BHR Symposium: Global Supply Chains–Where Art Thou in the BHR Treaty?

[Justine Nolan is a Professor in the Faculty of Law at UNSW Sydney and a Visiting Scholar with the NYU Stern Center for Business and Human Rights.]

Global supply chains affect every aspect of our lives. It is hard to overstate the impact of supply chains on the economy and people’s lives. Trade, production, investment, employment relations and labour itself have drastically changed with the growth of supply chains. The United Nations Conference on Trade and Development estimates that approximately 80% of international trade can now be linked to the global production networks of multinational enterprises. The International Trade Union Confederation estimates that 60% of global trade in the real economy depends on the supply chains of 50 corporations, which employ only 6% of workers directly but rely on a hidden workforce of 116 million people. Crucially, companies that source through supply chains do not generally have legal responsibilities towards workers at suppliers and subcontractors in the same way as they do towards their own employees.

But there is not a single mention of global supply chains in the second revised draft business and human rights treaty issued in August 2020. The growing influence of global supply chains, the international fragmentation of production, the changing nature of employment relations, the unprecedented power of some large corporations, and the extent of labour exploitation around the world means that regulating supply chains must be a critical part of any global effort to set rules for responsible business conduct. So how does the latest version of the draft treaty deal with this?

So while there is no mention of supply chains, the draft treaty refers to ‘business relationships’. Article 1.5 notes that this includes ‘any relationship between natural or legal persons to conduct business activities, including those activities conducted through affiliates, subsidiaries, agents, suppliers, partnerships, joint venture, beneficial proprietorship, or any other structure or contractual relationship as provided under the domestic law of the State, including activities undertaken by electronic means.’

This is broader than the 2019 revised draft treaty which had used a similar definition but referred to it as relevant to defining a business’ contractual relationship (Art 1.4 2019 revised draft treaty). This is a key issue. The substitution of ‘business’ for ‘contractual’ is important in defining the relationship between entities in supply chains, because such relationships are not always marked by direct legal connections between suppliers and the supply chain ‘captain’. In using this terminology, the draft treaty is acknowledging this broader relationship and also partially dismissing the formal limitations posed by the corporate form and the challenges that poses in tracing liability up and down a supply chain.

This new definition is similar to, but also expands on that used in the UN Guiding Principles on Business and Human Rights which refers to a business relationship as including ‘relationships with business partners, entities in its value chain, and any other non-State or State entity directly linked to its business operations, products or services.’ [emphasis added] (UNGPs, Commentary to Para. 13). Arguably this draft treaty version, by removing ‘direct link’ overcomes some of the uncertainty that surrounds determining what that in the context of supply chains. In essence, what the draft treaty is attempting to do is bring a broader and arguably more modern sensibility to determining which entities might be traditionally understood as falling within a corporate group.

Article 6 takes this definition of business relationships and incorporates it into the provisions on prevention. Articles 6.2-6.3 sets out the human rights due diligence (HRDD) measures expected of business and notes that such activities are relevant not only to a business’ own activities but also its business relationships. This includes identifying, tracking, monitoring and mitigating human rights abuses. Article 6.6 introduces sanctions for failure to conduct HRDD, which may include corrective action (without prejudice to the liability provisions included in Article 8). This approach is consistent with the growing appetite for making HRDD mandatory and including consequences for a failure to comply.

When read in conjunction with Article 8.7, the draft treaty posits a standard of legal responsibility of one company in relation to the harm caused by another company, no matter where the latter is located, when the former company ‘legally or factually’ controls, supervises or should have foreseen the activities that caused the harm.  In the 2019 version, this liability was seemingly limited by the reference to the ‘contractual relationship’ between the two companies involved and is now replaced by the broader term ‘business relationship’. The draft treaty also broadens ‘control’ from the 2019 version so that it now includes control over either the activity or the business, which seems a useful and pragmatic advance on the earlier wording.

Article 8.7 provides business with a defense, by making business liable for such harms only where it ‘failed to put adequate measures [in place] to prevent the abuse.’  The defense is qualified by Article 8.8, a new provision stating that ‘Human rights due diligence shall not automatically absolve’ a business from liability.  Rather, a court (or competent authority) will decide on liability ‘after an examination of compliance with applicable human rights due diligence standards.’  What does this mean? That a business whose HRDD complies with applicable standards has an automatic defense?  Or not?  And what are those applicable HRDD standards?

Article 8.8 is indicating that the mere fact of conducting HRDD cannot be used as a safe harbour for deflecting liability but the scope of this provision and the determination of the relevant applicable standard of conduct is uncertain. If for example, a country or region (such as the EU) established HRDD standards, this presumably would be used to determine an applicable standard as relevant for companies housed within its jurisdiction. But HRDD remains somewhat of a catch all and amorphous concept at present and will need further definition to apply it as a legal defense in this context.

This concept of using HRDD as a defense has been applied in other contexts and is a useful approach. For example, Section 7(1) of the UK Bribery Act holds that a company will be liable for a failure to prevent bribery. However, it is a defense for a company to show that it had in place adequate procedures designed to prevent this failure (s.7(2)). This ‘adequate procedures’ defence aims to incentivise companies to develop policies and procedures to prevent bribery and is also now reflected in the proactive and preventive due diligence approach set out in the draft treaty.

The adequate procedures defence is an attempt to shift toward a less prescriptive, procedural approach to regulation. It allows companies to develop internal mechanisms and policies that may limit their culpability but it should do within the context of a broader framework which provides guidance on HRDD. This defence should and seemingly does, place the burden of proof on the accused organisation, and if adequate procedures are found to be absent, liability may ensue. The scope of this defense is important because Article 8.7 could be interpreted to hold business liable for failing to see any abuse by a supplier regardless of their actions. What these provisions aim to do is create a framework that includes an emphasis on both penalty and deterrence, and if HRDD is clearly defined as a legal standard, then it may be effective in achieving this.

While the finalization of the draft treaty process is still some way off, the emergence of HRDD laws at both a national and regional level will provide further guidance in framing both the responsibility and liability of companies in global supply chains.  The drafters of the 2020 version are continuing to build on the improved coherence and consistency that was evident in the 2019 revised draft and are providing a glimpse into the future of a global framework that addresses the structural realities of global supply chains and recognizes that HRDD and corporate liability must be part of that model.