvement or control over the subsidiary’s operations by parent corporations.

Despite these examples, a remaining problem is to trace the corporation responsible for a wrong in the supply chain. If a factory is manufacturing products for several international brands and no one brand can be categorized as its main buyer, the question of attribution of responsibility remains a practical problem when it comes to choosing a party against whom the legal suit should be filed.

What is the Way Forward?

With the rapid increase in globalization and technological progress, many multinational and transnational corporations have diversified their operations beyond their jurisdictions. Such diversification of investments and economic transactions where on one hand have broadened the revenue opportunity for developing countries, on the other hand have given rise to issues of corporate governance and corporate social responsibility. Under such circumstances, the development of law on corporate accountability is still at its nascent stages. As noted earlier, the current legal mechanism is inadequate to provide compensation or justice to the victims of corporate abuse. The very few examples of cases of corporate liability are the ones where victims have shown remarkable strength in organizing themselves, yet they have had to overcome many legal hurdles.

The question remains as to what steps can be taken to overcome the limitations of strategic litigation to hold corporations liable for the violation of human rights.

1. Firstly, group claims should be introduced in legal systems so that victims of any corporate abuse can bring collective action. In 2017, the European Commission announced plans for EU-wide legislation for collective redress sought by consumers. However, such collective redress mechanisms for victims of corporate harm i.e. for employees and the community in general other than consumers, is yet to be developed in the European Union legal framework.

2. Secondly, the limitation period of tort actions should be increased to allow victims to gather evidence and resources for a claim filed in the corporation’s country of origin. Filing a complaint in a different jurisdiction requires resources as well as time, thus, shorter limitation periods in law further hamper the access to justice.

3. Thirdly, a corporation should be encouraged to provide access to information and evidence to its employees and workers. For example, the social audit reports should be made accessible and public. In many situations, workers of a factory are not even aware of any audit reports, let alone the corporations involved in performing social audits of their workplaces. Similarly, workers are also not aware of the true owners of the factories in which they are employed, as well as the corporations governing their employment matters.

As far as the international legal framework is concerned, responsibility to protect human rights falls upon states. These states and governments, by virtue of their international obligations, are duty-bound to push corporations to protect human rights. This includes making legislation for corporate accountability, ensuring introduction of corporate social responsibility in codes of conduct of every corporation operating within their territory and undertaking due diligence. This further requires effective domestic laws on occupational health and safety standards, environmental protection and consumer protection.

However, in case of failure of any international obligation, states can be held liable before the international community. Even if the Draft Treaty on Business and Human Rights gets passed by the UN, the actual liability will remain on states and governments and not on corporations under the international law framework. Until and unless direct legal liability is placed upon corporations for the violation of business human rights under international law, other remedies will lose their effectiveness. Under such circumstances, more effective mechanisms should be placed upon both states and corporations for violation of human rights at the hands of corporations.

The views expressed in this article are those of the author and do not necessarily represent the views of or any organization with which she might be associated.

Maria Khan

Author: Maria Khan

The writer is an advocate based in Lahore. She works at Raja Mohammad Akram & Co. as an associate.