Recent Trends Related to Human Rights Statements

In recent years, pressure has been mounting on companies to report on how they are upholding human rights in their supply chains. Across various jurisdictions, we see examples of primary and secondary legislation which require company directors to disclose what they are doing to combat human rights abuses. In the United Kingdom, for example, the Companies Act 2006 requires directors of quoted companies to prepare a strategic report including a consideration of human rights issues.¹ The recently passed UK Modern Slavery Act 2015 goes even further, requiring certain businesses with an annual global turnover of £36 million or more, to publish an annual statement setting out the steps they have taken to ensure that slavery and human trafficking are not present in their own business or their supply chain.²

In the European Union, Directive 2014/95/EU, known as the ‘Non-financial Reporting Directive’, requires many companies headquartered or having significant operations in the EU to disclose non-financial data such as data concerning their human rights conduct on a regular basis.³  This Directive must be implemented by Member States by 6 December 2016. In the state of California, the California Supply Chains Act 2010 requires large retailers and manufacturers doing business in the state with more than US$100 million in annual worldwide gross receipts to disclose their efforts to eradicate slavery and human trafficking from their direct supply chains for tangible goods offered for sale.⁴

Companies worldwide are also subject to various guidelines and principles regarded as ‘soft law’, such as the Principles of Responsible Investment, the Principles for Sustainable Insurance, the UN Guiding Principles on Business and Human Rights (the UN Guiding Principles) and the OECD Guidelines for Multinational Enterprises, to name but a few. Investors are increasingly including a review of how companies engage with human rights in their investment decisions and businesses are incorporating human rights related requirements into their business terms. In addition, businesses across the globe are increasingly making public statements about their commitments to human rights standards in order to bolster their profile and appear more attractive to investors and counterparties.

However, making their commitments public is not without risk. Where companies have made public representations about their commitment to human rights, be it voluntarily or as a requirement of the law in the jurisdiction in which they operate, they should be able to substantiate these commitments. If they cannot do so, they should adjust their internal systems and processes with the higher level of attention to human rights currently required by legislation and voluntary principles and ensure that their commitments reflect the actual underlying business and human rights processes in the company.

In order to inform themselves on what to say when reporting, businesses should refer to the relevant guidance attached to the legislation or other regime applicable to them. For example, companies which have expressed their commitment to the UN Guiding Principles should look to the UN Guiding Principles Reporting Framework, a question and answer document designed to help companies report meaningfully on their human rights performance.⁵ More general guidance is also provided by the UN Global Compact which sets out some key principles on managing human rights and has issued a number of publications on implementing human rights and sustainability.⁶ The UK Government has also issued 'Transparency in Supply Chains etc., A practical guide', a publication which gives further guidance on how to prepare slavery and human trafficking statements required by the UK Modern Slavery Act.

A certain degree of guidance can also be taken from recent case law which has shown in what kind of situations companies may be brought to account for human rights impacts in their own organisations as well as in their supply chains and what role their public statements may play in such cases. Although some of these cases do not reference human rights expressly, they are all generally considered as human rights case law.

Knowledge and Control

Chandler v Cape

In the United Kingdom, Chandler v Cape PLC [2012] EWCA (Civ) 525 demonstrated that in certain circumstances, an English court may find that a parent company owes a duty of care in relation to the health and safety of its subsidiary’s employees, depending on the extent of the parent company’s knowledge and/or control of the subsidiary’s activities. The claimant in the case was a brick loader employed by a subsidiary of the parent company which produced asbestos. The employee developed asbestosis. The parent company was held to be responsible for the health and safety of its subsidiary’s employees and in breach of its duty given that: (i) it had superior knowledge of the nature and management of asbestos risk within the asbestos business; (ii) it knew, or ought to have known, that the subsidiary’s system of work was unsafe; and (iii) it knew, or ought to have foreseen, that the subsidiary or its employees would rely on its superior knowledge for the employees’ protection.

Lubbe v Cape

Chandler v Cape cited an earlier case, Lubbe v Cape Plc [2000] UKHL 41, where the House of Lords had accepted jurisdiction over a claim against a parent company by the employees of its subsidiary. Lubbe v Cape settled shortly after the decision on jurisdiction and so provides only limited guidance. Since Chandler v Cape, the English courts have had few opportunities to examine the issue of a duty of care owed to employees of, or third parties affected by, the foreign subsidiaries or subcontractors of a United Kingdom-based parent company. The cases which have been brought have generally culminated in a settlement.

Thompson v The Renwick

However, in Thompson v The Renwick Group plc [2014] EWCA Civ 635, the Court found that a duty of care was not established, as the facts of the case did not support the imposition of a duty of care as they had in Chandler v Cape.⁷ The question in Thompson v The Renwick Group was whether a parent company can be held to have assumed a duty of care to the employees of its subsidiary in health and safety matters by virtue of it appointing an individual as director of its subsidiary with responsibility for such matters. It was held that in running the day to day operations of the subsidiary, the new director was not acting on behalf of the parent. There was no evidence that the parent company carried on any business apart from that of holding shares in its subsidiaries and it could not be shown that it had, or should have had, any superior knowledge.

What these cases show is that each case depends on its facts and it is important to examine the relationship between, and activities of, the respective companies in order to determine whether in any particular case the test for finding a duty of care is met. Equally, these cases suggest that the more knowledge and control a parent company has over the operations of its subsidiaries, the more exposed it is to a finding that it has assumed responsibility for managing the impacts of their activities.

Today, being ignorant of the operations of subsidiaries is seldom an option or the reality. Especially so in the case of large multi-jurisdictional corporate groups, in which parent companies often assume a central role in establishing group-wide policies and procedures in order to comply with increasingly global practice standards and risk management. However, having detailed knowledge of the work of subsidiaries and then failing to take action to prevent harm from their activities inevitably exposes the parent company to an increased risk of an adverse court judgment in the event that the subsidiary engages in harmful activities. Recent cases show how this knowledge may be established from public statements.

Relevance of public statements

Choc v Hudbay

In Canada, an increasing number of cases are emerging on the subject of the duty of care owed by a Canadian company with respect to its overseas supply chains. In Canada, there is potential for a parent company to be found legally responsible to third parties who have suffered damage as a result of the acts of a subsidiary or subcontractor and for the existence of a duty of care to be determined, at least in part, by reference to public statements made by the company about its relationship with affected stakeholders.

In Choc v Hudbay Minerals Inc. 2013 ONSC 1414, for example, although Hudbay claimed that there was no cause of action, the Ontario Superior Court of Justice refused to dismiss actions against Canadian mining company Hudbay and its subsidiaries related to alleged human rights abuses perpetrated by the company’s security personnel. The court ruled that the “public representations concerning Hudbay’s relationship with the local communities and commitment to human rights supported a finding of sufficient proximity between the parties.”⁸ These public representations included public statements committing the company to the implementation of detailed standards of conduct applicable to security personnel and adherence to Guatemalan and international law and to the Voluntary Principles on Security and Human Rights. In reaching that decision, the court did not look substantively at whether a duty of care existed in the case, but based on this judgment, there is clearly potential for plaintiffs to seek to use public statements of the sort made by Hudbay to help establish such a duty.

Joe Fresh and Loblaws

A recent action against Canadian companies Joe Fresh, Loblaws and others raises similar points. This case has been brought by Bangladeshi garment workers, employed by the defendants’ subcontractor, who suffered damage as a result of the collapse of the Rana Plaza building in 2013, killing 1,130 workers. If the case goes to trial, it is likely to provide the most extensive guidance to date from a Canadian court on the test for finding a duty of care between a company and the employees of its foreign subcontractor or, by analogy, its subsidiary.

Similar to Chandler v Cape, the plaintiffs are arguing that knowledge played a key role in creating a duty of care between the defendant companies and the garment workers. The plaintiffs argue that the defendants were aware of the “significant and specific” risk to the workers and were negligent in failing to ensure an appropriate standard of safety in their supply chain operations. Moreover, as in Choc v Hudbay, the plaintiffs argue that public statements made by the defendants as part of raising their corporate profile, as well as their public commitments to compliance with voluntary standards, such as the UN Guiding Principles, assist in creating the proximity required between the plaintiffs and the defendants to give rise to a duty of care.

The question of whether a duty of care exists in the circumstances of that case will likely be argued as a preliminary issue, either prior to or at the hearing of the motion for certification of the case as a class action. Regardless of the outcome of the case, this is a reminder of the general trend for companies with subcontractors (or subsidiaries) operating in countries known for poor working conditions to revisit what they know about the working environment of these entities and what action to take to manage the risks arising from those operations.

A decision that a duty of care exists as a result of, among other things, a public commitment to apply the UN Guiding Principles would also be likely to elevate the importance of these Principles and encourage companies to assess their own compliance with them and, furthermore, what they are saying publicly about them.

Costco

The danger surrounding public statements has never appeared more acutely than in the case of the global retail giant Costco which was sued by Californian shrimp consumers under the California unfair business practices law. The plaintiff alleged that Costco misled consumers in California regarding slave labour and human trafficking in its supply chain. The plaintiff claimed public disclosures Costco was required to make under California’s Human Trafficking in Supply Chains Act were deceptive because Costco sold farmed shrimp from Thailand, where slave labour and human trafficking in the fishing industry are widespread. Like Loblaws and Hudbay, Costco has made public statements to the effect that it does not tolerate human trafficking and slavery in its supply chain and these statements have been used against the company in the recent class action.

The claim alleged that Costco has for several years bought and resold farmed prawns from the leading Thai food group CP Foods and other companies that have sourced the raw material for their feed from ships manned by slaves. The lawsuit sought an injunction barring Costco from selling products tainted by slave labour and requiring it to disclose tainted products in its supply chain. It also sought to compensate purchasers of the shrimp products. The court recently dismissed the case on grounds that the plaintiff never actually bought the shrimp in question, but it is likely the lawyers behind the case will find a plaintiff with standing. If the case resumes and goes to trial, it will give some indication as to how the United States courts will treat misstatements concerning human rights compliance and may provide some further guidance on the possible consequences for businesses that make broad statements of commitment to human rights standards that may not have been fully complied with.

Businesses face increasing pressures to publicly commit to human rights standards and see that this commitment is fully implemented throughout their businesses and supply chains. Whilst it can appear desirable and beneficial for a company to state publicly that it is engaged with and respectful of human rights, the case law suggests that a company needs to take care that its public statements reflect reality.

Making factually incorrect statements about their human rights compliance can put businesses at risk of legal action. The cases against Loblaws and potentially Costco may provide further guidance in this area. In the meantime, businesses should consider carefully the way in which they approach and report on human rights compliance, by reference to applicable principles and frameworks. While businesses may reap considerable benefits from cultivating a reputation for being human rights compliant, they need to be fully aware of the standards to which they must comply and the risks of being made to account for significant departures from those standards, and consider how best to manage those risks. The conflict between needing to be transparent and risking potential liability through misleading statements has a simple solution – companies need to address their corporate minds to making substantive improvements to human rights within their global supply chains and then report on the action they have really taken.