24 Jun Business and Human Rights Symposium: The Conceptual Revolution of Supply Chain Liability – Towards Corporate Social Liability
[Penelope A. Bergkamp is a graduate from the National University of Singapore and KU Leuven, and law practitioner in Brussels.]
Corporate liability and supply chain liability (SCL) in particular are experiencing a rapid and dramatic revolution. Supply chain liability (“SCL”) is the liability of a multinational corporation for damages caused by its business partners, often in developing countries. The term business partners refers to any business partner, whether a subsidiary or an independently owned entity with which the company has a business relationship, including suppliers and customers. SCL is not (yet) imposed by statute, except, in some jurisdictions, in specific areas, and was, until recently, a mere academic theory. In recent years, the English courts have led the way in developing this area of potential corporate liability, and the Dutch courts are now taking it to the next level. The theories endorsed by these courts are also applicable in other countries.
This blog post analyzes the most recent developments. As shown below, if the novel SCL theories continue to gather judicial endorsement, corporate liability and SCL will be aimed at the progressive realization of a better world. SCL will help to realize such a better world by mandating corporations to pursue the public good. Thus, the novel theories of corporate liability and SCL pioneered by the UK and Dutch courts can be best understood as corporate social liability theories.
Corporate social responsibility
Multinational companies have been criticized for failing to prevent environmental harm and human rights infringements by their business partners. Often, this critique relates to events in developing countries, where regulation may be lax or poorly enforced. As local business partners of these multinationals may lack the resources or domestic civil liability regimes are toothless, plaintiffs bring claims against companies with deep pockets in Europe and North America, invoking theories of ‘corporate supply chain liability.’ These theories have now been revolutionized.
SCL theories develop against the background of corporate social responsibility, which relates to social justice. In the Western world, corporations have been instrumental in producing enormous increases in human wealth and well-being. Governments and economies in developing countries have not been able to replicate these positive dynamics within their jurisdictions. This is where the concept of corporate social responsibility comes in – if we put corporations in charge of solving public problems, such as environmental and human rights protection, in all places where they do business, their positive influence will be felt around the world.
Many multinational corporations have accepted responsibility for environmental and human rights protection in their worldwide operations and throughout their supply chains. Under the heading of environmental and social governance (ESG), through codes, policies, audits, and the like, corporations have committed to protect and respect human rights, and remedy violations. These commitments are now being translated into binding obligations through the open norms of tort law – fault, negligence, duty of care, standard of care. In short, the standard of the industry has evolved into a new standard of care.
Duty of care, causation, and control
Under tort law, corporate liability for damages or threatened harm depends on the existence of (1) a duty of care, (2) breach of this duty and (3) a causal link between the breach and the harm. Causation can involve commission (doing an act) or omission (not doing an act). Causation by omission has always been a fuzzy concept. After all, how can something that was not there, be a cause of anything? In SCL cases, causation needs to be analyzed at two levels: at the level of the multinational corporation and at the level of the business partner.
In the recent UK and Dutch SCL judgments, the concept of control or influence serves as a way to construct a duty of care and to find causation by omission at the level of the multinational corporation. The reasoning is straightforward – a corporation has a duty to prevent harm by a business partner’s activities it controls, and failure to meet that duty results in a finding of causation if the business partner has caused harm.
Actual control based on directions
Under English and Dutch tort law, a duty of care arises when a person has control over the acts of another person. Control refers to actual control, not legal control. Thus, a parent company can be liable for damage caused by its subsidiary on the basis of actual control, as opposed to legal control (shareholding and directorships). Consequently, there is no difference between SCL claims against parent companies and those against non-parent business partners; although as a practical matter, parent companies can exercise actual control more easily as a result of their legal control.
Until recently, the courts had not specified how control is to be determined. Recent court judgments in these countries addressed the level of actual control that may cause a duty of care to arise. Actual control can arise in two situations: (1) where a company has taken over the management of a business partner, and (2) where ‘constructed actual control’ is found. Constructed actual control refers to factors or circumstances on the basis of which the existence of actual control is assumed.
In ruling on the admissibility of two SCL claims involving damage in developing countries, Vedanta v Lungowe and Okpabi v Shell, the UK Supreme Court gave some guidance on when constructed actual control is present. The UKSC found that a company, may have a “sufficiently high level of supervision and control” over its business partner’s operations based on three factors:
- The parent company published statements to the effect that it “holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so”;
- The parent had laid down relevant standards of control over the activities of its subsidiaries; and
- It had implemented those standards by “training, monitoring and enforcement”.
Taking the reasoning a step further, in Oguru and Milieudefensie v RDS, a Dutch court applying UK law found that each of these factors individually and separately is sufficient to find actual control.
Actual control based on economic leverage
In the Shell climate case, of June 2021, however, the Dutch court adopted a different approach to find supply chain liability. The court construed the open standard of negligence with reference to the UN Guiding Principles on Human Rights and Business, which were deemed to be authoritative and widely used. Under these guidelines, multinational businesses are responsible for the protection and respect of human rights and the remediation of human rights violations throughout their value chain, defined to include both suppliers and customers.
Based on the finding that climate change poses a threat to the human right to life, the Court reasoned that a multinational company is liable for the greenhouse gas emissions of both its own operations and of those by its business partners throughout the value chain. The test for actual control was revolutionized by substituting economic relations for directions. The court phrased this substitution as follows:
- With respect to suppliers: “It is not in dispute that through its purchase policy the Shell group exercises control and influence over its suppliers (…). This means that through its corporate policy Shell is able to exercise control and influence over these emissions.”
- With respect to customers: “Shell does not contest that it can exert (…) control and influence through its energy package, and the composition thereof, produced and sold by the Shell group.”
Thus, Shell was deemed to control its suppliers based merely on the economic leverage inherent to the business relationship. Shell was also deemed to have control over its customers by virtue of the fact that it determines the composition of its product portfolio. In other words, in any supply chain involving a multinational corporation, control by the multinational is a given.
Consequently, the court ordered Shell to reduce its emissions and those by its suppliers and end users. As the court noted, this implies that Shell will have to divest or retire its fossil fuel resources and adjust its product portfolio.
Towards corporate social liability?
The writing has been on the wall for some time – recent court judgments have accelerated the conversion of corporate social responsibility into corporate social liability. In this new environment, corporations will have to work alongside governments to ensure the progressive realization of the continuously expanding positive entitlements required by human rights.
To paraphrase the President of the European Court of Human Rights, “corporations are required to play their role within the boundaries of their powers, forever mindful that the realization of human rights must be real and effective.”