21 December 2018

International arbitration of business related human rights disputes

This article was written by Alex Baykitch AM and Edmund Bao.

The proliferation of global enterprises brings a corresponding increase in manufacturing facilities located in developing countries. Often, poor worker treatment can lead to allegations of business related human rights abuses. Recently, focus has been brought upon the use of international arbitration to resolve human rights abuses in businesses (“BHR Arbitration”). BHR Arbitration carries the advantages of forum neutrality, party appointed arbitrators with expertise in human rights, procedural flexibility and universal recognition and enforcement under the New York Convention. Arbitration is also advantageous when human rights abuses occur in countries where national courts are “dysfunctional, corrupt, politically influenced or simply unqualified”.[1]

In November 2018, a working group of international law and human rights specialists published a consultation paper setting out the key elements of a set of proposed rules applicable to BHR Arbitration (“BHR Arbitration Rules”). Relevantly for international businesses, the consultation paper provides a frame of reference into the mechanics of BHR Arbitration. In this Alert, we set out the key elements of the proposed BHR Arbitration framework and its practical implications for affected businesses.

Consent to arbitrate

Agreements to arbitrate between alleged human rights abuse victims and individual companies are not common. One solution suggested by the consultation paper is for businesses to voluntarily submit themselves to arbitration, usually after the alleged harm has occurred. Termed the “open offer” model of consent, this is problematic in practice, as businesses are usually reluctant to adopt a proactive approach towards remediation of existing liabilities. An alternative is for businesses and workers to voluntarily enter into an agreement submitting human rights disputes to arbitration prior to any issues arising, for the express purpose of safeguarding workers’ rights. In such cases, the inventive for businesses to enter into BHR Arbitration is the confidentiality of the process, which allows companies to contain reputational damage common in the event of such allegations.

Applicable governing law

Another key element of BHR arbitration is the choice of governing law. There exists a number of potential sources of law from which human rights obligations and standards may be derived. This includes hard law, such as domestic human rights legislation, contractual human rights obligations and human rights treaties between nation states. There also exists soft law arising from quasi-legal human rights instruments, such as the United Nations Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. Parties to BHR Arbitration may agree to adopt standards acceptable to both parties. The consultation paper recommends that parties engaging in BHR Arbitration specify “the law or rules of law” applicable to the dispute,[2] thereby granting maximum autonomy for parties to choose their own governing law.   

Recognition and enforcement

The subject matter of BHR Arbitration brings forth unique challenges with respect to its recognition and enforcement. Nearly fifty states have adopted reservations under Art 1(3) of the New York Convention that arbitral award enforceability only applies disputes that are “commercial” in nature. It is unclear whether BHR Arbitration falls under this category. Each individual case will likely depend upon the facts, including the nature of the relationship between the parties. For example, the granting of rights to third party beneficiaries under a contractual supply agreement will likely satisfy this requirement. However, human rights related obligations under employment contracts, or allegations of breaches of domestic health and safety laws arguably take on less of a commercial character.

A second limitation on enforcement of BHR Arbitration is the public policy exception under Art V(2)(b) of the New York Convention. This exception provides grounds for refusing enforcement to the extent domestic courts consider human rights as a public policy issue. A 2015 survey by the International Bar Association on this issue concluded that the public policy concept is “difficult to clearly apprehend and impossible to precisely define”.[3] Currently, there exists limited jurisprudence from domestic courts on the arbitrability of human rights. The public policy exception is therefore a source of uncertainty when it comes to the enforcement of BHR Arbitrations.  

Procedural considerations

Arbitration of human rights in business presents some unique procedural challenges. Commonly, human rights abuses in business affect numerous victims and across different business entities. In such cases, there will also be a need for procedures for the consolidation or joinder of multiple arbitral proceedings. Such consolidation procedures are not yet mature in mainstream arbitration. Such procedures therefore present additional difficulties when applied to BHR Arbitration.

Second, the consultation paper proposes that BHR Arbitration not preclude victims seeking recourse from alternative avenues such as national courts. The intention is to provide victims of business-related human rights abuses the greatest opportunity to pursue potential claims. However, this is problematic in practice, as multiple proceedings infringe upon the finality of the arbitral process. The possibility for multiple proceedings in various jurisdictions will also expose businesses to an unacceptable level of commercial risk. This is not withstanding the fact that legally, parallel proceedings in domestic courts (with avenues of appeal) constitutes a re-judging of the dispute on its merits (res judicata).

Third, the consultation paper considered whether BHR Arbitration should adopt a minimum standard of transparency, due to public interest considerations in instances of human rights violations. For example, should the choice for publication of awards remain with the parties or should BHR Arbitration remain confidential? Given the negative publicity associated with allegations of human rights abuses, companies should consider the fact that full transparency will likely remove a fundamental attraction for businesses to engage in BHR Arbitration.

Unequal standing

Human rights disputes in business often occur between parties of unequal bargaining power, commercial sophistication and financial means. This gives rise to access to justice issues for victims of business related human rights abuses. The consultation paper proffers solutions such as third party funding, pro bono representation or specialised funds dealing with human rights arbitration claims (modelled on the Permanent Court of Arbitration’s Financial Assistance Fund).[4] The consultation paper also suggests the inclusion of express rules on cost–allocation in human rights arbitration to incentivise parties towards the expeditious and efficient presentation of evidence. These measures, if adopted, carry potential to increase the costs of human rights arbitration for businesses.

Conclusion

Increasingly, multinational enterprises are incorporating human rights standards into their contractual provisions. Business related human rights disputes are therefore becoming an enviable aspect of international business operations. International arbitration provides for a viable, albeit currently incomplete, alternative. Key challenges remain, including issues with the choice of governing law, enforceability, and procedural difficulties. In this respect, the flexibility of arbitration is perhaps its greatest asset in overcoming such challenges, through the adoption of arbitral mechanisms tailored towards human rights disputes. For now, businesses should be mindful of their human rights obligations, which will become increasing relevant as the framework for BHR Arbitrations crystallises in the future.


[1] Bruno Simma et al, ‘International Arbitration of Business and Human Rights Disputes: Elements for Consideration in Draft Arbitral Rules, Model Clauses and Other Aspects of the Arbitral Process’ in The Hague Rules on Business and Human Rights Arbitration (Elements Paper, Centre for International Legal Cooperation, November 2018).

[2] Bruno Simma et al, ‘International Arbitration of Business and Human Rights Disputes: Elements for Consideration in Draft Arbitral Rules, Model Clauses and Other Aspects of the Arbitral Process’ in The Hague Rules on Business and Human Rights Arbitration (Elements Paper, Centre for International Legal Cooperation, November 2018).

[3] IBA Sub-Committee on Recognition and Enforcement of Arbitral Awards, ‘Report on the Public Policy Exception in the New York Convention’ (report, October 2015) 18.

[4] The Permanent Court of Arbitration’s Financial Assistance Fund serves to assist developing countries meet their investor state arbitration costs.



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