UNIVERSITY OF ESSEX
LAW DEPARTMENT
LLM in International Human Rights Law
2004-2005
DISSERTATION:
The notion of Socially Responsible Investment in the context of StateInvestor Agreements: human rights or economic returns
Name of student:
Adalyat Abdumanapova
Registration number:
0410918
Name of supervisor:
Professor Sheldon Leader
Number of words:
21 165
Date of submission:
14.09.2005
INTRODUCTION
2
I. CORPORATE RESPONSIBILITY IN TERMS OF SOCIALLY RESPONSIBLE INVESTMENT
5
(i)
The notion and objectives of Corporate Social Responsibility
5
(ii)
Importance of the stakeholder approach
7
(iii)
Socially Responsible Investment and its strategies
8
(iv)
Responsibilities of corporate governance function towards the social investment
12
(v)
Summary
16
II. THE RELATIONS BETWEEN TRANSNATIONAL CORPORATIONS AND STATES IN
TERMS OF HUMAN RIGHTS OBLIGATIONS
(i)
The nature and scope of TNCs’ human rights obligations
17
17
(ii)
Host State and FDI: the models of good, weak and bad governments
21
(iii)
Political influence of TNCs versus the national sovereignty of the Host State
27
(iv)
The extraterritorial jurisdiction of the Home State towards human rights protection
29
(v)
Summary
32
III. THE STATE-INVESTOR AGREEMENT AND FOREIGN INVESTMENT DISPUTES ON
HUMAN RIGHTS ISSUES
33
(i)
The legal nature of State-Investor Agreements
34
(ii)
The doctrine of Permanent Sovereignty versus contractual sanctity
38
(iii)
Stabilization clause and government interference with State-Investor Agreements
41
(iv)
State responsibility for injuries to alien property: the legitimacy of nationalization and
the concept of compensation
44
Summary
48
(v)
CONCLUSION
50
BIBLIOGRAPHY
54
LIST OF CASES
58
1
INTRODUCTION
It is evident that the power of transnational corporations (TNC) to control international
investment has impacted enormously on the economies and politics of developing countries.
TNCs have been recognized as powerful engines of private sector development, important
mechanisms for the transfer of technology, potential catalysts for host state efficiency through
the introduction of globally competitive standards, and facilitators in gaining access for local
products into world markets through their familiarity with worldwide distribution channels
and procedures.1 Nonetheless, despite the benefits that foreign investment brings, increasing
concerns are being voiced about the environment, human rights 2 and the kind of world to be
inherited by future generations. In recent decades, multinationals have been embroiled in
controversies because of their alleged involvement in human rights violations worldwide.
Some high-profile examples include Royal Dutch/Shell’s operations in Nigeria; British
Petroleum’s development of the Cusiana-Cupiagua oil fields in Colombia; and alleged human
rights violations that occurred during Total and Unocal’s construction of the Yadana gas
pipeline in Burma and Thailand.
Experience demonstrates that the relationship between a company and its foreign subsidiaries,
joint venture partners and states can often give rise to considerable ethical dilemmas. While
obedience of the law is considered mandatory, ethics remains in the realm of discretion. For
the international corporation the problem can be put this way: In making business decisions,
should social and cultural consideration of host country be taken into account, or should
commercial factors be the sole determinant?3
It has been convincingly argued that the liability of TNCs under the international human
rights law is necessary, possible, and inevitable. However, most companies have still not
come to terms with the new reality that they are to be held accountable for their human rights
records. This paper focuses on the principal policy issues facing TNCs, host and home states
in relation to investment and human rights obligations. It does not review the extensive
Wallace, Cynthia “The Multinational Enterprise and Legal Control. Host State Sovereignty in an Era of
Economic Globalization” (Martinus Nijnoff Publishers, 2002), p.4
2
The term ‘human rights’ is used in this work to refer to the full range of rights in the Universal Declaration of
Human Rights (1948): civil and political rights, as well as economic, social and cultural rights. These rights are
recognized as being universal, indivisible, interdependent and interrelated.
3
Webley, S. in Addo, M. “Human Rights Standards and the Responsibility of Transnational Corporations”
(Kluwer Law International, 1999), p.107
1
2
literature on the question of whether direct investment per se is good or bad. Rather, it seeks
to unravel some of the challenges associated with socially responsible investment from the
institutional investor's perspective, focusing on the tensions that exist between TNCs and host
states in respect of investment decisions and guarantees for human rights.
The scope of the dissertation
This study consists of three chapters. Chapter I introduces the notions of corporate social
responsibility and socially responsible investment, including their content, strategies and
interdependence, which come under a variety of designations such as the stakeholder
approach, ethical and social responsibility, shareholder advocacy and good corporate
governance.
Chapter II examines the phenomenon of TNCs in terms of the scope and impact of their
activities on human rights. This will be done within the context of relationships between
multinationals and developing countries, focusing on the types of obligations created and to
which these obligations should be applied. Special attention is given to the analysis of TNCs’
influence upon the host state’s internal affairs and to the debate on the extraterritorial
jurisdiction of home states over human rights violations committed by TNCs. However, it is
beyond the scope of this work to analyze the entire discourse on corporate responsibility and
the rationale of holding corporations accountable for human rights violations.
Chapter III, the central part of this work, considers the legal aspects of investment
relationships. A number of issues relevant to the legal nature of international investment
agreements are dealt with in this chapter. Such issues include: the examination of contractual
clauses, including the ‘choice-of-law’ and ‘stabilization’ clauses that protect the foreign
investor against deprivation of ownership or control or substantial benefits from investments;
the legal requirements for the seizure of alien property by host state in response to the human
rights violations; the questions that have been addressed by the international arbitral practice
based on the concepts of ‘public purpose’ and permanent sovereignty over natural resources
and other related issues.
In a wide sense, the objective of this work is not merely to revisit the controversies of TNChost state relations but, rather, to contribute to the resolution of those controversies. Due to
the above mentioned limitations of scope for this study, little or no attention is paid to the
3
legal aspects of international personality of TNCs, the substantiations of corporate
responsibility under international human rights law or the questions of international,
multilateral and bilateral regulatory regimes.
Definitions
Before embarking upon the analysis of the main questions it is necessary to determine the key
definitions for this study. The definition of the TNC4 has been the subject of difficult
discussions. The ‘transnational corporation’ may be defined as an enterprise which owns (in
whole or in part), controls and manages value-adding activities in more than one country. In
so doing it engages in production and/or service activities across national boundaries, financed
by foreign direct investment. The essential elements of multinational operations are, first,
direct, as opposed to portfolio investment abroad, giving the power of control over decisionmaking in the foreign enterprise. A second key element is the collective transfer of a package
of resources, involving factor inputs such as capital, technology, entrepreneurial and
managerial skills, and access to markets for trade and foreign production. A third element of
the definition is that the value-adding activities of the enterprise are located in at least two
countries.5
The term ‘host country’ refers to the country within which a corporation operates; particularly,
for this study, developing countries. The notion of ‘home state’ refers to the country of origin
or the domicile of the TNC.
‘Foreign investment’ involves the transfer of tangible and intangible assets from one country
to another for the purpose of generating wealth under the total or partial control of the owner
of the assets.6 According to the definition introduced by the IMF, ‘direct investment’ is the
investment that is made to acquire a lasting interest in an enterprise operating in an economy
other than that of an investor, the investor’s purpose being to have an effective choice in the
management of the enterprise.7
This term should be understood to be synonymous with ‘multinational corporation’, what the U.S. Department
State refers to as ‘transnational enterprise’ (TNE), or what UN refers to as ‘transnational corporation’ (TNC).
5
Thomas Brewer & Stephen Young “The Multilateral Investment System and Multinational Enterprises”
(Oxford University Press, 2000), p.11
6
Sornarajah, M., “The International Law on Foreign Investment” (Cambridge, 1994), p.4
7
“Balance of Payment Manual” IMF (1980), para.408
4
4
I. CORPORATE RESPONSIBILITY IN TERMS OF SOCIALLY RESPONSIBLE
INVESTMENT
(vi)
The notion and objectives of Corporate Social Responsibility
(vii)
Importance of the stakeholder approach
(viii)
Socially Responsible Investment and its strategies
(ix)
Corporate governance and social investing
(x)
Summary
___________________________________________________________________________
“We’re part of society and we have some responsibility to contribute to its positive development.
That covers issues such as human rights…”
- Sir John Browne, Chief Executive, BP Amoco
In this chapter we will consider the scope and depth of corporate commitment to social
responsibility. Although the primary subject of the present study is the discourse on socially
responsible investment (SRI), the further scrutiny of this notion would be inefficient without
examination of the content of corporate social responsibility (CSR). It should be noted at the
outset that we are not intending to illustrate the diverse definitions of the corporate
responsibility or to uphold debates on the necessity of holding corporations accountable for
human rights violations. This study, rather, aims to discuss the interconnection between CSR
and SRI, and to pin down their significant elements including stakeholder approaches,
shareholders advocacy, corporate governance and fiduciary obligations.
(i) The notion and objectives of Corporate Social Responsibility
It is well-known that the issues of socially responsible behaviour are not new and examples
can be found throughout the world and at least from the earliest days of the Industrial
revolution and the concomitant founding of large business entities and the divorce between
ownership and management.8 Nowadays, the rising debate on business ethics carries more of a
global focus following to the TNCs’ operations that take place all around the world. However,
the term CSR still remains to be vague and means different things to different people. In
general terms the corporate responsibility can be defined as a concept whereby companies
“Perspectives on Corporate Social Responsibility” Crowther, D., Rayman-Bacchus, L. (eds), (Ashgate
Publishing Ltd., 2004), p.1
8
5
integrate social, environmental and ethical concerns into the business decision-making process
and their interactions with stakeholders on a voluntary basis. CSR is about companies
recognizing their operations have an impact on the society they operate in, and that businesses
have to be accountable to the community on the way they conduct their affairs above
compliance and reporting more on the non-financial elements of their operations.9
Nevertheless, despite the myriad advocacy movements towards corporate responsibility, the
notions of business being responsible for human rights have traditionally received the negative
response from large corporations. One of the strongest advocates of shareholder capitalism,
Milton Friedman is also one of the fiercest opponents of any suggestion that business should
take seriously social responsibilities. He argues simply that if management starts trying to
serve other goals than maximizing profits for shareholders then they are no longer acting in
the interests of their employers and “spending someone else’s money for a general social
interest.”10 Friedman further argues that rather than subverting the democratic process by
foisting inappropriate responsibilities in business, we should recognize that there is one and
only one social responsibility of business – to use its resources and engage in activities
designed to increase its profits so long as it stays within the rules of the game, which is to say,
engages in open and free competition without deception and fraud.11 Some corporate
advocates also endorse the opinion that social responsibility distorts the market by deflecting
business from its primary role of profit generation and that the role of well run companies is to
make profits, not save the planet.12
Whatever the case, we still witness the widespread abuse of human rights by corporate power.
The influence of TNCs is steadily growing and their presence increasingly affects the societies
in which they operate. Therefore, as members of the universal community and organizations
created by human beings, multinationals have responsibilities to respect basic rights wherever
they operate, including obligations not to cause harm, obligations to respect freedoms, and to
act in a fair manner in business dealings with all stakeholders.13 This idea is directly linked
with the concept of sustainability and the long-term view of the business, which means that
companies should have a vision of their business that is sustainable not only in the short term
Sercovich, T. “Engaging with Stakeholders. Output of the Corporate Responsibility Policy and Practice
Taskforce” (Business in the Community Research Project, 2003), p.8
10
Freidman, M. in “Ethical theory and business” Beauchamp, T.L. and Bowie, N.E. (eds) (Prentice-Hall, 1993),
p.57
11
Vassal-Adams “Human Rights, the Interests of Companies and the Law: Striking the Balance”, LL.M. Essex
Thesis, 1998, p.60
12
See for example the article of Martin Wolf in Financial Times (May 16, 2001), available at www.ft.com
13
Werhane, P. in Dienhart, J. “Business, Institutions and Ethics. A Text with Cases and Readings” (Oxford,
2000), p.294
9
6
vision of profit, but also in the long-term where the needs of stakeholders in the workplace,
the marketplace, the community and the environment are addressed.14
(ii) Importance of the stakeholder approach
As was indicated at the outset, companies cannot be indifferent to the society in which they
operate; furthermore, the main idea underpinning the concept of CSR is that companies should
recognize and define their sphere of influence (SOI), and to assess the impact on all their
stakeholders. The following two senses of stakeholders were distinguished. The ‘narrow
definition’ includes those groups who are vital to the survival and success of the corporation.
The ‘wide-definition’ includes any group or individual who can affect or is affected by the
corporation.15 The usual model of SOI sets out the corporate obligations to the following
constituencies:
-
Employees
-
Shareholders
-
Suppliers, contractors, business partners (including joint venture partners) and
competitors
-
Customers
-
The local community16
Thus, the impact on society means how a business recruits, trains and develops its own
people, where it sources its products, how it buys and sells goods, how it invests in the
community and how it impacts on the environment. Based on this concept the corporate
responsibility can be explained in terms of four areas or pillars: workplace, marketplace,
community and environment. 17 Each of these stakeholder groups has a right not to be treated
as a means to some end, and therefore must participate in determining the future direction of
the firm in which they have a stake.18 Furthermore, it can be mentioned that stakeholders
have not just an interest in the activity of company but also a degree of influence over the
shaping of those activities. This influence is so significant that some authors argue that the
power of stakeholders can amount to quasi-ownership of the organization.19
14
supra note 9, p.9
Freeman, E. and Reed, D. in Dienhart, J.W, supra note 13, p.249
16
See for example the Statement of General Business Principles (1997), where Royal Dutch/Shell Group
specifies its sphere of influence.
17
supra note 9, p.9
18
supra note 15, p.247
19
supra note 8, p.4
15
7
The worldwide practice demonstrates the vast number of examples when TNCs had to turn
down the activity due to the firm pressure of NGOs, customers or local community. The case
on Brent Spar oil platform of Royal Dutch Shell in the North Sea is a vivid example to this
argument. In 1995 environmentalists from Greenpeace learned that the UK government had
granted permission for Shell Oil to dump a huge, heavily contaminated oil installation - Brent
Spar, into the North Atlantic despite it being loaded with toxic and radioactive sludge.
Greenpeace went into action with plans to take over and occupy the rig to prevent the
dumping successfully galvanizing the public opinion. Soon, consumer boycotts hit Shell’s
retail business and Shell gasoline stations came under violent attacks. The publicity led the
oil company to drop its plans in 1995 and no oil structures have been dumped at sea since
then.20
Thus, the stakeholder approach can be define as a generalization of the notion of
shareholders, which means that just as shareholder have a right to demand certain actions by
management, so do other stakeholders have a right to make claims. 21 However, the exact
nature of these claims is a difficult question that should be addressed. Undoubtedly, that TNC
is obliged to respect the rights of its employees and other stakeholders who are directly
affected by its activity. However, it is questionable whether the multinationals’ obligations go
beyond the duty mere to not interfere with the enjoyment of human rights by its stakeholders.
This particular issue is one of the core subjects within the present study and requires more
detailed scrutiny, which would be explored further below.
(iii) Socially Responsible Investment and its strategies
Needless to say that every investor seeks a favourable and stable environment with legal
certainty and harmony, fair relations with host state and an investment-friendly climate. In the
meant time, every business must take the social environment into account when making
economic calculations. Whether described as social investing, ethical investing, mission-based
investing, or socially aware investing, SRI reflects an investing approach that integrates social
and environmental concerns into investment decisions.
20
The disposal of disused installations was discussed at the Ministerial Meeting of the OSPAR Convention in
Portugal in July 1998 (OSPAR: Convention for the Prevention of Marine Pollution by Dumping from Ships and
Aircraft, signed in Oslo on 15.02.1972). For more information:
http://europa.eu.int/scadplus/leg/en/lvb/l28053.htm
21
supra note 15, p.249
8
SRI is a growing business, which has long historical roots in the US, dating back to the late
1700s when religious investors (such as the Methodist Church, Church of England, Society of
Friends or Quakers) decided not to invest in companies engaged in alcohol, defence,
gambling and tobacco. In the 1970s and 1980s, SRI re-emerged as a means to put economic
pressure on the South African government to end apartheid.22 In recent years, the interest in
SRI has grown significantly around the world given with a positive impact on performance.
Although SRI becomes the prominent characteristics of the current paradigm of global
economy, there is still no single definition of it. The US Social Investment Forum (US SIF)
determined that SRI is an investment process that considers the social and environmental
consequences of investments, both positive and negative, within the context of rigorous
financial analysis. It is a process of identifying and investing in companies that meet certain
standards of CSR and is increasingly practiced internationally.23 Thus, the SRI brings the
notion of CSR at the international marketplace and regards to the operations of companies
beyond their national borders. As was affirmed by Russel Sparkes, “CSR and SRI are in
essence mirror images of each other. Each concept basically asserts that business should
generate wealth for society but within certain social and environmental frameworks. CSR
looks at this from the view point of companies, SRI from the viewpoint of investors in those
companies.”24
According to D’Antonio and Jonsen SRI rests on three main characteristics: the first is a belief
that the private sector is a critical vehicle for accomplishing social objectives through positive
or negative reinforcement; the second, that Socially Responsible Investors 25 are advocates for
social change, and the third, that Socially Responsible Investors are willing to put their money
where their heart is, but still demand no less of a financial return (or not significantly less) that
they might get with traditional investment vehicles.26
With the purpose to promote socially and environmentally responsible business, the
following dynamic strategies of SRI were indicated:
“Self-regulation in the Workplace: Codes of Conduct, Social Labeling and Socially Responsible Investment”
Urminsky, M. (ed.), ILO, p.47
23
Report on Socially Responsible Investing Trends in the United States, Social Investment Forum (SIF Industry
Research Program, Dec 2003), available at http://www.socialinvest.org
24
Sparkes, R. “Socially Responsible Investment: A Global Revolution” (West Sussex, 2002), p.42
25
Social investors include individuals and institutions such as corporations, universities, hospitals, foundations,
insurance companies, pension funds, nonprofit organizations, churches, etc.
26
D’Antonio and Jonsen in “Human Rights, Corporate Responsibility: A Dialogue” Rees, S., Wright, S. (eds)
(Pluto Press Australia Ltd, 2000), p.48
22
9
(1)
Screening - is the practice of including, excluding, or evaluating publicly traded
securities from investment portfolios or mutual funds based on social and/or
environmental criteria. Generally, social investors seek to own profitable companies
that make positive contributions to society. ‘Buy’ lists include enterprises with above
average to best in class employer-employee relations, strong environmental practices,
products that are safe and useful, and operations that respect human rights around the
world.27
(2) Shareholder Advocacy - describes the actions many socially aware investors take in
their role as owners of corporations. These efforts include dialoguing with companies
on issues of concern, as well as filing, co-filing, and voting on proxy resolutions.
(3)
Community Investing - is capital from investors to communities that are underserved
by traditional financial services. It provides access to credit, equity, capital, and basic
banking products that these communities would otherwise not have. The community
investing makes it possible for local organizations to provide financial services to lowincome individuals, and to supply capital for small businesses and vital community
services, such as child care, affordable housing, and healthcare.28
In respect of the investing screening, this concept stemmed from the activity of the religious
investors, who were running investment portfolios subject to certain ethical constraints as
indicated above. They used a simple avoidance approach with investment portfolios excluding
certain sectors of the stock market including alcohol, tobacco, guns, pornography, and
gambling (‘sin stock’). Positive screening is based on the principle that investors wish to
actively support companies whose social and environmental records are consistent with good
corporate citizenship. This strategy is motivated by the desire to set standards for, and
improve, corporate social and environmental performance. Thus, the screens are used to
eliminate some companies from consideration and to monitor those companies that are
selected for the portfolio.29
Community investing is also the fastest growing component of SRI especially in the US, with
assets in community development financial institutions (CDFIs) nearly doubling over the past
several years. According to the Community Investing Program, a project of the SIF and Co-op
America, total assets held by CDFIs in the US grew 84 percent during that period, from $7.6
27
The investment screening is a significantly growing tendency. For example, in the USA the total screening
grew up from $529 billions in 1997 to $2,143 billions in 2003.
28
supra note 23, p.3
29
supra note 23, p.5
10
billion in 2001 to $14 billion in 2003.30 Community investing is targeted to offer the financial
services to economically disadvantaged people who are underserved by traditional financial
institutions.
Besides the ‘screened’ funds and community investing, there has been increasing interest in
the rights and opportunities that investors may have to engage with companies to influence
their environmental and social performance. Being shareholder is not just about putting money
into a company that gives a good return for the investment, it is also about using the possessed
rights and powers to make a company take notice of issues concerned. The shareholder
activism means the use of voting rights attached to ordinary shares to assert political, financial
or other objectives. Particularly it occurs when a group of shareholders get together to raise
public awareness of something that a company is doing, and it represents an attempt to use
shareholder’s unique power as the owners of companies to facilitate changes.31 The US SIF
classified the following types of shareholder advocacy: writing letters to management;
initiating negotiations (dialogue) with top executives; filing shareholder proposals
(resolutions); voting proxy ballots regarding shareowner- and executive-proposed resolutions;
attending annual meetings and speaking on behalf of an issue; or, as a last resort, joining in
class action legal suits.32
Among the listed types of advocacy the proxy resolutions play a significant role in
considering the social issues being the formal communication channel between shareholders,
management, and the board of directors. According to the data of US SIF between January
2001 and June 2003, shareholder advocacy resolution filing in the US increased by 15 percent,
rising from 269 social and ‘crossover’ resolutions filed in 2001 to 310 in 2003.33 With regard
to other countries, in the UK shareholder activism has been also tried on a significant scale. 34
However, in Canada the shareholder activism was illegal until late 2001, while practical
obstacles in continental Europe and Asia still make it very difficult.
Baue, William “Top Five Social Investing News Stories of 2003” (SocialFunds, Dec. 2003), available at
http://www.socialfunds.com/news/article.cgi/article1299.html
31
supra note 24, p.29
32
supra note 23, p.15
33
supra note 23, p.13
34
The actual beginning of UK shareholder activism on SRI issues can be precisely dated to 1997, when Shell
was the first-ever British company to face the social resolution. The Company’s management was requested to
behave in a more socially and environmentally responsible way, asking the company to draw up a detailed policy
on the environment and human rights, with a specific board member responsible for its implementation, and that
it should be independently audited. For more information see Sparkes, R. supra note 24, p.35
30
11
Although the shareholder activism has always been an integral part of SRI, it is not always the
prompt and successful measure for the improvement of corporate behavior. For example, it is
extremely rare for a social proxy resolution to actually win 50% of the vote. Any social proxy
that receives 10% or more is normally considered to be a great success. Besides, the process
of filling and considering the resolutions usually takes several years before its final outcome.
As a result, the increasing attention is given to the authorities of company’s fiduciaries that
perform the day-by-day administration of corporate entity and make the decisions by
encompassing the social and environmental issues.
(iv) Corporate governance and social investing
Social and environmental issues and corporate governance concerns have historically been
viewed as entirely separate and different constituencies. Today, this agenda is converging
rapidly. One of the principal drivers of that convergence has been the mounting empirical
evidence that CSR issues are entirely legitimate concerns for advocates of fiduciary
responsibility and good corporate governance.35 Corporate failings have been widely
attributed to insufficiencies in governance, not only with regard to financial performance, but
also in relation to damaging social and environmental impacts. The Enron Corporation has
become a symbol of potential excesses of unchecked capitalism. Its spectacular failure,
following the discovery of its corporate misdeeds, and the failure of its corporate auditors, the
formerly lionized Arthur Andersen firm, has done more to put business ethics, corporate
governance and CSR centre stage than any amount of good-natured campaigning ever could.36
The management plays a special role having the duty of safeguarding the welfare of
corporation and balancing the multiple claims of conflicting stakeholders. The managers’
actions are not totally prescribed by corporate procedures and as such they often have to make
choices on behalf of the corporation. The practice shows that the corporate decisions
involving the exercise of executive discretion for benefits other than the narrow business
concerns can enhance the overall image of the individual company. In the UK, the Body Shop
and the Co-op ate often held up as good examples of enterprises in which there is a deliberate
policy to allow executives to perform discretion for causes that are wider than strictly business
concerns.37
Matthew J.Kiernan “Corporate Social Responsibility – the Investor’s Perspective” in John Hancock (ed)
“Investing in Corporate Social Responsibility” (Kogan Page Ltd., 2004), p.75
36
John Peters in Crowther, D., supra note 8,p.206
37
Donna Wood in Addo, M., supra note 3, p.18
35
12
Unfortunately, the actual impact of fiduciary obligations upon social investing has received
comparatively little attention. Probably one of the reasons is that the concept of fiduciary
responsibilities is conceived to be more related to the notion of CSR. However, it can be
affirmed that the management of corporation possess almost the equal degree of influence
over the investment decisions along with their shareholders. Besides as a fiduciary (the
officer, manager, director, trustee or other functionary), the corporate director’s relationship is
not with the shareholder personally but with his investment.38 As Steve Viederman, the
founding director of the Initiative for Fiduciary Responsibility, states - "fiduciary
responsibility for the 21st century must require consideration of the social, environmental,
political, and cultural effects of investments, both positive and negative, over the short and
long term as a fundamental part of the investment process."39
Initially, the fiduciary duties were imposed on the trustees40 in order to protect legal owners
who were not in position to manage their own affairs from the unscrupulous self-dealing of
those administrators the incompetent were forced to rely upon. This concept resides mainly in
the legal systems of the UK, and the US, and requires of trustees honesty, adequate care for
the entrusted property, providing the owner with any relevant information, avoiding any
unauthorized personal gain.41 However, when shareholders have challenged management’s
actions as being too generous to other stakeholder groups then the courts have ‘almost always’
upheld the rights of management to manage. Management’s justification of defence has often
been on rational business performance grounds, such as efficiency or productivity, and the
accuracy of such claims is difficult to prove.42
The Michigan case Dodge Brothers v. Ford is a prominent example of the limited capability
of shareholders to interfere with the managerial decisions. In this case the Court did not hold
that investors could interfere with managerial business planning or insists that their immediate
financial gain become the only consideration of the board of directors. The judge actually
dismissed most of the complaints filed by the shareholders, holding that Company’s directors
38
In accordance with the common law system the directors owe their duties to the company and not to the
individual shareholders. This position was affirmed by the Court in Multinational Gas and Petrochemical Co v.
Multinational Gas and Petrochemical Service Ltd. (1983); Percival v. Wright (1902) 2 Ch.421. For more
information see Farrar, J.H. & Hannigan, B.M. “Farrar’s Company Law” (Butterworths, 1998), p.378; Fisher, J.
& Bewsey, J. “The Law of Investor Protection” 2d edition (Sweet&Maxwell, 2003), p.508-509
39
Viederman, S. in Baue, W. “Fiduciary Duty, Undivided Loyalty, and Socially Responsible Investment
Performance” (Oct., 2004), available at http://www.socialfunds.com/news/article.cgi/article1530.html
40
The trustee is an individual or body given possession of trust property with legal obligation to administer it
solely for the purposes set out in that trust. The directors are recognized as trustees of company property under
their control.
41
Marens, R. and Wicks, A. in supra note 13, p.259
42
Cooper, S. “Corporate Social Performance: A Stakeholder Approach” (Ashgate, 2004), p.18
13
had the right to plan the business as they judged best, free from second guessing on such
business decisions and certainly under no obligation to forego these in favor of distributing
further dividends.43
Accordingly, the fiduciaries can hold firm authorities and have an important influence on the
social performance of company. In fact, the fiduciary duties do not limit managers to a very
narrow shareholder approach inasmuch as meeting these duties to shareholders does not mean
that managers must side with shareholders and against other stakeholders. The main objective
of management is to keep the relationships among stakeholders in balance.
In this context, it seems to be vital for management to take the right course in balancing the
different rights between, from the one hand, ultimately priority accorded to some basic rights
and, from the other, priorities in the adjustment of these rights against the company’s
objectives. Professor Leader introduced the concept where certain human rights can have a
lower priority in adjustment as compared with others, and the former have this quality because
they are collateral to the objectives of the corporation in question. In other words, the rights
are taken seriously in that they are given ultimate priority, but they are shaped in a particular
way that reflects the fact they fall to one side of the direct concerns of the organization.44
To bring an example, the consortium of multinationals in Baku-Tbilisi-Ceyhan (BTC)
petroleum pipeline project45 has declared that it intends to respect all relevant human rights
during the lifetime of the project. However, in working out its legal liabilities, it drew a sharp
line between its obligations to compensate someone once damage occurs and an obligations to
allow the state to intervene proactively, stopping the project if necessary in order to prevent
risk from such damage arising in the first place. Thus, the consortium refused any significant
interference by the state with the running of the project, even for valid human rights reasons,
on the ground that limiting itself to the compensation strategy will have less of an impact on
revenue. The corporation has thereby given ultimately priority to a right to a safe
environment, but it has given in adjustment to the property rights of its investors. According to
Professor Leader the consortium sought this adjustment not because it simply has preference
43
Marens, R. and Wicks, A. in supra note 13, p.260
Sheldon Leader “Collateralism” in R Brownsword (ed) “Global Governance and the Search for Justice”
(2005), p.55
45
BTC is the project on building two pipelines (oil and gas) from terminals near the Caspian Sea, though
Azerbaijan, Georgia and Turkey. The partners of the consortium are BP (UK), TPAO (Turkey), Statoil (Norway),
Unocal (USA), Eni (Italy), etc. For information visit www.caspiandevelopmentandexport.com
44
14
for building and operating the pipeline at a profit, but because it feels that this is its primary
mandate, i.e. this is what the corporation believes fidelity to its legitimate role requires. 46
Having arrived at that conclusion we can affirm that the companies’ approach towards human
rights obligations is primarily determined by its corporate objectives. In turn, these objectives
are set forth in the constitutional documents of company such as memorandum, articles of
association, charter, foundation agreement, etc.47 Thus, in order to require the corporations to
give central place to human rights obligations, which seems to be beyond their ambit, it is
important to revise the legal nature of company’s constitutions. By virtue of the constitutional
documents the principles of sustainable development and respect for human rights can be
embedded in corporate objectives. Accordingly, the fiduciaries will have to pursue this
objective along with other purposes being in charge of following the company’s directions.48
Otherwise, the management can be held accountable for breach of its fiduciary duty.
The shareholders also play the key role being entitled to constitute the content of
memorandum and articles of association as the owners of company. However, we have
already seen that the movement of shareholder activism is extremely slow and it takes years to
come up with the final solution. In this regard, the obligatory provisions of domestic law that
establish the requirements to include the social and environment concerns to corporate
constitutions, could efficiently stimulate corporations to pursue these objectives.49 Thus, the
combination of the moral and legal measures would have more productive results on the
promotion of social responsibility.
It is suggested that one of the obstacles for improvement of corporate governance is the moral
origin of corporate human rights obligations rather than firm legal grounds. Number of
companies has commenced to identify human rights as their corporate responsibility;
however, this recognition is realized under the umbrella of voluntary initiatives. There are still
46
supra note 44, p.55-56
The range of corporate constitutions varies from country to country and depends on the domestic legislation
and relevant requirements for business enterprises.
48
Directors manage the company in accordance with the articles of association. The articles of association are the
internal regulations of the company, which determine how the powers conferred on the company by the
memorandum of association should be exercised. For more information see Farrar, J.H. & Hannigan, B.M. supra
note 38. See also Bishopsgate Investment Management Ltd [1993] BCC 140
49
The recent step towards this tendency is the Pensions Act adopted by UK government in July 2000, which
require all occupational pension funds to declare whether and how they integrate social and environmental
factors in their investment decisions. A survey conducted by Environmental Resources Management in 2000
revealed that 21 of the UK’s largest 25 pension funds intended to implement SRI principles, representing nearly
half of the US$1.2 trillion in UK pension fund assets, which makes up about a third of all investment in the UK
stockmarket. For more information see Tomas Clarke and Marie de la Rama in Crowther, D. supra note 8, p.174
47
15
no direct international obligations to oblige corporate private actors to respect and fulfill the
fundamental human rights.50 Nevertheless, we should not undermine the importance of moral
obligations due to their close relationship with legal obligations inasmuch as today’s social
concerns are likely to be tomorrow’s legal obligations. The development of legal obligations
relating to environmental matters and corporate criminal responsibility are good examples of
this progressive concept.51 However, in practice we still witness the frequent unwillingness of
corporations to extend their social responsibility beyond those imposed by the law. Thus, one
of the ways to be suggested for expanding the fiduciary obligations can be redefining the
directors’ responsibilities by virtue of imposing the relevant norms within the domestic
legislation.52 However, it can be pointless to define responsibility in terms of national
jurisdiction only, while the TNCs continue to have ease of movement between countries. The
human rights standards will therefore need to be globally acceptable and compatible with
existing rules and practices.
(v) Summary
On the basis of foregoing discussion it has been made evident that the notions of CSR and SRI
are interrelated and interdependent. The CSR means open and transparent business practices
that are based on ethical values and respect for its stakeholders by keeping the balance among
the interests of each stakeholder group. In turn, SRI is the process of investing on the basis of
CSR standards and can be characterized as the way of promotion of these standards beyond
the national boarders.
In the light of presented arguments it becomes more apparent that a new approach for SRI
strategies should be developed. The notion of social investing can be extended beyond the
shareholder approach involving the obligations of directors to improve the corporate
governance by means of observing the human rights obligations while planning or/and doing
business in the developing countries. Nevertheless, this question is still unsettled, and the
challenge remains to find the most effective ways to promote the corporate social obligations.
However, taking into account the limited framework of this study as well as the necessity to
examine other substantial issues of dissertation, this question is to be left to outside of this
work.
50
The international criminal responsibility is beyond the framework of this study.
Addo, M., supra note 3, p.16
52
For example, under s.309 of the UK Companies Act 1985 the directors of a company are now obliged to have
regard to the interest of employees.
51
16
II. THE RELATIONS BETWEEN TRANSNATIONAL CORPORATIONS AND
STATES IN TERMS OF HUMAN RIGHTS OBLIGATIONS
(vi)
The nature and scope of TNCs’ human rights obligations
(vii)
Host State and FDI: the models of good, weak and bad governments
(viii)
Political influence of TNCs versus the national sovereignty of Host State
(ix)
The extraterritorial jurisdiction of Home State towards human rights
protection
(x)
Summary
__________________________________________________________________________
“What ultimately matters is what a company does in practice about human rights, not what it
declares in its company code.”
- Christopher Avery, Director of Business and Human Rights Resource Centre
As was clearly seen in the previous chapter the TNCs are in the process of transformation and
adapting new challenges in the realm of social responsibility. Since corporations, through
their activities, have far-reaching effects on national economies and political systems, they
have become very visible in international relations and the most attacked agents in terms if
their social and environmental impacts. The aim of this chapter is to examine the nature of
relationships that arise between TNCs and host states in terms of human rights protection.
First, the nature, scope and limits of TNC’s responsibilities will be explored, along with the
extent of corporate influence on human rights in the developing countries. Meanwhile, the
special attention would be given to the rationale of TNC’s positive obligations and their
interactions with the internal affairs of the host states.
(i)
The nature and scope of TNCs’ human rights obligations
Before embarking upon the analysis of the main question on the nature of relationships
between TNCs and host governments, the scope and extend of corporations’ human rights
obligations needed to be clarified. Traditionally, the states are conceived the primary bearers
of obligations; however, this fact does not imply that it is only the states which has such
responsibility. As Professor Asbjorn Eide, the former UN Sub-Commission Special
Rapporteur on the Right to Food, pointed out: “it should be kept in mind that all members of
17
society share a responsibility for the realization of human rights.”53 This statement has the
sound legal substantiation that was enshrined in the preamble of the Universal Declaration of
Human Rights (UDHR) where “every individual and every organ of society shall strive to
promote respect for rights and freedoms”.54 This provision is one of the key panaceas for
human rights activists to advocate that the private enterprises (as the “organs of society”)
should be held responsible for the breach of international human rights law.55
Nevertheless, despite these persuasive arguments there still remains the gap in understanding
the nature of corporate responsibilities that leads to the inconsistent practice between
companies and host states. With the purpose to unravel this issue Nicola Jagers suggested the
following classification of corporate human rights obligations:

To respect — negative obligation, which entails limits on the exercise of corporate
power that might threaten directly or indirectly with the enjoyment of the human
rights;

To protect — requires corporations to take measures aimed at preventing human rights
violations by third persons. For example, through contracts or otherwise, the
corporations should ensure that their partners do not violate human rights;

To fulfill — is usually considered the most controversial. By virtue of this obligation a
corporation may have a certain degree of responsibility towards society, which
requires adopting the necessary measures to achieve the realization of human rights.

Not to co-operate- requires from the corporation to either abstain from operations in
states where widespread and systematic human rights abuses occur, or to take
measures to ensure that its operations do not amount to complicity in these
violations.56
Unfortunately, we cannot examine the mentioned obligations in detail because of the work’s
space constraints. However, it is important to consider the main concern of multinationals and
human rights advocates - Whether the TNCs have to go beyond the negative obligations
53
Asbjorn Eide, UN Doc. E/CN.4/Sub.2/1987/23, 7 July 1987, para 65
UDHR was adopted on 10 December 1948 as the first set of minimum standards of human rights accepted by
all the member states of the newly-formed United Nations.
55
See also Steven Ratner “Corporations and Human Rights: A Theory of Legal Responsibility” (111 Yale Law
Journal, Dec.2001) 443. Professor Ratner substantiated that international law has already recognized human
rights duties on private entities other than states.
56
Nicola Jagers “Corporate Human Rights Obligations: in Search of Accountability” (INTERSENTIA, 2002),
pp.79-94
54
18
(merely not to interfere with the enjoyment of human rights) and to contribute to the whole
society by improving the social and environmental conditions. In other words, it is essential to
determine the boundaries between responsibilities of TNCs and obligations of the host state so
that business entities do not take on the public role of government.
One of the widespread opinions is that companies can be powerful tools for social and
political changes; consequently, they should take over positive responsibilities even if there is
no connection between human rights abuses and multinationals’ activities. Margaret Jungk
determined that once a company has ‘direct connection’ with human rights violations it can
incur ‘positive’ obligations and be expected to speak out or act on behalf of the oppressed
population.57 In turn, Ratner argues that “extend their [corporations’] duty away from a
dictum of ‘doing no harm’ – either on their own or through complicity with the government –
toward one of proactive steps to promote human rights outside their sphere of influence
seems inconsistent with the reality of the corporate enterprise.”58 Accordingly, the scope of
companies’ commitment to support and respect human rights is limited to their own sphere of
influence (SOI). The notion of SOI could ensure that business entities are not forced to
undertake over-burdensome human rights responsibilities, but only responsibilities towards
people within their SOI.59
This suggestion may sound reasonable, but what is corporate SOI, and how should
corporations determine the relevance of human rights to their business? The concept of SOI is
not precisely defined by international human rights law; it will tend to include the individuals
to whom the company has a certain political, contractual, economic or geographic proximity.60
According to Lee A. Tavis, “the sphere of influence is a limiting factor, although some
managers see it as extending their stakeholder boundaries such as to include the stakeholders
of firms to whom they subcontract. But, by limiting responsibility to the sphere of influence,
the enterprise is not held accountable for the human rights of those with whom it does not
have some kind of linkage.”61
In contrast to this view, Statoil, the Norwegian energy group, declared that company should
make a contribution to meeting national challenges such as poverty, corruption and the abuse
Margaret Jungk “A Practical Guide to Addressing Human Rights Concerns for Companies Operating Abroad”
in Addo, M., supra note 3, p.178
58
supra note 55, p.28
59
Report of the UN High Commissioner on Human Rights on the responsibilities of transnational corporations
and related business enterprises with regard to human rights, E/CN.4/2005/91, Feb.2005, p.14
60
“Embedding Human Rights in Business Practice” Joint Publication of UN Global Compact & OHCHR, p. 17
61
Lee A. Tavis “The UN Global Compact Principles and Multinational Corporate Standards.” Available at
http://www.novartisfoundation.com/en/articles/human/symposium_human_rights/speeches/speech_tavis.htm
57
19
of human rights, as well as taking responsibility for the direct impacts that its business
operations have on society. In Venezuela Statoil works with government, Amnesty
International and the UN Development Programme to train judges in human rights and help
vulnerable and excluded groups to find work. It supports efforts to combat discrimination
against the indigenous people of the Orinoco delta, where much oil is produced. Company
believes that all these issues lie within its SOI.62
Certainly, not all companies would take such a broad view of their human rights
responsibilities. Most of them still take a minimalist approach, referring only to issues for
which their industry has been criticized. For example, the codes of conduct of many apparel
companies have provisions about working conditions and child labor or forced labor. There is
seldom any reference at all to the company’s responsibility to support and promote
fundamental human rights in the wider society where it operates.63
Further, among the arguments against the positive obligations of TNCs the key one stands that
those obligations attempt to replace government with business by obligating business to
provide essential goods or services (such as housing, food, healthcare or education) that are
pure government responsibilities. Furthermore, Jungk considers that imposing the positive
duties on TNC can be too soon in most cases inasmuch as the company risks the accusation of
meddling in the governmental realm and interfering with the right to self-determination with
no clear positive responsibility to do so.64 As a result, the highly complex question arise Where to draw the line as to what is in the sphere of government and the public sector and
what is, or should be, within the realm of business?
According to Patrick Butler the role of TNCs is becoming so heavily integrated into the
political system as to blur the boundaries between public and private organizations,
particularly in the extent to which TNCs serve and are responsible to the public.65 Thus, being
the part of society is not a simply matter of passive duty; the key principle of CSR is the
contribution to social and environmental objectives.
Alison Maitland “A Widening Sphere of Influence” (Dec.2001) Available at
http://spinwatch.server101.com/modules.php?name=News&file=article&sid=301
63
Chris Avery “Business and Human Rights in a Time of Change” in “Liability of Multinational Corporations
under International Law” Menno T. Kamminga & Saman Zia-Zarifi (eds) (Kluwer Law Int., 2000), p.58
64
Margaret Jungk “A Practical Guide to Addressing Human Rights Concerns for Companies Operating Abroad”
in Addo, M., supra note 3, p.178
65
“The New Sovereigns: Multinational Corporations as World Powers” Abul A.Said&Luiz R.Simmons (eds)
(New Jersey: Prentice-Hall, 1975), p.53
62
20
Whatever the case, the decision on expanding of positive impact on the world around still
stands for the company itself. The voluntary aspect of corporate responsibility gives to TNCs
the possibility to go above or beyond existing requirements and standards. Undoubtedly, that
the prime reason why paying attention to human rights is the increasing importance for
companies of a good reputation and public image among their stakeholders. This intangible
asset triggers the corporate initiatives on contributing to the progressive realization in the
various social and environmental issues.
From a general viewpoint, the negative corporate duties do not raise much doubt as TNCs
must refrain from human rights violations; whereas, multinationals’ positive obligations still
fuel the critical corporate resistance. In fact, it is feasible for companies to create positive
societal value by engaging in, for example, innovative social investment, stakeholder
consultation, policy dialogue and building civic institutions, alone or with other companies. In
some cases, this interaction can arise from the obligations imposed by legislation of host state
or under the State Investment Agreements66; from the other side, the companies’ initiatives
towards building the better society still fall into their voluntary attitudes. As Mark Goyder
affirmed “the most impressive corporate leaders have always been those whose vision of a
successful business stretches beyond the product and the profits to their positive impact on the
world around them.”67
(ii)
Host State and FDI: the models of good, weak and bad governments
Another principal issue to be considered within the present discussion is the approach of host
state towards inward foreign investment. If the host state does not respect/protect the rights of
its own citizens, it may not be possible to expect a foreign investor operating in its territory to
be obliged to honour the obligations either.
Many countries have specific policies directed at inward investment and the multinational
corporations. FDI is generally understood to assist the developing countries in their efforts to
develop the national economies. At the same time, the government’s reaction to reports of
abusive practices associated with corporate presence varied. The separation between the
potential capability of host governments to exercise greater negotiating strength in their
66
For example, according to the agreement between the Republic of Cameroon and Cameroon Oil Transportation
Company, S.A (COTCO 1997), “…COTCO is bound to regularly monitor the effects of all the activities it
authorizes or carries out, in order to ensure that said activities are not dangerous for the population and do not
pollute the environment of the sea” (Art. 13)
67
Mark Goyder “Responsibility – or what well-led companies do naturally: a pattern for the future” in “Investing
in Corporate Social Responsibility” John Hancock (ed), (Kogan Page Ltd., 2004), p.199
21
relations with foreign investors and their political ‘will’ to do so should be underlined. There
is a question how to ensure the respect for human rights in situations where an effective
governance or accountability are absent because the state is unwilling or unable to protect
human rights; for example, due to a lack of control over its territories, weak judiciary, lack of
political will or corruption. In this context, the following ‘models’ of host governments may
help to understand these attitudes:
(i)
‘Good government’ endeavors to hold predominant position over the foreign
investor through establishment of effective legal and administrative systems
(Kazakhstan, Iran, Guatemala).
(ii)
‘Weak government’ attempts to promote ambitious economic development plans
by offering to foreign investors the conditions that will be highly attractive to
them. Such kind of countries has erratic or poor human rights records being too
willing to ignore irresponsible corporate practices (Indonesia, Mexico, Chad,
Cameroon).
(iii)
‘Bad government’ sustains or perpetrates severe human rights violations. These
states also are highly attracted by the foreign investment and build the favorable
environment for inward FDI usually at the expense of brutal oppression of people’s
resistance (Burma (Myanmar), Sudan, Afghanistan, Angola).
Good government
The specific feature of ‘good government’ is that it can offer the favourable investment
opportunities, keeping, at the same time, its social and economic interests at stake. Those in
the strongest position are usually the semi-industrialized countries with large and rapidly
growing markets in which TNCs want to maintain or enlarge their share of local
consumption, even if they have to accept limiting conditions.68 These states tend to put in
place regimes not only to promote but also to regulate the foreign investors. As a result, the
‘good governments’ have more capabilities to improve the human rights situations by means
of foreign presence at their countries. For these countries the real issue is how to use the
economic power of the TNCs to achieve their objectives by directing them toward
development goals. The practice illustrates that the host state can use the following models of
behaviour for maximizing the benefits from foreign investment to realization of its national
objectives.
“Private Direct Foreign Investment in Developing Countries”, World Bank Staff Working Paper No.348,
1979, p.14
68
22
I model: The host state can use the revenues received from companies for improving the
social and environmental situation in the country.
In fact, this model is used by all countries by virtue of the taxation scheme and control over
the financial returns from investing activity. The ‘good government’ tends to turn the received
revenues to the realization of its social policy by means of its fair redistribution in the society.
For example, in 1972 Jamaica elected a new government under the leadership of Michael
Manley whose avowed aim was to eliminate unemployment, poverty and inequality. The main
source for the social programs undertaken by the government was the increased taxes being
paid by the aluminum companies. The investors refused at first to pay the increased levies but
then they accepted the new requirements. As a result, government’s revenues on bauxite and
alumina rose from $28 million in 1972 to $187 million in 1974. The local schools were
expanded and made available to all, nurses and doctors were brought to the countryside, and
government employment programs were set up.69
Although this model can be very feasible in terms of the realization of national goals, the host
state should not overdo this strategy inasmuch as there is also the risk of corporate resistance
and shifting TNCs’ operations to the countries with softer tax policy. Turning to the same
example, the aluminum corporations in Jamaica did not put up with the new governmental
tax policy and retaliated by gradually shifting their operations out of the country.
Consequently, the Jamaican government’s revenues dropped rapidly over the next several
years and conditions in the country gradually worsened – unemployment was at 30 percent,
living standards was lower in 1980 than they had been in 1960, inflation has reached levels as
high as 47 percent, violence and acute shortage of food and other basics were common,
besides the country had an enormous debt.70 The observers emphasized that in this case the
foreign investors were not solely to blame for the terrible situation that country found itself in
at the end of the 1970s. Much of the blame for Jamaica’s problems was attributed to mistaken
government policies.71 Thus, it is common practice when the possibility that a TNC might
move from a developing country seeking to control it to another would seem to prevent these
countries from implementing policies that are necessary for national development.
Manuel Velasquez “International Business Ethics: The Aluminum Companies in Jamaica” supra note 13,
p.302
70
ibid
71
ibid
69
23
II model: Host government imposes directly on TNC the obligations to make positive
contribution to the state’s social development.
The ‘good government’ can impose on TNCs the direct obligation to contribute to the welfare
of society through building the public institutions (schools, clinics, universities, etc.);
development of various social programs; increasing the employment attitude and so forth. For
example, the government of Kazakhstan demands from the foreign investors to uphold the
state employment policy by providing the local population with additional job places.72
Ministry of Labor and local municipalities are directly in charge of the realization of this
policy by controlling the foreign investors’ activity.
Unfortunately, not all developing countries are in the position to achieve their objectives by
directing the TNCs’ economic power towards creating the better societal value. The
bargaining power of host states vis-à-vis TNCs primarily depends on the existence of national
institutions capable of carrying out well-defined policies, laws and procedures. Another
principal obstacle to be mentioned in this context is the contractual obligations undertaken by
the government under foreign investor agreements. The distinctive feature of such
agreements is the protection of the foreign investor from the consequences of any changes in
national and international legislation that might hamper its interests. This feature is called
‘the stabilization clause’ and would be explored further in the next chapter of this work.
Weak government
In contrast to the ‘good government’ there are still many developing countries which face with
pressures to attract foreign investment and have little or no alternative but to be obedient to
the terms of TNCs. Generally, these countries have limited market potential, a lack of human
capital and/or with small resource endowments, and do not have a strong and effective
administration to negotiate with TNCs from a position of strength. These countries often try to
attract TNCs by offering a wide range of incentives – from tax holidays to government credits
– which usually cannot offset their disadvantages as loci for investment. They try to keep the
multinationals within their boarders with the purpose to take advantage of the potential
benefits that could flow from the operations of TNCs.
72
See The Rules on determination of quota and issue to employers the permissions for import of foreign labor
force to the Republic of Kazakhstan, N 836 dated 19.06.2001
24
Needless to say that ‘weak government’ is ready to sacrifice its human rights obligations in
exchange for the profitable foreign investment. One of the ways to do so is the enactment of
relevant legislation in order to mitigate the presence of corporations in these countries. For
example, Korea has adopted legislation for forbidding strikes against American corporations;
in Singapore the labor legislation has also been enacted to keep union activity and wages
down.73
Another prominent example to be presented at this point is the obligations of Turkey under
the BTC pipeline project. This project place restrictions on Turkey’s ability to fulfill its
human rights mandate, which could undermine the human rights of local population,
endanger the environment, and fuel the further conflict in a region that suffers from ethnic
tension.74 Being anxious for inward investment Turkey more likely will move its human
rights obligations to the background scene providing with a higher level of legal protection
for foreign investment than for human rights standards.
Bad government
It is important to understand the distinction between ‘ineffective’ governments, which are too
weak and ineffective to secure human rights even if they acknowledge and respect them, and
‘oppressive’ governments, which endorse and perpetrate human rights violations through
their laws and practices. In fact, many foreign investors are increasingly accused for the work
along with the small coterie of the ruling elite in the host state who profit from the making of
these investments and jointly exploit the resources of the host state. Such claims are usually
made in totalitarian states or countries where the armed conflict occurs.75 In recent times,
they have been made in connection with the military rulers of Burma and the former military
rules in Nigeria, the regime of Suharto in Indonesia and the regime of Marcos in the
Philippines.76 The involvement of corporations in such situations usually is of an indirect
nature, where TNC stands by and benefits from human rights abuses that are committed by
the host state.
In general terms, corporate complicity means that a company is participating in or facilitating
human rights abuses committed by others, whether it is a state, a rebel group, another
Kwamena Acquaah “International Regulation of Transnational Corporations: The New Reality” (New York:
Praeger, 1986), p.152
74
“Human Rights on the Line: The Baku-Tbilisi-Ceyhan pipeline project”, Amnesty International UK (2003), p.6
75
The Secretary-General of UN has noted that “companies take advantage of, maintain and have even initiated
armed conflicts in order to plunder destabilized countries to enrich themselves, with devastating consequences
for civilian populations.” (UN Report, S/2002/1300, para.58)
76
Sornarajah, M., “The Settlement of Foreign Investment Disputes” (Kluwer Law International, 2000), p.75
73
25
company or an individual. The following situations clearly illustrate the forms of complicity:
first, when the company actively assists, directly or indirectly, in human rights violations
committed by others; second, when the company is in a partnership with a government and
could reasonable foresee, or subsequently obtains knowledge, that the government is likely to
commit abuses in carrying out the agreement; third, when the company benefits from human
rights violations even if it does not positively assist or cause them; and fourth, when the
company is silent or inactive in the face of violations.77
To date, one of the prominent examples of corporate complicity is the case against Shell78,
where the company was accused to be accomplice in the hanging of two leaders of the
Movement for the Survival of the Ongoni People in Nigeria. The claim also stated the
violations with respect to alleged participation in: crimes against humanity, violation of the
rights to life, liberty and security person, peaceful assembly and association, torture and cruel,
inhuman and degrading treatment. While the human rights violations were perpetrated by the
Nigerian military, they were allegedly instigated, orchestrated, planned and facilitated by
Shell Corporation.79
Precisely at this point, TNCs can hide behind the governments referring to their sole
responsibility to protect human rights or, conversely, can take affirmative steps to fulfill their
obligations through acting or speaking up for human rights, privately or publicly. Given the
existence of this dilemma, companies are left stumbling through a moral maze of whether to
continue the commercially successful business or whether to fulfill an obscure concept of their
human rights responsibilities in states with poor human rights records.80 Undertaking or
withdrawing operations from states with bad governments is an issue which can directly affect
company’s reputation and therefore its long-term economic prospects, it is likely that
companies perceive the normative and commercial aspects of the decision as inseparable.
However, they should be separated if the human right aspects are to be given their due
consideration.81
The human rights advocates insist that it is a responsibility of corporations to make
improvements in a country where obvious social ills or political evils take place.
Unquestionably, the companies cannot remain silent witnessing widespread human rights
International Council on Human Rights Policy “Beyond Voluntarism: Human Rights and the Developing
International Legal Obligations of Companies” (Geneva, 2002), pp.125-136
78
Ken Wiwa v. Royal Dutch Petroleum Co. No.96 Civ. 8386 (S.D.N.Y 1998)
79
supra note 56, p.191
80
“Deciding Whether to Do Business in States with Bad Governments” The Danish Centre for Human Rights
(2000), p.1
81
supra note 80, p.3
77
26
violations and this is so because the responsibility to respect the rights of others is their own
rather than that of the host government. Whereas, some opponents argue that the businesses
are burdened with an unrealistic expectations to bite the hand that feeds them by requiring
them to criticize host government. Not all governments are particularly keen on human rights
protection themselves and so may not be relied upon to fully ensure that individuals, including
TNCs, comply with their responsibilities. Some governments may be deliberately ineffective
in this regard for their own selfish political reasons; besides, there may be others who would
be unwilling to insist on human rights standards because of fear of losing investment to
competing jurisdiction.82
(iii) Political influence of TNC versus the national sovereignty of Host State
While TNCs cannot be said in any credible sense to have replaced the State as the unit of
official power it must be admitted that the decisions and activities of TNCs carry considerable
weight on national and international policy-making. 83 The enhancement of TNCs’ economic
power leads to increase their political power and, as a result, the interference of TNCs with
domestic political affairs in developing countries has occurred frequently. For example,
Kwamena Acquaah suggested the following categorization of the TNCs’ tendency to subvert
domestic political affairs in the host states: 1) by co-opting the local elites; and/or 2) by using
the TNCs’ influence in their home countries to bring about pressure to keep host governments
‘in line’; and/or 3) by structuring the international system to respond to their multinational
needs to the detriment of host authorities.84
Companies are not political actors, and as a general rule they should not interfere in the
internal political affairs of the countries in which they operate. Interference can be dangerous
both for the company and the state’s political system, which should be determined by the
population and not a foreign business.85 As Patricia Werhane argues “even if totalitarianism,
apartheid, human rights violations, lack of democratic procedures, etc are evils, one surely
questions the interference of one nation with another except on very stringent moral grounds.
There is a presumption of national political sovereignty unless circumstances are most
abhorrent. Nations are independent states. If a nation seldom has justifiable moral grounds for
intervening with the autonomy of another nation, a TNC’s positive moral responsibilities to
82
Addo, M., supra note 3, p.31
Addo, M., supra note 3, p.4
84
supra note 73, p.66
85
supra note 80, p.26
83
27
become engaged in politics is even more questionable conclusion. The facts that some
multinationals have enormous capital resources, sometimes greater than the community in
which they are conducting business, should give further strength to the arguments defending
the presumption of sovereignty.”86
Thus, if corporations begin to engage in local politics of a host country they are overstepping
their bounds as multinational visitors. If successful, TNC might succeed in interfering with the
political balance of that community. The Organization for Economic Co-operation and
Development (OECD) also stresses the importance of TNCs refraining from any improper
involvement in local political activities and expresses the general expectation that business in
host countries remain separate from politics.87 One needs only to be reminded of ITT’s
interactions with the Chilean government in the 1970s to worry about this possibility.88
Whatever the case, the multinationals are urged to respect the goals and directions of host
countries’ economic and political development. TNCs’ objectives should not contravene the
components of a nation’s being and sovereignty; nor should they interfere in the internal
political affairs of host countries through improper political activities, political bribes or
questionable payments of any kind made to political candidates or public officials.89
Furthermore, the recent court practice shows that corporate complicity in human rights
violations is not left with impunity being the subject to the jurisdiction of home states. TNCs
have been frequently sued in the US and UK courts for alleged violations of human rights
occurring in conjunction with their operations in developing countries or in places governed
by repressive regimes.
86
Patricia H. Werhane in supra note 13, p.296
Ariadne K.Sacharoff “Multinationals in Host Countries: can they be held liable under the Alien Tort Claims
Act for human rights violations”, 23 Brooklyn Journal of International Law, 927 1998
88
International Telephone and Telegraph, Inc. (ITT) attempted to interfere in the 1970 election of Socialist Party
candidate Salvador Allende, who had campaigned on a platform of land reform and nationalization of key
industries in Chile. ITT's board, led by former Central Intelligence Agency Director John McCone, tried to
convince the Nixon administration and CIA to prevent Allende's election. ITT affair came to symbolize the
darkest fears of developing countries that foreign TNCs might conspire with home governments to compromise a
host nation’s political sovereignty. For more information see Meyer, W.H. “Human Rights and International
Political Economy in Third World Nations: Multinational Corporations, Foreign Aid, and Repression” (Praeger,
1998), p.177-183
89
William C. Frederick “The Moral Authority of Transnational Corporate Codes” in supra note 13, p.363
87
28
(iv) The extraterritorial jurisdiction of Home State towards human rights
protection
Despite the increasingly involvement of TNCs in human rights abuses, there is still a
‘remedial gap’ in international law when it comes to the accountability of TNCs. As a matter
of history, international law largely creates governmental liabilities yet fails to articulate the
mechanisms for regulating corporate conduct. The impoverished countries, desperate for
foreign investment, are also unable or unwilling to introduce the legal measures for corporate
accountability. It is often the case when TNCs manage to effectively escape local jurisdictions
by playing one legal system against the other, by taking advantage of local legal systems illadapted for effective corporate regulation, and by moving production sites to places where
local laws are most hospitable to them. At stake, therefore, is the widening gap between the
transnational character of corporate activity and the availability of both national and
transnational regulatory regimes that may be invoked to monitor and restrain corporations
irrespective of the territory in which they happen to operate.90
Over the last few decades the United States introduced one of the possibilities for holding
TNCs accountable for human rights violations. The Alien Tort Claims Act (ATCA)91 has been
used to permit the aliens to sue corporations for certain gross violations of human rights
committed either within the US or abroad. Initially, ATCA has been used in lawsuits against
individuals; however, recently it has been held applicable to companies. In March 1997 the
federal court in Los Angeles declared admissible the complaint filed by Burmese citizens
against the American corporation Union Oil Company of California (UNOCAL).92 This
decision was of a significant importance by opening up the possibility of holding the private
corporations liable for the violations of international human rights law. Since the 1990s,
dozens of MNCs have been exposed to such legal challenges in the US including Texaco,
Coca-Cola, Talisman, Royal Dutch Shell, ExxonMobil and Fresh Del Monte Produce. In all
these cases, plaintiffs have tried to subject TNCs to the jurisdiction of American courts in
order to overcome their inability to enjoy the protection of the local jurisdictions where the
alleged violations occurred.93
Ronen Shamir “Between Self-regulation and the Alien Tort Claims Act: on the Contested Concept of
Corporate Social Responsibility”, Law and Society Review (Dec., 2004), p.637
91
ATCA has been enacted in 1789 as part of the US First Judiciary Act.
92
Doe v. UNOCAL, 963 F.Supp. 880 (US District Court, C.D.Cal) March 25, 1997. The claim included such
human rights violations as: forced labor, crimes against humanity, torture, violence against women, arbitrary
arrest and detention and cruel, inhuman and degrading treatment.
93
supra note 90, p.638
90
29
In fact, ATCA is conceived as truly extraterritorial in its reach, potentially allowing American
courts to declare the valid human rights norms of international law and to apply them to
events that took place in other countries. Nevertheless, the nature of ATCA still remains to be
very controversial fueling the debates on global corporate liability in its relationship to state
sovereignty, international relations, and extraterritorial jurisdiction.
Despite an allegation of the extraterritorial application of the US courts’ jurisdiction, they
frequently limited the admissibility of cases by virtue of the doctrine of forum non
conveniens. The doctrine has been repeatedly invoked by TNCs in litigation as a successful
weapon to prevent themselves from high damage compensation. The forum non conveniens
gives courts discretion to refuse to hear a case where the court holds the opinion that, in the
interests of all the parties and of justice, it may be more appropriately heard in another forum.
The court might decide that the case should be tried in the courts of the country where the
alleged abuse occurred. For instance, in Bhopal case94 the court dismissed the case lodged by
the Indian government to invoke the jurisdiction of the US courts, on the basis of the motion
of American Union Carbide Corporation introducing the doctrine of forum non conveniens.95
Another principal cornerstone in attacks on ATCA is the political risk of US national interests
and amounts to an illegitimate intervention in the affairs of other sovereign states. The
developing countries have a legitimate interest in determining their own policies and if
American courts interpret the law of nations to include norms that are not sufficiently defined
or universally recognized, they will encroach on the legitimate authority of the foreign
states.96 The ExxonMobil case is one of the prominent examples on the fusing economic
interests with national security interests and with mobilizing the U.S. government to side with
TNCs in their efforts to curb the impact of ATCA.97 In this case the US State Department
submitted its opinion stating that “adjudication of this lawsuit at this time would in fact risk a
potentially serious adverse impact on significant interests of the US, including interests
related directly to the ongoing struggle against international terrorism.” Further, the opinion
noted that an important aspect of US foreign policy on increasing opportunities for American
94
Re Union Carbide Corp. gas Plant Disaster at Bhopal, India in December 1984, 643 F.Supp. 842 (S.D.N.Y.
1986); See also Flores v. Southern Peru Copper Corp., 253 F. Supp. 2d 510 (S.D.N.Y. 2002)
95
Ichihara, M. “Transnational Corporations and Human Rights: Legal Accountability for the Interference with
Human Rights by TNCs” (Essex Thesis, 1992), p.28
96
“Corporate Liability for Violations of International Human Rights Law” 114 Harvard Law Rev. 2025 (2001),
p.2043
97
John Doe I, et al. v. Exxon Mobil Corp., et al., No. 01CV01357 (D.D.C. 2001)
30
business abroad, while adjudication in this case could “prejudice the Government of
Indonesia and Indonesian businesses against the US firms.”98
In addition to ATCA, another interesting instrument recently is being used by American
courts in response to the illegal practice of TNCs - the revocation of corporation’s charter. The
fifty states have laws that enable the Attorney General to procure a judgment dissolving a
corporation when it is believed to be acting against public interest. In October 1998 petitioners
called on the Attorney General to procure a judgment that will revoke the corporate charter of
UNOCAL because of complicity in human rights violations and environmental devastation.99
Besides the American practice of holding corporations liable, the United Kingdom also
opened the doors for overseas claimants. The landmark judgment was concluded in 1995 in
the UK when it was decided that British-based companies can be sued in English courts for
harm caused abroad as a result of adopting lower health and safety standards than the levels
considered acceptable in Britain.100
Overall, the recent developments demonstrate that the authorities of home states can be a
powerful remedy for the domestic enforcement of international human rights law even taking
into account the limited scope of their jurisdiction. By forcing the issue of corporations and
human rights into the open debates, ATCA, for example, already shapes the corporate
behavior because it forces corporations to reflect upon, if not to institutionalize, human rightsrelated issues.101 On the other hand, there is still a political danger involved in unwarranted
intervention in the internal affairs of other countries and the principal need to respect other
states' sovereignty. Therefore, the home state’s courts should keep balance between the core
principles of international human rights law and self-interested campaigns of the corporations.
The key ground for this balance requires the impartial and objective adjudication for the sake
of protection and promotion of fundamental human rights.
98
supra note 93 p.652,
Nicola Jagers “The Legal Status of the Multinational Corporation under International Law” in Addo, M., supra
note 3, p.268
100
Ngcobo & Others v. Thor Chemicals Holdings Ltd. & Others (1997); Connelly v. RTZ (1996); Adams &
Others v. Cape Industries plc and another (1990). For more information see Richard Meeran and Nicola Jagers
in Addo, M., supra note 3
101
supra note 93, p.660
99
31
(v) Summary
Within this chapter we have distinguished the types of corporate human rights obligations and
discussed the controversial issue of to what extent these obligations should be applied. First, it
has been made evident that human rights do not only give rise to the negative obligations for
multinationals but may also embrace the more positive duties to secure and promote human
rights. Although this question is still up for debates, the foreign investors are increasingly
addressed the demands on contribution to the society they operate in.
In a wide sense, the principal conclusion reached at this point is that where states open their
markets each is responsible for the effects of that decision on users, producers, and third
parties. The powerful non-state actor should also hold the responsibility in equal balance the
interests of the range of individuals as they are all affected by what it does.102 Still, more work
needs to be done to explain the positive responsibilities of business, to challenge companies to
act and to engage directly with the knowledge which so far have tended to be on the sidelines
of human rights debates. The greatest challenges we face today still remain in the question on
how to harmonize economic growth and the protection of human rights.
102
supra note 44, p.60
32
III. THE STATE-INVESTOR AGREEMENT AND FOREIGN INVESTMENT
DISPUTES ON HUMAN RIGHTS ISSUES
(vi)
The legal nature of State-Investor Agreements
(vii)
The doctrine of Permanent Sovereignty versus contractual sanctity
(viii)
Stabilization clause and government interference with State-Investor
Agreements
(ix)
State responsibility for injuries to alien property: the legitimacy of
nationalization and the concept of compensation
(x)
Summary
___________________________________________________________________________
“Human rights are not negotiable items that companies and governments are permitted to
eliminate by contract”
- Andrea Shemberg, Amnesty International UK
As can be noticed from the foregoing discussions the cardinal concern of both host states and
TNCs is to safeguard their interests against the possible risks when entering into investment
relationships. The prime risk TNCs face is taking the property by a host state, which can
occur in the form of nationalization, confiscation, or expropriation of an enterprise as well as
creeping expropriation, which is defined as a series of illegal government actions that
cumulatively deprive an investor of the financial interests in his investment.103 In turn, the
main concerns of host state, from the one side, is the amount of revenue flowing from the
investment projects and attraction of foreign capital for the sake of this revenue, and, from
the other side, implementation of its national social and economic policy. In the upshot, the
human rights are found at the middle of this tension being frequently put at the potential
danger of ignorance and setting aside by host states and corporations.
This part of the study intends to shade some light on the specific legal aspects of relationships
between host states and TNCs. At the heart of this chapter is the tension between the
international human rights obligations of the host governments and their contractual
obligations arising under foreign investment agreements.
For more information see Paul E. Comeaux, N. Stephan Kinsella “Reducing Political Risk in Developing
Countries: Bilateral Investment Treaties, Stabilization Clauses, and MIGA & OPIC Investment Insurance” 15
N.Y.L. Sch. J. Int’l & Comp. L. 1(1994), p.26
103
33
(i)
The legal nature of State-Investor Agreements
The investment agreement is the starting point for relationship between the host state and
foreign investor. Such agreements are known by various names, including host government
agreements, concessions contracts, transnational investment agreements, etc., but throughout
this work they are primarily referred to as State-Investor Agreements. In fact, the StateInvestor Agreements are recognized as a separate category of contracts subject more to public
law than to the principles of ordinary contract law. As was pointed out by Professor
Sornarajah, “…unlike a domestic contract, they are concluded, by definition, with aliens. The
involvement of a foreign multinational corporation and the diplomatic protection it receives
from its home state has led to the vigorous assertion that it is the subject of rules and
principles of international law.”104
It should be mentioned at the outset that the theory of internationalization of investment
agreements between host states and TNCs poses some of the hardest questions that relate both
public and private international law from the one side, and international human rights law
from the other. For example, in the Serbian Loans Case105, the Permanent Court of
International Justice clearly indicated that the contract must be subject to the domestic law of
a state, clearly this must be the law of host state. The Mexican Mixed Claims Commissions
also proceeded on the basis that the municipal law of the host state would apply to foreign
investment contracts.106 However, TNCs which make investments in developing countries
have not been comfortable with this idea. The greatest threat that arises from this position is
that the sovereign party to the contract could change the law to the detriment of foreign
investor at will. For this reason, TNCs have consistently contended that a foreign investment
transaction is an international transaction, which could be subjected to laws other than those of
the host state.107
Nowadays, it is widely recognized that the nature of obligations contained in the new type of
contractual relationship between the state and foreign investor implies the ‘international’
character of such relationship. According to Garcia-Amador, “by virtue of the choice-of-law
clauses contained in modern concession agreements, the contractual relationship entered into
by a State and a foreign private person is removed, wholly or in part, from the domestic law of
the contracting State, and is subject to a different and hierarchically higher legal order which
Sornarajah, M., “The Settlement of Foreign Investment Disputes” (Kluwer Law International, 2000), p.85
Serbian Loans Case (1929) PCIJ Series A, No.20
106
supra note 76, p.27
107
supra note 76, p.28
104
105
34
may be either the general principles of law or international law as a whole… Being so, the
concession agreement has an international validity, which means in turn that obligations
stipulated therein also partake the nature of international obligations.”108
Equally important to note, that being exclusively governed by the municipal law of the
contracting state, the mere breach will not engage the latter's international responsibility; the
concurrence of a denial of justice, or of any other wrongful or arbitrary state conduct, must
still be required.109 However, given the ‘international’ character of such relationship, clausula
pacta sunt servanda, as a principle of international law, becomes applicable. Accordingly, the
breach of obligations emanating from an ‘internationalized’ contractual relationship creates a
legal situation similar to that created by the breach of any of the international obligations of
the state regarding the treatment of aliens, including its treaty obligations in this regard. 110 In
Losinger and Co.111 the Swiss Government contended before the Court stated that principle of
pacta sunt servanda “must be applied not only to agreements directly concluded between a
State and an alien. The principle enables a State to resist the nonperformance of conventional
obligations assumed by another State in favor of its nationals.”112 Moreover, it was declared at
the Conference of the International Law Association in 1959 that “the parties to a contract
between a State and an alien are bound to perform their undertakings in good faith. Failure to
performance by either party will subject the party in default to appropriate remedies.”113
Another prominent feature of an investment contract in the light of ongoing discussion is the
presence of elements of public interests and national sovereignty. The State-Investment
Agreement is to be concluded on behalf of the society and for the common general interest.
Every time government enters into such contract, it does more than does a contractor under
the civil or commercial code.114 As a result, there arises the tension between the legitimate
expectations of a foreign investor, which has invested on the basis of agreements which it
expects to continue into the future, and of the legitimate needs of a government to protect the
public interest against changed and unforeseen circumstances. The same pressures operate
upon all nations possessing important exploitable natural resources, regardless of their stage of
F.V. Garcia-Amador “State Responsibility in Case of ‘Stabilization’ Clauses”, 2 Journal of Transnational
Law and Policy 23 (1993), p.29
109
supra note 108, p.33
110
ibid
111
Memoire Pour le Gouvernement de la Confederation Suisse (Switz. v. Yugo.), 1936 P.C.I.J. (ser. C) No. 78, at
10
112
supra note 108, p.27
113
supra note 108, p.35
114
supra note 76, p.88
108
35
development or their traditional commitment to the sanctity of contracts and the inviolability
of international law obligations.115
It has been also widely recognized, that one of the fundamental problems of State-Investors
Agreements is to reconcile two legitimate needs: stability and flexibility. The foreign investor
aims at protecting not only the investment it has made in the host country, but also at securing
its profit expectations based on the agreement. As a rule, the main concerns of investor are the
legislative and administrative changes that may modify its rights and obligations or annul the
contract.116 In addition, the major danger TNC face is that a host state may in principle take
the property of a TNC within its own jurisdiction, provided that it does so for a public purpose
and in the absence of discrimination; and provided that compensation is paid.
Given this framework, important questions immediately and necessarily emerge: Whether a
host state must honour its contractual commitments to foreign investor or government must
act in the public interest of protection of human rights, where its commitments can be given
up if this public interest so requires it? Should the element of public interest predominate over
the notion of contractual sanctity?
These questions are the sore concern of foreign investors as the exigencies in the life of a state
are so unpredictable that, when they occur, there can be no guarantee that a host government
will not sacrifice commitments to corporations in order to serve the public interest. As was
affirmed by Rowlatt, J in the English case, Rederiaktiebrolaget Amphitrite v. R:
It is not competent for the government to fetter its future action which must necessarily be
determined by the needs of the community when the question arises. It cannot by contract hamper
its freedom of action in matters which concern the welfare of the state.117
In contrast, the major argument against the mentioned ‘public interest’ approach has been that
sanctity of contracts is such a general principle and that it constitutes a principle of public
international law binding on governments so that governments entering into contracts with
aliens should fulfill the contractual commitments undertaken in those contracts.118 This
concept of contractual sanctity pervades arbitral practice and has been seldom departed
Rosalyn Higgins “The Taking of Property by the State: Recent Developments in International Law” 176
Recueil Des Course 298 (1982), p.305
116
Wolfgang Peter “Arbitration and Renegotiation of International Investment Agreements” (Kluwer Law
International, 1995), p.46
117
supra note 76, p.87
118
supra note 76, p.88
115
36
from.119 It also takes the form of bringing the contract to the position of a treaty and applying
the doctrine pacta sunt servanda as was mentioned above.
The facts and viewpoints just illustrated are equally logical and lead to the inference that the
State-Investor Agreements can be defeasible in the public interest, but at the same time
ensuring that the foreign investor has certain remedies in the event of the contract being
discontinued by the state. The particular nature and mechanism of such remedies would be
explored further below. At this point, it is relevant to note that in terms of human rights issues
the investment agreements can provide incentives for the host state and TNC to disregard their
human rights obligations for the sake of underpinning the investment project. By the same
token, the Amnesty International UK (AI) pointed out that these agreements are in themselves
not a cause of human rights violations; however, certain aspects may signal a disregard the
protection of human rights and could:
1. Hold back the governments from taking steps to improve human rights protection;
2. Encourage the governments to ignore their human rights obligations;
3. Be relied upon by the consortium in an attempt to frustrate efforts of host governments to
fulfill human rights obligations.120
The vivid example of this approach is the $US 4.2 billion Chad-Cameroon oil pipeline where
a consortium of oil companies is extracting oil from the Doba oilfields in southern Chad and
transporting it by pipeline to Cameroon’s Atlantic coast. The consortium is led by the US
Corporation ExxonMobil, and includes Chevron, and Petronas, the Malaysian state oil
company. According to AI “the legal agreements governing this project place a ‘price tag’ on
human rights by creating financial disincentives for the governments of Chad and Cameroon
to protect human rights. The agreements may require the two countries to pay large financial
penalties if they interrupt the operation of the pipeline or oil-fields – even when making an
intervention to protect rights and enforce laws that apply elsewhere in their countries. This
makes it extremely difficult for Chad and Cameroon to take action against company
malpractice, and for individuals adversely affected by the pipeline to obtain redress.”121
119
The highpoint of this attitude is to be found in the Texaco Arbitration (1978) 17 ILM 1; Aramco Arbitration
(1963) 27 ILR 117; Amco v Indonesia (1984) 23 ILM 351
120
“Contracting out of Human Rights: The Chad–Cameroon pipeline project”, Amnesty International, September
2005, p.12 Available at www.amnesty.org
121
Chad-Cameroon Pipeline: New Report Accuses Oil Companies and Governments of Secretly Contracting out
of Human Rights, Press release, 09/07/2005 Available at http://news.amnesty.org/index/ENGPOL300282005
37
As a result, the project agreements could encourage the governments of Chad and Cameroon
to ignore their human rights obligations, by claiming that the agreements prevent them from
taking measures that would destabilize the financial equilibrium of the project, even if such
measures are intended to respect, protect and fulfill human rights. 122 Thus, it seems that the
host governments are caught in a “love-hate” syndrome. They want the contributions to
wealth and economic growth that TNCs can provide, but, at the same time, they dislike and
fear the incursions on national sovereignty and technological independence.123 In the context
of human rights this dilemma appears to be more crucial as there is trade-off may be required
between sovereignty and human rights from the one hand, and greater wealth from the other.
(ii)
The doctrine of Permanent Sovereignty versus contractual sanctity
The achievement of promotion and protection of human rights should be made within the
confines of positive law principles and norms, including the principle of state sovereignty. In a
wide sense, the human rights obligations of state are ultimately based on the notion of
sovereignty, which inherently requires that a state refrain from interference in the internal or
external affairs of another state. Considering this notion through the prism of our discussion it
can be clearly seen that TNCs equally with states possess considerable influence in varying
parts of the world challenging the concept of sovereignty in investment relationships.
In this context, the most significant threat stands for the safeguard provision of State-Investor
Agreements, the so-called ‘stabilization clause,’ which aims to freeze the ability of
government neither to annul the agreement nor to modify its terms, either by legislation or by
administrative measures. As was noted by Ian Brownlie “the legal significance of such clauses
is inevitably controversial, since the clause involves a tension between the legislative
sovereignty and public interest of the state party and the long-term viability of the contractual
relationship.”124 Brownlie further pointes out that if state agreement is valid on the plane of
public international law, then it follows that a breach of such a clause is unlawful and to be
compensated as a form of expropriation. Another view is that stabilization clause as such is
invalid in terms of public international law as a consequence of the principle of permanent
sovereignty over natural resources.125
122
supra note 120, p.7
Jack N.Behrman in supra note 73, p.44
124
Ian Brownlie “Principles of Public International Law” (Oxford University Press, 2003) 6 th edition, p.526
125
ibid
123
38
The acceptance of the principle of permanent sovereignty over natural resources in
international law recognized the right of the state to change its policies on the exploitation of
mineral resources. Times when foreign investors enjoyed almost sovereign rights, a sort of
‘enclave status’ in the host country, without state control or state joint-ownership and only
minimal financial obligations ended with decolonization. Close to a hundred new nations
emerged from a colonial past and formed a ‘Third World’ claiming control over natural
resources, most prominently articulated by the UN Resolutions 1803 on “Permanent
Sovereignty over Natural Resources”.126 These proclamations were aiming to establish
political control over natural resources exploitation in order to ensure maximum benefits for
the host country from the use of non-renewable assets.127 The Resolution 1803 affirmed the
primacy of national legislation in dealing with natural resources, which can serve as the
protection of the interests of developing countries:
The exploration, development and disposition of such resources, as well as the import of the
foreign capital required for these purposes, should be in conformity with the rules and
conditions which the peoples and nations freely consider to be necessary or desirable with
regard to the authorization, restriction or prohibition of such activities.128
According to Brownlie the concept of permanent sovereignty over natural resources may have
the same status and role as the freedom of the high seas, the principle of territorial integrity,
and the principle of self-determination.129 That the concept does have legal corollaries or
consequences seems well-established. In this context, Professor Sornarajah indicates an effort
to elevate permanent sovereignty to a UN Charter principle in that the Declaration states that
“the violation of the rights of peoples and nations to sovereignty over their natural wealth and
resources is contrary to the spirit and principle of the Charter of the United Nations”. This
interpretation of the principle as a Charter principle facilitates the making of the argument that
the principle has the status of a ius cogens principle in modern international law.130 In fact, the
concept of permanent sovereignty has its historical origins in the principle of selfdetermination, primarily by recognition that people have self-determination to territory and,
consequently, the resources on the territory belong to the people. The case-law131 recognized
126
General Assembly Resolution 1803 (XVII) of 14 December 1962
supra note 116, p.7
128
supra note 126, Para 2
129
Ian Brownlie “Legal Status of Natural Resources in International Law (some aspects)”, 162 Recueil Des
Cours, 1979, p. 270
130
supra note 76, p.143
131
See for example, Case concerning East Timor (‘Timor Gap case’) [1995] ICJ; Southwest Africa Case [1966]
ICJ Rpts 6.
127
39
that principle of self-determination created erga omnes obligations and regarded it as ‘one of
the essential principles of contemporary international law’ thereby accepting that it is part of
jus cogens. Accordingly, the doctrine of permanent sovereignty also creates erga omnes
obligations and that it is now a principle of jus cogens.132 Nevertheless, this question is
controversial and still up for debates.
The concept of permanent sovereignty appears highly important in terms of the present study
as this doctrine in some cases substantiates the validity of state’s authority to terminate the
investment agreement and even to nationalize the foreign property. According to Judge
Jimenez de Arechaga “contemporary international law recognizes the right of every State to
nationalize foreign-owned property, even if a predecessor State or a previous government
engaged itself, by treaty or by a contract, not to do so. This is a corollary of the principle of
permanent sovereignty of a State over all its wealth, natural resources and economic activities,
as proclaimed in successive GA resolutions and particularly in Art.2, para 1, of Chapter II of
the Charter of Economic Rights and Duties of States133. The description of this sovereignty as
permanent signifies that the territorial State can never lose its legal capacity to change the
destination of the method of exploitation of those resources, whatever arrangements have been
made for their exploitation and administration.”134
In the meantime it should be kept in mind that whatever the legal content of the concept of
permanent sovereignty may prove to be, there must remain the question of the relation of the
concept and other, no less important, institutions of international law. For example, if a host
state were to invoke permanent sovereignty as a legal title for dispossessing certain alien
interests, its exercise should be for public purposes, non-discriminatory in form, effected with
due process of law, and accompanied by appropriate compensation. The latter requirement on
the payment of compensation is the matter of controversies, which would be explored further
below.
132
supra note 76, p.331
Charter of Economic Rights and Duties of States, GA Res. 3281(xxix) (1974) 50. Art.2, para 1, of Chapter II
states: Every State has and shall freely exercise full permanent sovereignty, including possession, use and
disposal, over all its wealth, natural resources and economic activities.
134
supra note 129, p. 269
133
40
(iii)
Stabilization clause and government interference with State-Investor
Agreements
Another manifestation of the state sovereignty with respect to investment relationships is its
right to bind itself through the use of stabilization clauses in investment contracts. The tribunal
in Texaco v. Libyan Arab Republic135 stated that “nothing can prevent a State, in the exercise
of its sovereignty, from binding itself irrevocably by the provisions of a concession and from
granting to the concessionaire irretraceable rights.” In particular the tribunal held that, “in
entering into concession contracts with the plaintiffs, the Libyan State did not alienate but
exercised its sovereignty.”136
The term stabilization clause relates to any clause contained in an investment agreement,
which seeks to freeze the law of the host state at the time of entry so that the operating
conditions of the foreign investment process will remain constant throughout the life of the
foreign investment contract.137 Such clause is of vital importance to the investor who wishes
to invest in a country that maybe intended to change its laws in order to expropriate the
investor’s profits and assets. In this case, the stabilization clause is aimed to immunize the
investment agreement from a range of matters, such as taxation, environmental controls and
other regulations, including international human rights treaties to which a host state may be a
party and measures aimed at improvements in environmental and social protection and
development.
Turning to the Chad-Cameroon project, the following example of stabilization clause can be
introduced:
“24.1 The Republic of Cameroon guarantees the stability of the legal, tax, customs and
exchange control regime applicable to the activities undertaken under this Convention, as
defined in Article 30.1, as well as the stability of the terms and conditions of this Convention.
24.2 With regard to the activities undertaken under this Convention, the Republic of Cameroon
shall not modify such legal, tax, customs, and exchange control regime in such a way as to
adversely affect the rights and obligations of COTCO, Shareholders, Affiliates, Contractors,
Sub-Contractors, Shippers or Lenders arising from this Convention and no legislative,
135
Texaco Overseas Petroleum Company and California Asiatic Oil Company v. The Government of the Libyan
Arab Republic (TOPCO/CALASIATIC), Award on the Merits of January 19, 1977, 53 I.L.R. 389, 403-04 (1979),
17 I.L.M.1 (1978)
136
Paul Comeaux, Stephan Kinsella “Reducing the Political Risk of Investing in Russia and Other CIS
Republics: International Arbitration and Stabilization Clauses”, 2 Russian Oil&Gas Guide 21 (1993), p.23
137
supra note 76, p.50
41
regulatory or administrative measure contrary to the provisions of this Convention shall apply
to the persons mentioned above without COTCO’s prior consent.”138
As a matter of fact, such clauses pose a fundamental problem for human rights. The
stabilization clause cannot by itself remove any of the basic human rights or freedoms, but it
risks seriously undermine the ability and willingness of host state to protect its citizens and to
meet its obligations to respect, protect, fulfill and promote their human rights. As a result,
such restrictions are likely to place the host state in violation of undertaken human rights
obligations. In addition, the host state is not in the position to improve its human rights
records by entering into new conventional obligations as it may find itself having entered
reservations exempting the investment project from each new international undertaking it
makes and pushing those affected by the project more deeply into second class status.139
The investment agreements usually allow the state to intervene with the project only when
there is a ‘serious and imminent threat to public safety, civil safety or the protection of
environment’.140 However, as was noticed by AI in its Report on BTC pipeline project the
European Court of Human Rights (ECHR) has produced standards that a more exacting than
those mentioned in investment contracts. If the state permits a dangerous environment to come
into existence, then it can be held liable for violation of the right to life even if the damage
risked is not imminent. The liability arises from a failure to implement reasonable
precautionary measures, and such precautions must be taken well before the damage becomes
imminent.141 For example, in Oneryildiz v Turkey142 the state failed to prevent the methane
explosion that caused the death of thirty-nine people. ECHR found the violation of Art. 2 of
European Convention of Human Rights (right to life) and arrived at the conclusion that the
Turkish authorities knew or ought to have known that the inhabitants of slum areas were faced
with a real and immediate risk both to their physical integrity and their lives. The authorities
failed to prevent those risks materializing and to comply with their duty to inform the
inhabitants of those risks, which might have enabled them to assess the serious dangers for
themselves and their families.143
138
1997 COTCO Convention of Establishment between COTCO and the Government of Cameroon, where
COTCO is Cameroon Oil Transportation Company
139
The same concern was expressed by AI UK in respect of BTC pipeline project, supra note 74, p.16
140
See for example Art. 9.4. para (a) of COTCO-Cameroon 1997, supra note 138
141
supra note 74, p.16
142
Oneryildiz v Turkey, № 48939/99, ECHR, 18 June 2002
143
supra note 142, para. 87
42
By the same token, an issue of the so-called ‘changed circumstances’ does not fit with the
concept of stabilization clause. As a rule, the State-Investor Agreements are long term
agreements and, of course, the circumstances surrounding the investment project do not
remain constant. The context in which the agreement operates will change continuously,
including the changes related to social, political or environmental situations, where the host
state is likely to interfere with the agreement.
Aminoil v. Kuwait144 is a vivid example of a dispute resulting from changed circumstances. In
this case the tribunal was favourable to the view that changed circumstances should be taken
into account and changes made in the contract in accordance with these circumstances.
Changed circumstances have an impact on foreign investment as they bring about a new
climate in which the foreign investment has to operate.145 On the whole, the Aminoil award
provides strong authority for the view that, whatever contractual safeguards may have been
taken by the parties in their original agreement, changed circumstances affecting the
contractual equilibrium contained in that agreement will always require renegotiation of the
agreement. There is recognition in the award of a presumption against a limitation on the
sovereign rights of the states by acceptance that the ‘contractual equilibrium’ may change in
such a way that the state’s interests had become predominant. Finally, there is acceptance of
the fact that changed circumstances could alter the internal character of the contract and that,
when happens, clauses such as the stabilization clause may not prevent changes being made in
response to the new situation. It must follow that the presence of a stabilization clause does
not negate the duty to negotiate where circumstances have changed.146
The award in Aminoil case is of essential importance in terms of protection of human rights as
in the case of disputes generated by allegations in human rights violations, the claims based on
the recognition of the power of state to renegotiate or reorder the original bargain with the
foreign investor in situations of changed circumstances will bring new dimension to these
disputes. It would be capable to provide defenses or substantiations to the state for
interference with the process of foreign investment that may appear unlawful or threatening
towards the rights of state’s population. Thus, it would seem reasonable to point out that
where a state terminates the foreign investment due to the human rights abuses, the
interference will be looked at more favorably than where similar excuse for the rumination did
not exist. In other words, the contractual safeguards, including ‘stabilization clause’, should
144
Government of Kuwait v. American Independent Oil Company (Aminoil), 66 I.L.R. 519, (1984)
supra note 76, p.68
146
supra note 76, p.123
145
43
not fetter the ability of host state to intervene with the investment project for the purpose of
protection and promotion of human rights. Furthermore TNCs also must follow and obey the
international human rights standards. The notion of SRI directs corporations to integrate the
social and environmental concerns into their investment decisions that make them responsible
for protection of human rights.
(iv)
State responsibility for injuries to alien property: the legitimacy of
nationalization and the concept of compensation
It has been made evident that what the foreign investor fears is that later changes to the legal
system will erode the rights he acquires at the time of entry. In this regard, the threat of
nationalization of foreign assets and profits is to be the prime concern of TNCs. But from the
viewpoint of host states the nationalization is seemed to be the last resort available to assert
their national interests vis-à-vis TNCs. The pint must be made that in most developing
countries, the nationalization is seen nor simply as the involuntary divestment of ownership of
FDI. What is more important to these countries is that it is seen as a crucial step towards
development since it represents a political commitment which galvanizes the government as
well as the country in question into further self-reliance.147
Nevertheless, the nationalization is an area of international law which abounds with
controversy and poses the greatest threat for foreign investment. It is now generally accepted
that states have the right to nationalize or expropriate the assets of a TNCs operating in their
territory, but the following requirements are to be in place in order to recognize the legitimacy
of nationalization in international law:
1) it must be for a public purpose related to the internal needs of the taking State;
2) it must be followed by the payment of compensation; and
3) nationalization measures which are arbitrary or discriminatory or which are motivated
by considerations of a political nature unrelated to the internal well being of the taking
State are, by a reference to those principles, illegal and invalid.148
In the course of ongoing discussion it is important to determine the nature of ‘public purpose’
which seems to be the broad and vague concept. According to Rosalyn Higgins “a public
purpose is an objective test, and the requirement has generally been understood as a means of
147
supra note 73, p.87
Robert von Mehren, Nicholas Kourides “International Arbitrations between States and Foreign Private
Parties: The Libyan Nationalization Cases”, 75 American Journal International Law 476 (1981), p. 486
148
44
differentiating takings for purely private gain on the part of the ruler from those for reasons
related to the economic preferences of the country concerned. Such controversy as there has
been over the international law phrase ‘public purpose’ has centered on whether retaliatory
takings may be deemed takings for a public purpose…This appears at first sight to be a more
subjective phrase, requiring an assessment by the Commission or Court as to whether
measures purporting to be for a public purpose are in fact in the public interest. In fact, the
organs of the [European] Convention have shied away from such an interventionist
interpretation.”149
Thus, ECHR refers the doctrine of ‘margin of appreciation’ in deciding whether the taking had
a public purpose. In James case the Court held that:
Because of their [states] direct knowledge of their society and its needs, the national
authorities are in principle better placed than the international judge to appreciate what is ‘in
the public interest’. Under the system of protection established by the Convention, it is thus
for the national authorities to make the initial assessment both of the existence of a problem of
public concern warranting measures of deprivation of property and of the remedial action to be
taken.
Furthermore, the notion of "public interest" is necessarily extensive. The Court, finding it
natural that the margin of appreciation available to the legislature in implementing social and
economic policies should be a wide one, will respect the legislature's judgment as to what is
‘in the public interest’ unless that judgment be manifestly without reasonable foundation.150
Meanwhile, it should be kept in mind that under the principles of international law, measures
taken by a state against the interests of foreign nationals which are motivated not by reason of
public utility but of political retaliation are invalid and not entitled to recognition by other
states. For example, in Libyan nationalization151 the Libyan Government made it clear that the
reason for nationalizing the interests affected was that of political retaliation against the
Government of the United States, as a reply to the Washington Conference of petroleum
consuming countries.152
149
supra note 115, p.395
Case of James and Others v. UK Judgment of 21 February 1986, Series A, No. 98, para 46
151
Between 1971 and early 1974, the Libyan Government nationalized the interests and properties of foreign oil
companies in Libya. Three separate arbitral tribunals adjudicated the lawfulness of these nationalizations and the
remedies of the companies: BP Award (infra), TOPCO/CALASIATI (supra note 135) and LIAMCO (infra).
152
Libyan American Oil Co. v. The Government of the Libyan Arab Republic (LIAMCO). The award of the
arbitral tribunal in the LIAMCO arbitration, dated April 12, 1977. See also BP Exploration Co. (Libya) Ltd. v.
The Government of the Libyan Arab Republic dated October 10, 1973 (BP Award), where it was found that the
ground of nationalization clearly violated principles of international law as it was made for purely extraneous
political reasons and was arbitrary and discriminatory in character.
150
45
Based on the presented arguments it can be deduced that the measures on protection of human
rights also fall under the umbrella of ‘public purpose’. The preservation of public order and
protection of population should be the prime objective of the state policy along with its
economic and social development. In this respect, the act of nationalization should amount to
an exercise of overwhelming governmental function and must be the subject to sovereign
immunity when the human rights are in danger.
As was mentioned earlier, the nationalization is lawful, but the legality of this statement is
conditional under the compensation rule. As was noted by Brownlie, “the justifications for the
rule are based on the assumptions prevalent in a liberal regime of private property and in the
principle that foreign owners are to be given the protection accorded to private rights of
nationals, provided that this protection involves the provision of compensation for any
taking.”153
The issue on the amount of compensation is one of the most controversial areas of
international law, which have ranged of opinions from the payment of full compensation
(including the damnum emergens and lucrum cessans154) to the payment of no compensation
at all. Some developing countries, following the development of the Calvo doctrine 155 in Latin
America, insist on paying compensation in accordance with the laws of the nationalizing
country and not as determined by the so-called international practice. These countries have
argued that the terms for paying compensation should take their unique economic
circumstances into consideration.156 But, on the other hand, TNCs and their home
governments insist upon ‘prompt, adequate, and effective compensation’ that is generally
referred to as so-called ‘Hull formula’157.
It is not the aim of this study to discuss the principles, calculation and standards of
compensation; rather, the balance between the corporate interest and the public benefit which
results from the nationalization and leads to the compensation, would be examined here. The
general view taken by the courts is that where the taking by the state is for public purpose, the
153
supra note 124, p.510
This means the value of property and future profits of investor.
155
According to Calvo doctrine, the alien agrees not to seek the diplomatic protection of his own state and
submits matters arising from the investment agreement to the jurisdiction of the host state.
156
supra note 73, p.88
157
This formula was first introduced by US Secretary of State Cordial Hull in 1938 during the Mexican
expropriations, but was not universally accepted as customary international law.
154
46
extent of the public purpose will affect the amount of compensation. The individual interest in
securing compensation will diminish according to the strength of the justification for the
taking provided by the public purpose.158 In Lithgow v UK159, which involved the taking of
aircraft industry belonging to a British subject by the British government, ECHR took the
view that the decision of state to nationalize and the amount of compensation it decides to pay
are intertwined and that the Court will not question the amount of compensation which is
eventually paid unless it is manifestly unreasonable. The court stated the preposition in the
following terms:
Article 1 (of the Protocol I to the ECHR) does not guarantee a right to full compensation in all
circumstances since legitimate objectives of ‘public interest’, such as pursued in measures of
economic reform or measures designed to achieve greater social justice, may call for less than
reimbursement of the full market value. Furthermore, the Court’s power of review is limited to
ascertaining whether the choice of compensation terms fall outside the State’s wide margin of
appreciation of this domain.160
In evaluating the presented arguments it can be inferred that where the nationalization is based
on the objective grounds that the practices adopted by TNC within the investment project are
harmful to the environment or human rights, there is room for argument that these factors
should be taken into account when considering the dispute on compensation. For example, in
the Aminoil case, Kuwait had argued that the oil field practices of the claimant were harmful
and that the harm that flowed from such practices should be set off from the compensation
that was due. However, the tribunal avoided pronouncing on the validity of the claim by its
finding on facts that the oilfield practices were not improper. But the future claims along these
lines will continue to be made. 161
Further, the additional fact illustrating the fragility of compensation rule is widely recognized
exceptions to it, including, for example: exceptions under treaty provisions; exceptions as a
legitimate exercise of police power, including measures of defence against external threats;
confiscation as a penalty for crimes; seizure by way of taxation or other fiscal measures; loss
caused by health and planning legislation and the concomitant restrictions on the use of
property; the distraction of property of neutrals as a consequence of military operations, and
the taking of enemy property as part payment of reparation for the consequences of an illegal
158
supra note 6, p.371
Lithgow v UK (1986) 8 ECHR 329
160
supra note Lithgow case 159, para 121
161
supra note 6, p.405
159
47
war.162 In the light of increasing awareness of human rights situations worldwide, the measure
on protection and promotion of human rights is also should be recognized as the appropriate
exception for the compensation rule.
In addition, another principal solution to avoid the huge amount of compensation while
protecting the human rights can be the suspension and/or revocation of licenses and
permissions given by the host state for running the investment project. The foreign investor’s
ability to conduct his business can be seriously affected or become completely impossible,
where licenses and permits are necessary to operate in certain sectors of the economy and
these are denied.163 This, for example, would appear to leave no room for stabilization clauses
as the investor will be subject to the state’s regulatory framework through the licensing
requirements.
There are many awards of arbitral tribunals and claims commissions which have asserted that
the withdrawal of licenses or impositions of controls do not amount to the taking of
property.164 In Murphyores Ltd v The Commonwealth, a concession had been given to
American companies for sandmining on Fraser Island. Later an environmental study found
that the sandmining was harmful to the local environment. The Australian Government
refused to give export licenses for the export of the minerals that effectively terminated the
companies’ operations. The Australian High Court rejected the claims of the two companies
for compensation on the basis that no compensable taking was involved.165
(v)
Summary
It has been determined within this chapter that the investment agreement serves as the mere
beginning of the relationship between foreign investor and host state, supplying the
framework within which it is to operate and the objectives to be achieved by it. Meanwhile,
the presence of sovereign state in the contract complicates matters inasmuch as the state must
act in the public good, accordingly, it should not be possible for any state to bind itself by
contract, to fetter its legislative and administrative powers. The principle of permanent
sovereignty over natural resources supports this argument by preventing the idea that an
162
supra note 124, p.511
For example, according to Kazakhstani legislation the operations on exploration, mining, production and
transportation of hydrocarbon materials can be undertaken only on the basis of state license and special
permissions. See also the Law of Kazakhstan On Licensing dated 17.04.1995 for more types of works that are the
subject of license requirements.
164
See for example Kugele v. Polish State (1931-32) AD 69; Claim of Erna Spielberg (1958) 8 Whiteman,
Digest 988.
165
supra note 6, p.313
163
48
agreement can bind the legislative competence of a state and by affirming the applicability of
international law to the expropriation of alien property.
The arbitral practice and opinions of scholars convincingly demonstrate that the sanctity of
contract can be overridden by the states’ obligations to act in public interest, particularly, for
this study, in the interests of human rights. Thus, the measures on protection of human rights
must be defined as one of the grounds of public purpose and, as a result, must be given
priority above those of the business venture when the objectives conflict.
49
CONCLUSION
As a rule, before any foreign investor commits his capital to a project, he wants to be assured
that of stability in the investment regime. That is to say, the whole or key aspects of the
investment agreement will be respected by the host state and that the rules of the game will
not be changed unilaterally. The foregoing analysis indicates that TNCs seek to fashion rules
which promote freedom of access for investments and optimum conditions of protection for
such foreign investments, even if they amount to an erosion of the sovereignty of the host state
or create the conditions for human rights abuses. However, nowadays, it is generally accepted
that corporations have ethical obligations and must consider non-financial aspects of their
investment business inasmuch as social responsibility is no longer the purview of just a
handful of managers concerned with the social or environmental impact of their firm’s
operations, but increasingly has become the part of overall business strategy.
The prime objective of this study was to examine the issues attached to an interactive
relationship between human rights and foreign investment. The study has attempted to
scrutinize the human rights duties of foreign investors that exist alongside the obligations of
states within the concept of socially responsible investment. The starting point to our
discussion stands for the analysis of the notion of SRI and its interconnection with the
principles of corporate social responsibility. It has been made evident that the social investing
requires managers to reach investment decisions or activities through the deliberate
application of moral, ethical, social and environmental values. The SRI must not be seen as an
additional element or an optional policy that a company can adopt. Rather, it is about a set of
values that should be incorporated into the company’s ethos and business vision, one that is
translated into the company’s decision-making and investing procedures.
Having addressed the theoretical questions surrounding the applicability of social investing
toward corporate policy, the issue of the content of possible corporate human rights
obligations was discussed. We found that, depending on the circumstances, TNCs may have
not only the negative obligation to respect, but also more positive obligations to protect and
fulfill human rights. From this perspective, the specific situations and features of the TNC and
host state should be taken into account when identifying the scope of corporate human rights
duties. The key question in this context is where the line should be drawn when identifying
the borders of positive corporate obligations. At the international level, state responsibility
50
still offers an important avenue for addressing human rights obligations. However, we cannot
deny that TNCs have a direct impact on the economic, political, and social landscape of the
countries in which they operate as well as on human rights.
Along this line of thought, the following primary factors should be kept in mind when
assessing the course of action for companies with regard to the application of relevant human
rights to individual situations:
1) The nature of the host state - whether developed or developing country.
Developed countries are better placed to conduct effective negotiations with TNCs,
demanding respect for human rights and national policy. In turn, developing countries can be
unable or unwilling to resist the threat that TNC may pose upon the social or environmental
situation in the country. In this case, the models of government (‘good’, ‘weak’, ‘bad’)
should be taken into account as discussed in Chapter II.
2) The form of investment activity in which a TNC engages.
Different standards of behavior are applied within the different types of TNCs activities (such
as mining, apparel, oil&gas, pharmaceutical and other industries). The sphere of influence
also depends on the particular form of corporate activity. For example, the SOI of a US
pharmaceutical company can impact far beyond the place of production by improving access
to essential drugs and thereby helping to develop the right to health, for example, in African
countries. Further, a mining company should bear in mind not only the interests of its
employees and shareholders, but also the specific parts of a local community, such as
indigenous peoples, when operating in remote areas of country.
3) The attitude of the TNC toward human rights obligations.
To date, efforts at the international level to regulate the activities of TNCs have not met with
great success. There are still no international norms which place direct human rights
obligations on corporations. The CSR system of self-regulatory instruments including the
code of conduct, certification, good corporate governance, and disclosure measures still
represents the main attempt to fill this gap. Many companies have accepted that they must
improve their culture of respect for human rights and have set ethical standards giving human
51
rights norms practical meaning.166 Thus, on the basis of adopted regulations, TNCs are
expected to conduct themselves well in their dealings with developing countries and to
motivate positive change in support of human rights.
In fact, the forms and practical effectiveness of each of the above mentioned factors may be
different but it is fair to say that they all reveal the same intention of seeking to broaden the
bases upon which corporations are held accountable for the protection and promotion of
human rights.
Further, this study examined the legal framework governing TNC activities and their
relationships with Host States by virtue of State-Investor Agreements. The traditional view is
that the relationship between host state and the TNC begins with a contract and that sanctity
must be attached to such contracts. However, the investment contracts are a distinct type of
state agreements, primarily due to the presence of the state as a sovereign entity. This
argument substantiates the position that a mere contractual provision cannot fetter the
legislative sovereignty of the host state which must have the authority to alter or depart from
the investment agreement if public purpose or national interest requires. The rationale of this
position lies in the principle of permanent sovereignty over natural resources, which allows a
host state to unilaterally cancel or amend the contract. Still, the precise status of this doctrine
is controversial. Some elevate it to a ius cogens principle. Others treat is as only lex ferenda.
Whatever the true position on this matter may be, there is case law which seems to treat
disputes in the natural resources area, arising from nationalizations, as even more conclusively
subject to sovereign immunity than other disputes.167
Another principal obstacle for the implementation of international human rights obligations by
host states is the so-called stabilization clause, which prevents the state from imposing new
laws on the investor that would change the terms of the concession or affect detrimentally the
rights guaranteed thereunder. The cardinal concern of the jurist in these matters is that this
clause compromises the ability of the state to take measures that are intended to respect,
protect and fulfil human rights, while maintaining the financial equilibrium of the project.
However, the foregoing analysis demonstrated that the stabilization clause should not prevent
changes to the agreement being made in response to changed circumstances, such as the threat
166
For example see the CSR standards adopted by Royal Dutch/Shell Group: Statement of General Business
Principles (1997), Business and Human Rights. A Management Primer(1998)
167
For example, in IAM v. OPEC (1979) 477 F.Supp.572 and in MOI v. Bangladesh (1982) 579 F.Supp.79,
American courts used the doctrine in support of permitting the plea of sovereign immunity. See supra note 76,
p.297
52
to human rights or the necessity to implement the state’s international human rights
obligations.
In the light of increasing awareness of human rights situations worldwide, it is crucial to focus
on the contractual relationships of states and TNCs, specifically by revising the agreements
and including “an explicit guarantee that nothing in the agreements can be used to undermine
either the human rights obligations of the states or the human rights responsibilities of the
companies”168. The host states also must bear in mind this guarantee when negotiating with
the foreign investor at the moment of its entry to the investment project.
In addition, the right of host state to nationalize foreign property should be recognized as an
inherent attribute of national sovereignty, where the national interest cannot be challenged by
TNC or another states. Within the present study, we found out that the taking of alien property
is acceptable on the ground of public purpose, which is recognized as overriding corporate
interests, especially in cases of human rights abuses. The concept of full compensation also
must be the subject of objections on the grounds of national interests and should be consistent
with the capacity of the host state to pay. Given the existence of disputes on the compensation
rule, the solution generally adopted accommodates the view that full compensation need not
always be paid and that each situation must be approached on a case by case basis taking into
account the existing exceptions and particular circumstances as was discussed earlier.169
In conclusion, the original study aimed to develop certain legal principles that facilitate
mutually beneficial and harmonious relationships between the host states and foreign
investors. What we do know is that the struggle for universal human rights within the context
of a global investment system will continue for the foreseeable future. While the debate on the
balance between commercial considerations and the guarantee of human rights is still the
matter of complexity and far from resolved, appropriate accountability mechanisms must be
developed to monitor TNCs adherence to the socially responsible policies espoused - not with
a view to blame and punish, but with a view to consolidating the human rights standards and
practices, and, at the same time, evaluating how corporate responsibility can be embedded in
the DNA of companies. The continuing disclosure of corporate wrong-doing and negligence –
and unintended negative impact - suggests that while corporate social responsible behavior
has improved, much still remains to be done.
168
169
supra note 121
supra note 6, p.141
53
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15. BP Exploration Co. (Libya) Ltd. v. The Government of the Libyan Arab Republic dated
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17. Case of James and Others v. UK Judgment of 21 February 1986, Series A, No. 98
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19. Kugele v. Polish State (1931-32) AD 69
20. IAM v. OPEC (1979) 477 F.Supp.572
21. MOI v. Bangladesh (1982) 579 F.Supp.79
58