Rolf H. WeberLiability of parent Companies for Human Rights Violations of Subsidiaries

Rolf H. Weber/Rainer Baisch, Liability of parent Companies for Human Rights Violations of Subsidiaries, Working Paper Series, 1 July 2015.

Summary

In this essay, Prof. Dr. Rolf Weber and Prof. Dr. Rainer Baisch address the issue of human rights violations by subsidiaries of multinational companies and the legal instruments available to victims to bring their claims against mother companies. The authors discuss existing international laws and their implementation as well as the legal environment and court practice at a national level (with a particular focus on the Swiss legal system), while highlighting, inter alia, differences in practice between common law and civil law jurisdictions.

As a starting point, the peculiarity of multinational companies as parent-subsidiary structures is stressed. The subsidiary is an autonomous legal entity often domiciled in a different jurisdiction than its mother company. Hence, the very essence of a multinational company is, per definition, a barrier for victims of human rights violations. In fact, a plaintiff will usually prefer to bring his claim against the parent company in his or her own home jurisdiction; but, the private international law doctrine of lex loci actus often results in the application of the domestic laws of the state where the subsidiary is operating. However, in both civil law and common law jurisdictions, alternative legal approaches exist; this opens a window for corporate liability claims against mother companies.

The general normative framework for human rights violations in the context of multinational companies fundamentally consists of cross-border regulations with a mere soft law character; important examples here are the United Nations Guiding Principles on Business and Human Rights (UNGP) and the OECD Guidelines for Multinational Enterprises. However, due to their non-binding and non-enforceable nature, it is difficult for international guidelines to reach an adequate level of legal accountability; they are therefore not really an effective legal basis for plaintiffs.

Human rights are, in principle, not directly applicable in private relations. However, alternative doctrines have developed to overcome this conceptual weakness. The so-called third party effect theory (“Drittwirkung”) pursuant to art. 35 (3) Swiss Constitution, according to which fundamental rights also have an impact on economic enterprises, is a good example of how human rights violations could be granted direct effect. Notwithstanding this conceptual barrier, access to justice for the victims is very difficult. In fact, there are many legal barriers; examples include the limitation of extraterritorial jurisdiction, the separate legal personality of a mother company and its subsidiaries and inadequate legislation and enforcement procedures. Coupled with procedural and evidentiary difficulties, legal barriers such as the aforementioned make it almost impossible for victims of human rights violations to successfully access judicial remedies.

Profs. Weber and Baisch identify and analyze two main legal approaches in corporate liability. First of all, jurisdiction can be based on the extraterritoriality concept. With regard to this approach, the authors point out that following recent case-law developments, the Alien Tort Statue (ALS), namely the most important instrument for foreign direct liability in the U.S., is not likely to be effective in corporate liability cases. Yet, the doctrines of forum non conveniens and the civil law forum necessitatis provide for suitable alternative legal venues. Following the second approach, which is investigated in greater detail, corporate liability claims may be based on violations of national laws, notably company law, rather than international norms.

In company law, corporate liability in the group of companies context can arise on the basis of two main approaches. First of all, directors and officers of the parent company can be held liable for wrongdoings of their subsidiaries based on violations of their duty of care. The scope of the corporate duty of care [e.g., art. 717 para. 1 of the Swiss Company Law (CO)] varies between jurisdictions and legal systems, being a less powerful instrument in civil law than common law countries. As an alternative to the duty of care approach, liability of the mother company can be achieved via “piercing the corporate veil”. The separation of the legal personality of companies and the individuals owning or controlling them is, however, one of the milestones of corporate law; courts are always very careful in deciding whether to allow a piercing of the corporate veil.

In summary, under both of the aforementioned approaches, corporate liability claims will always be carefully scrutinized, and court decisions will always be very case-specific in order to avoid vicarious liability. However, the authors note that, with the drafting of proper accountability frameworks clearly defining corporate responsibility, the duty of care approach is potentially a more suitable instrument to tackle the problems of human rights violations in a group of companies environment. It should nevertheless not be overlooked that, ideally, the improvement of the jurisdictional situation at the place of business of the subsidiaries would be the best and most effective approach, considering that mother companies would anyhow always be able to avoid liability with alternative business structures (e.g., hiring local subcontractors).

Profs. Weber and Baisch conclude by providing an outlook on corporate liability for violations of human rights. In Switzerland and the U.K., recent developments highlight the tendency towards more awareness, both in public opinion as well as in courtrooms. Once again, the authors stress the need to concretize standards of duty of care, in particular in connection with human rights, in order to embed such standards in a sound and proper accountability framework. However, the risk of vicarious liability and its impact on the corporate activity of multinational companies should not be overlooked and should always be taken in consideration when assessing liability.

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