Finding a silver lining in the rejection of the Swiss Responsible Business Initiative: a hope of legal accountability in the parliamentary counterproposal (Part 1)

By Laura Knöpfel (Senior Research Fellow Transnational Law Institute, Dickson Poon School of Law, King’s College London) and Carlos López (Senior Legal Adviser, International Commission of Jurists)

On 29^th November 2020, Switzerland narrowly rejected the popular Responsible Business Initiative (RBI) which would have obliged Swiss companies and the businesses they control anywhere in the world to respect human rights and environmental standards and introduced civil liability for the controlling company for breaches of those norms. Instead, a Parliament counterproposal, introducing mainly new reporting obligations, will automatically enter into force.

The vote attracted much international attention. Switzerland is home to large corporations, many of which -such as Glencore and Trafigura- have been subject to allegations of serious environmental and human rights abuses in other countries. In this context, the results of the vote are truly historic: The majority of voters (50.7 %) approved the RBI, which nevertheless failed to gather the support of the majority of cantons (another necessary element in the approval process according to the Swiss Constitution).

The popular majority in favour of legal liability for corporations in Switzerland, a country traditionally identified with big banks and financial secrecy, signals a critical shift in public opinion towards more stringent regulation of globally operating businesses. A clear message to the authorities has been sent that the implementation of the Parliament counterproposal should be aligned with the objectives of the RBI.

The parliament counterproposal

The parliament counterproposal will enter into force after a 100 days waiting period. Its content follows the main lines of the EU Directive 2014/94/EU on non-financial reporting, the Dutch Child Labour Due Diligence Act of 2019 and the EU Regulation 2017/821 on supply chain due diligence obligations for conflict minerals. It requires large public-interest companies which in two consecutive financial years, together with the domestic and foreign corporations under their control, exceed the average number of 500 employees and have either a turnover of 40 million Swiss Francs or total assets of 20 million Swiss Francs to submit annual reports with non-financial information on social and environmental matters, including of controlled corporations. The report shall describe risks and the actions taken to reduce these risks regarding CO2 emission targets, labour conditions and corruption. The main duty created by this counterproposal only entails reporting. In particular, it does not oblige a company to take any concrete measures in relation to the social and environmental risks identified in the report.

The counterproposal only imposes a mandatory human rights due diligence (HRDD) obligation on companies in two ‘sectors’. Companies must conduct HRDD if they import or process minerals containing tin, tantalum, tungsten or gold or metals from conflict-affected and high-risk areas, or if they sell products and services for which the use of child labour is suspected (the suspicion must be ‘well founded’). The proposal also introduces a new provision into the Criminal Code (article 325ter) which establishes criminal sanctions for false reporting. Importantly, it refrains from introducing civil liability for harm produced in violation of human rights and environmental standards of controlled companies and from ensuring the applicability of Swiss law.

Potential implications for access to justice

On first sight, the parliamentary counterproposal does not advance access to justice for those who suffered harm by Swiss corporations. But although it does not have provisions on legal liability for corporations, it may have some impact in the establishment of such legal liability in two respects. First, it does introduce HRDD obligations for certain corporations relating to conflict areas or potentially using child labour, and, second, the central reporting provisions may lead to more publicly available information about human rights and environmental policies, projects and programmes that Swiss corporations adopt, including in respect to their controlled business partners (discussed in the second part of this Blog).

Direct liability for negligence

Article 41 of the Swiss Code of Obligations (CO) on non-contractual responsibility for harm establishes that ‘any person who unlawfully causes loss or damages to another, whether wilfully or negligently, is obliged to provide compensation’. In the context of a multinational enterprise, it might well be that an omission of the parent or lead corporation results in loss or damage for a third party (worker or community member). Yet, under Swiss law, liability for omission requires the pre-existence of a duty to act which had been breached. Such a duty to act might be established in a contract or a legal provision, or flow from the position of the duty-bound person as a guarantor. This is where the new HRDD obligations might become relevant. In the context of the two ‘sector’ of conflict minerals and child labour, they might establish a legal duty to act of the kind required for liability by omission.

HRDD processes entail the identification of actual and potential risks, the prevention or mitigation of those risks, the external communication (reporting) of the measures taken and the integration of the lessons learnt from the process into the company’s due diligence and governance structures. In short, it requires a company to take appropriate steps to prevent risks and remedy harm that had resulted from any direct or indirect involvement with human rights violations. It must use its leverage, financial and contractual, against the subsidiary to ensure that the controlled company follows the health and safety standards.  A failure to do so may amount to an omission and hence give rise to direct liability for negligence. However, it must be noted that the new provisions on HRDD in regard to child labour and conflict minerals will be introduced into the section of the Swiss Code of Obligations on commercial accounting and financial reporting (new Article 964quinquies), and not, for example, in the part on the duties of the board of directors. This suggests that the legislator considers the new HRDD duties to rather be part of an extended reporting obligation than establish a duty to act. But could also be interpreted otherwise.

The problem of the applicable law

The most important change of the RBI initiative would have consisted in ensuring the applicability of Swiss law in cases of conflict of laws. The RBI included an overriding norm whereby irrespective of the applicable law according to the private international law of Switzerland, the RBI provisions on civil liability and human rights due diligence apply. As a general rule, the law applicable to civil liability cases is the law of the country in which the wrongful conduct was committed. For instance, if a Swiss company has a controlled subsidiary in Ivory Coast which uses child labour, the civil law of Ivory Coast will apply to the case (Article 133 Swiss Federal Act on Private International Law).

But in cases of liability for omission there is a different situation. At stake is the omission of the Swiss parent company, domiciled in Switzerland, for breach of a duty to carry out human rights due diligence across its own operations and those of controlled companies. The tortfeasor and the injured parties do not have their habitual residence in the same state. Thus, the law of the state in which the tort occurred, in our case the breach of a duty of due diligence causing harm, is applicable. Having said that, if the harm materialises in a different state, the law of this state is applicable if the tortfeasor should have foreseen that the result would occur there. Ultimately whether the breach of the HRDD obligations was of a general nature or related to a specific factory, extraction site or controlled corporation, will depend on the specific facts of each individual case.

The popular majority obtained for the RBI is a great cause of celebration and its rejection regrettable. However, the counterproposal that is about to enter into force could also offer some potential that is worth analysing with regards to civil liability for negligence, further explored in the second part of this blog.