1. Introduction
The United Nations (UN) Human Rights Council adopted the UN Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework (UNGPs) in 2011.Footnote 1 Pillar II of the UNGPs prescribes that multinational corporations (MNCs) should respect human rights. It urges corporations to discharge their “responsibility to respect” through a human rights due diligence (HRDD) framework. However, scholars argue that the HRDD framework is vague, ambiguous, and discretionary — characteristics that MNCs exploit to evade corporate accountability.Footnote 2 In July 2024, the World Benchmark Alliance reported that 80 percent of the two thousand most influential companies in the world scored zero in terms of implementing HRDD in their businesses.Footnote 3 The challenge has been to ensure that MNCs conduct HRDD in compliance with the spirit of the UNGPs.
Since adopting the UNGPs, scholars have turned to various mechanisms to hold MNCs accountable, including public international law (international treaty) and domestic legislation (HRDD legislation).Footnote 4 This article contributes to scholarship that investigates how contract law can promote corporate accountability in relationships between MNCs and local communities.Footnote 5 For example, James Gathii and Ibironke Odumosu-Ayanu identify different types of contracts in the extractive industry — community development agreements, investor-community contracts, environmental contracts, human rights deeds, and investor-state-local community contracts (tripartite contracts).Footnote 6 They reject the nineteenth-century laissez-faire view of contracts as purely private agreements (individualism) and argue that external or extrinsic criteria, such as international human rights, notions of justice, fairness, or environmental norms, influence contracts in the twenty-first century. Gathii and Odumosu-Ayanu conclude that these new forms of contracts, although private, have legal implications in international law — they serve as sources of obligation, enabling local communities to hold MNCs accountable for their activities in the extractive industry.
Using a relational contract theory, this article characterizes Gathii and Odumosu-Ayanu’s notion of community development agreements (CDAs) as internationalized relational contracts that impose a duty on MNCs to discharge HRDD obligations in good faith. It argues that good faith is an established principle in international law that serves as a standard of conduct in relational contracts between states and MNCs (investor-state contracts). Since CDAs are also internationalized contracts like investor-state contracts, this article proposes a similar good faith interpretation in the business and human rights (BHR) context, especially when MNCs contract with local communities to conduct HRDD. A good faith interpretational exercise would (1) reduce MNCs’ cosmetic compliance with HRDD principles; (2) increase transparency in the HRDD exercise; and (3) become a source of rights for local communities by which to enforce corporate accountability.
The seven sections of this article are set out as follows: section 2 discusses the relational theory of contract and its judicial recognition in domestic courts. It notes that courts increasingly hold parties to a good faith standard in negotiating and performing relational contracts. Section 3 transposes the relational theory to an international context. It argues that MNCs are international actors who enter relational contracts with states and local communities and that this relationship attracts a duty or good faith obligation. The nature of good faith in international law, particularly in international investment law, and its role in maintaining a relational equilibrium between states and MNCs is taken up in section 4. Section 5 discusses the relational character of CDAs, especially those characterized by HRDD, averring that HRDD adds a relational dimension to the negotiation and performance of MNC agreements with local communities. Section 6 then examines good faith’s role in interpreting and enforcing HRDD. It argues that, similar to investor-state contracts, MNCs must comply with good faith obligations in the discharge of their HRDD duties. This point is particularly reaffirmed in section 7, which argues that the recognition and interpretive infusion of a duty of good faith in all analyses and examinations of the performance of the CDAs would benefit both MNCs and the local communities materially as well as in the functional trustworthiness of their legal relations under the CDAs.
2. Relational theory of contracts
The nineteenth-century classical theory of contracts was characterized by transactional exchanges (discrete contracts). In intermediating these, the courts focused primarily on market efficiency and competition rather than the relationship between the parties.Footnote 7 This type of transaction rested on market economy and laissez-faire principles — the market-regulated exchanges between seemingly equal and autonomous individuals acting by free will.Footnote 8 Scholarly criticisms of the laissez-faire principle pointed to its lack of sensitivity to differences in wealth, status, position, and power, all of which affect individual freedom of choice.Footnote 9 One of the critics, Ian MacNeil, developed a relational contract theory in response to the unfairness that a market economy perpetuates.Footnote 10 He defines contracts as “relations among people who have exchanged, are exchanging, or expect to be exchanging in the future.”Footnote 11 In contrast to classical contracts theory, MacNeil conceives relational contracts as “contracting beyond law per se.” To him, such contracts reflect complex interdependence and a continuous relationship between contracting parties that evokes strong commitment, collaboration, good faith, and trust.Footnote 12
MacNeil explains that relational contracts are characterized and regulated by behavioural norms that provide a business infrastructure for collaborative exchanges.Footnote 13 The first norm is role integrity. This dictates that a contracting party maintain the character expected of a person occupying a particular position. For example, an employer is expected to provide work for their employees, as this aligns with societal expectations regarding their role as an employer. Second is the mutuality norm, which is an exchange in which contracting parties anticipate “a possible improvement from their pre-exchange position” — that is, a win-win outcome.Footnote 14 The third norm — effectuation of consent — enables parties to make continuous choices as the relationship evolves.Footnote 15 These decisions are based on the initial agreement that future choices may be necessary to fulfill the parties’ expectations.Footnote 16 The fourth norm — flexibility — refers to the parties’ capacity to adapt, modify, or terminate a relationship as needed. Parties require flexibility because of the “limits of the human mind to focus on available information … and partly because the socioeconomic world is in a constant state of flux.”Footnote 17 Contractual solidarity is the fifth norm, defined by MacNeil as parties’ “belief in being able to depend on another.”Footnote 18 This norm enables parties to work together to achieve desired outcomes, even in the face of adversity.Footnote 19 The solidarity norm requires trust and good faith between the parties. In contrast to discrete contracts, which are characterized by individualistic and neoclassical competition, relational contracts encourage joint problem-solving and mutual commitment to pursue a common goal.Footnote 20
These non-exhaustive behavioural norms serve as a checklist for identifying and characterizing relational contracts.Footnote 21 Scholars have applied the relational theory to various relationships, including employment, corporate, marriage and family, construction, franchising, housing, insurance, and consumer regulation.Footnote 22 However, discussions about relational contracts have moved beyond academic rhetoric; courts now recognize and give judicial backing to relational contracts, a paradigm shift from the classical notion of discrete contracts.Footnote 23 This recognition has significantly influenced jurisprudence on good faith.
There is a growing convergence among common law countries, including the United Kingdom,Footnote 24 Canada,Footnote 25 and Australia,Footnote 26 that relational contracts impose a good faith obligation on parties. However, the scope of the duty of good faith doctrine and the criteria for identifying relational contracts vary from country to country.Footnote 27 For example, in the United Kingdom, not all contracts are relational contracts, which attracts the duty of good faith.Footnote 28 In contrast, Canada recognizes an organizing principle of good faith that applies to all contracts. At first glance, it appears that there is no distinction between the duty of good faith required in discrete and relational contracts in Canada. However, the Supreme Court of Canada in Bhasin v Hynew noted that the degree of good faith required from parties in relational contracts may differ from discrete transactions where parties deal at arm’s length.Footnote 29 Therefore, even in jurisdictions where courts recognize a generalizing duty of good faith, they acknowledge that relational contracts require higher good faith obligations. Courts have generally interpreted the duty to include notions of cooperation and honesty, especially when (1) there is a continuing relationship between the parties; (2) the contract results in a substantially unfair outcome; and (3) there is an asymmetry of information between parties or a power imbalance that affects contract formation or performance. In sum, the judicial exercise to interpret and enforce relational contracts is meant to fulfill contracting parties’ reasonable expectations via the good faith doctrine.
Given this emergent reality that relational contract theory has been judicially recognized and that it continues to shape domestic jurisprudence on good faith, it is probably unarguable to extend the application of relational contracts to the international context. The subsequent discussion does this. It considers whether MNCs are subject to obligations arising internationally and then advances an internationalized relational contractual framework that attracts a duty of good faith as a principle of international law. It posits that, though courts may be reluctant to read a good faith doctrine into transnational agreements as a matter of private law, good faith is an essential and mandatory principle in international law that binds states and non-state actors.
3. MNCs as international actors: internationalizing contractual obligations
Recent academic commentaries highlight the changing nature of the roles of MNCs in international economic law. Barnali Choudhury argues that MNCs are active participants in international economic law and global governance frameworks.Footnote 30 In her view, MNCs can be considered lawmakers when they perform functions that have real or potential effects on international law. These functions include lobbying states in the treaty-making process, setting industry practices that influence the scope of international norms, and enforcing compliance with international rules relating to the World Trade Organization (WTO) and international investment law (IIL). Choudhury concludes that the focus should be on the effects of corporate actors’ actions as legal persons in international law.
One of the incidents of corporate legal personality is the capacity to enter into contracts in international law.Footnote 31 Julian Arato argues that, through contract clauses like fair and equitable treatment (FET), umbrella clauses, guarantees against expropriation, and non-arbitrariness, MNCs transform private legal agreements with states into internationalized contracts that engage with public international law rules.Footnote 32 He describes these contracts as “involving a long-term relationship between the putative investor and the state.”Footnote 33 These contracts derive powers from bilateral investment treaties (BITs) concluded between states. BITs are international legal instruments that take precedence over domestic legal orders as a matter of international law.Footnote 34 Therefore, investment contracts derive their powers from international law, notwithstanding that they are private contracts between states and investors.
Although Arato limited his analysis to investor-state contracts, Odumosu-Ayanu extends the concept of internationalized contracts to those involving multiple actors — states, investors, and local communities. Odumusu-Ayanu defines multi-actor state contracts as “agreements among local communities hosting or impacted by a particular investment project, foreign investors involved in project development, and host government(s).”Footnote 35 She argues for a shift from a state-centric contractual framing in IIL to one that recognizes the importance of local communities during the contractual stage. She notes that contracts with local communities begin with a consultation, proceed to sustained interaction, and ultimately culminate in contractual rights.Footnote 36 Odumosu-Ayanu cites global memorandum of understandings (GMOUs) and impact benefit agreements (IBAs), which are often concluded between industry actors and local communities, as multi-actor agreements.Footnote 37 She defines an IBA as a “privately negotiated agreement[s], typically between extractive industries and community organisations, in which government is relegated to an external observational role.”Footnote 38
Applying Odumosu-Ayanu and Arato’s concept of contracts, it is safe to conclude that MNCs and local communities are not invisible in international law.Footnote 39 They are active participants within legal frameworks that regulate transnational relationships.Footnote 40 As international actors, MNCs negotiate and perform long-term relational contracts with state and non-state actors. These internationalized contracts are relational because they are long term and require interdependence, flexibility, cooperation, and trust.Footnote 41 The UN Conference on Trade and Development (UNCTAD) confirms that “[i]nvestments are not one-off transactions; they typically involve economic projects of significant duration, such as business concessions, and many do not have any time limitation at all.”Footnote 42 Given this, scholars like Nicolas Perrone think that international investment law must be applied relationally because it polices long-term cooperative relationships between states, MNCs, and local communities.Footnote 43 That this reality contextualizes international contracts necessitates introducing international gap-filling principles, like good faith, that provide a standard of obligation and conduct by which to intermediate the functioning of complex but flexible long-term investor-state contracts.Footnote 44
We now turn to the nature of good faith in international law to illustrate how this principle applies to both state and non-state actors. The discussion argues that, similar to the interpretation of good faith in investor-state contracts, MNCs are obligated to negotiate and perform HRDD in good faith in CDAs.
4. Good faith in international economic law
Good faith is one of the fundamental pillars of relationships among international legal actors.Footnote 45 Some commentators describe it as a general principle of international law and a principle of customary international law arising from Article 38(1)(c) of the Statute of the International Court of Justice,Footnote 46 the UN Charter,Footnote 47 the Vienna Convention on the Law of Treaties (VCLT),Footnote 48 and the UN General Assembly’s Declaration of Principles Concerning Friendly Relations and Cooperation among States. Footnote 49 For example, Articles 26 and 31(1) of the VCLT urge state parties to perform and interpret treaty obligations in good faith.
International courts and tribunals have repeatedly invoked and acknowledged good faith as included in these treaties. For example, in the Nuclear Test Cases, the International Court of Justice (ICJ) proclaimed: “One of the basic principles governing the creation and performance of legal obligations, whatever their source, is the principle of good faith.”Footnote 50 The court noted that even unilateral promises by state parties must be enforced. Similarly, the Court of Justice of the European Union characterizes good faith as “a rule of customary international law” and a “corollary in public international law of the principle of protection of legitimate expectations.”Footnote 51 Although good faith is an amorphous concept that is not easy to apply, it has some interconnected functions. First, it plays an interpretative or gap-filling role in cases of ambiguity in the discharge of an obligation.Footnote 52 Second, it protects the parties’ legitimate expectations, which is the cornerstone of confidence and faith in their relationships.Footnote 53 Third, it protects certain common interests against excessive individualistic claims (protects against abuse of rights especially in cases where parties have discretion in performing an obligation).Footnote 54 Fourth, good faith prevents parties from benefiting from uncooperative conduct and infringing on norms of reciprocity and equality because no one should profit from their wrong.Footnote 55 These functions emphasize notions of trust, justice, and cooperation.
As a general principle of international law, good faith is a mandatory norm that underlines the performance of obligations.Footnote 56 Although it seems uncertain whether good faith is a free-standing rule, courts have held that it is a non-derogable norm that is an accessory to substantive provisions.Footnote 57 One commentator eloquently describes it as follows:
Good faith plays … a role in international law comparable to that of a catalyst in a chemical reaction. Alone, the catalyst is completely passive. It must be added to other elements for a reaction to occur; without it, nothing will happen, even if all the necessary components are present in sufficient quantities. It is a bit the same with good faith. … It is always related to specific behavior or declarations and it invests them with legal significance and legal effects.Footnote 58
A good faith obligation extends beyond state-to-state relationsFootnote 59 to international economic contexts involving states and non-state actors.Footnote 60 In internationalized contracts, as discussed above, good faith performs the gap-filling function of clarifying ambiguities regarding states’ obligations to protect MNCs’ investments. Through the good faith principle, investor-state arbitration (ISA) tribunals shape the standard of conduct expected from states and MNCs in an investment relationship. They do this because, for every relational contract, “trust and confidence are of the essence in investment and commerce.”Footnote 61
One of the workings of good faith in internationalized contracts is demonstrated through its influence in interpreting a FET standard.Footnote 62 The FET clause, included in most BITs and contracts, benefits MNCs by ensuring that states treat them fairly and equitably throughout the investment process; it prevents states from expropriating MNC properties. But it is still under debate whether the FET standard is a norm of customary international law or part of a minimum standard of treatment.Footnote 63 As well, since concepts like fairness and equity remain vague, there is, altogether, some palpable confusion about the scope and application of the FET standard.Footnote 64 In light of this ambiguity, good faith informs the structure of reasoning and interpretation of the FET standard.Footnote 65 Good faith is often located “at the heart of the concept of fair and equitable treatment,”Footnote 66 serving as a “guiding beacon … to the obligation[s].”Footnote 67 Arbitral tribunals have broadly relied on the good faith principle in interpreting FET to (1) prohibit states’ arbitrariness and prejudice towards MNCs without a legitimate purpose; (2) protect MNCs’ legitimate expectations arising from host states’ specific representations or investment-inducing measures; and (3) shield MNCs from host states’ coercion, duress, and harassment to ensure fundamental principles of due process.Footnote 68 In fulfilling these functions, good faith has become a source of rights that parties rely on to support their claims.Footnote 69
Given the relational character of internationalized contracts, good faith informs the nature of the obligations arising from states’ representations or conduct through a legitimate expectation doctrine.Footnote 70 This doctrine is crucial because, as stated in the UNCTAD report, “[w]ith the long duration of a project, there comes a risk that the conditions of the investment’s operation will change, producing a negative impact on the investment concerned.”Footnote 71 The legitimate expectation doctrine operates as an estoppel, preventing states from reneging on their promises of investment protection as governments change and the parties’ relationship evolves.Footnote 72 In Gold Reserve Inc. v Bolivarian Republic of Venezuela,Footnote 73 the tribunal recognized that common and civil law systems have established doctrines on estoppel and good faith that protect parties’ reasonable expectations. These domestic doctrines can be adopted as general principles of law to inform reasonable interpretations of the FET standard.Footnote 74 Thus, where MNCs rely on states’ specific representation or conduct, good faith protects their legitimate expectations regarding return on investment, impartial treatment, and transparent dealings by host states.Footnote 75
Conversely, good faith protects states by introducing another facet to interpreting the FET standard — the abuse of rights doctrine.Footnote 76 This doctrine shields states from frivolous claims and fictitious legal constructions aimed at artificially bringing claims under ISA clauses. The doctrine “pierces the veil” of such constructions and denies MNCs the protection they seek through artificially created entities.Footnote 77 For example, in Phoenix Action Ltd. v Czech Republic,Footnote 78 the Czech Republic objected to the MNCs’ claim before the tribunal because the investment was not made in good faith — the MNC was a sham entity incorporated by an Israeli national to exploit treaty advantages through what is commonly known as “treaty shopping.” The tribunal upheld this objection, noting that “[t]he protection of international investment arbitration cannot be granted if such protection would run contrary to the general principles of international law, among which the principle of good faith is of utmost importance.”Footnote 79 Similarly, in Inceysa v El Salvador, the tribunal held that investments not performed in good faith could not benefit from the protection of the international rules provided in BITs.Footnote 80
Essentially, good faith serves as a standard of conduct against which the actions of international actors are assessed. This standard is instrumental in maintaining the equilibrium of rights between parties in relational contracts.Footnote 81 In the realm of IIL, MNCs wield good faith as a sword (claim) to limit state powers to unilaterally modify applicable regulatory frameworks. Conversely, states use it as a shield (defence) to avoid liability or mitigate damages in arbitration proceedings.Footnote 82 As an investment tribunal concluded, “[i]t is indisputable, and this Arbitral Tribunal can do no more than confirm it, that the safeguarding of good faith is one of the fundamental principles of international law and the law of investments.”Footnote 83 That the relational nature of investment contracts is undergirded by the duty to deal in good faith now allows us to examine contracts concluded within a multi-actor framework. These contracts inherently involve elements of investment. As well, that they include HRDD clauses or elements also identifies them as international relational contracts obligated under good faith.
5. CDAs as international relational contracts
The UNGPs on business and human rights serve as the authoritative normative framework for guiding responsible business conduct and addressing human rights abuses in business operations. Pillar II of the UNGPs emphasizes the corporate responsibility to respect human rights (CR2R); it urges corporations to respect international human rights standards wherever they operate. This means that corporations “should avoid infringing on the human rights of others and should address adverse human rights impacts with which they are involved.”Footnote 84 Pillar II does not stem from any legal obligation. Rather, it embodies a social norm to which corporations are expected to adhere. Principle 13 of the UNGPs emphasizes the importance of fulfilling the CR2R norm through HRDD. John Ruggie defined HRDD as a “comprehensive, proactive attempt to uncover human rights risks, actual and potential, over the entire life cycle of a project or business activity, to avoid and mitigate those risks.”Footnote 85 HRDD involves four key components: (1) identifying and assessing any actual or potential adverse human rights impacts; (2) taking appropriate action by integrating the findings from impact assessments; (3) tracking the effectiveness of their response; and (4) communicating externally how adverse impacts are being addressed.Footnote 86
Traditionally, MNCs employ due diligence in business transactions, such as mergers and acquisitions or securities transactions to assess risks associated with the company itself.Footnote 87 In contrast, MNCs are expected to conduct HRDD to evaluate risks to third parties, including employees and local communities.Footnote 88 Another difference is that, while due diligence in transactions is typically a one-time activity (a discrete contract), HRDD is an ongoing process spanning the entire lifecycle of a project (relational contract).Footnote 89 Consequently, HRDD entails a continuous endeavour to identify, prevent, mitigate, and address business risks affecting third parties.
Instead of conceptualizing HRDD as a process, it should be thought of as an outcome-oriented exercise that yields a social licence to operate (SLO).Footnote 90 A SLO represents an agreement — a quid pro quo — between local communities and MNCs; communities grant MNCs a social license in exchange for preventing, mitigating, and remedying business risks to the environment, climate, and human rights.Footnote 91 Initially viewed as an intangible construct,Footnote 92 the SLO has evolved into a legal construct epitomized in CDAs.Footnote 93 CDAs, recognized as “legally enforceable contract[s],” are signed by community groups and corporations, delineating the community’s SLO terms and conditions alongside the benefits that corporations derive from undertaking developmental projects.Footnote 94 The execution of these contracts by local communities symbolizes their endorsement of the project.
A CDA is an umbrella term for community-investor contracts, including community joint venture agreements, community benefit agreements, empowerment agreements, exploration agreements, investment agreements, and impact benefit agreements.Footnote 95 These contracts may be bilateral or tripartite, forming what Odumosu-Ayanu refers to as a multi-actor framework.Footnote 96 CDAs have been used in arrangements between local communities and MNCs in several countries, including Nigeria, Australia, Canada, the United States, Kenya, and Mozambique.Footnote 97 While the names of these contracts may vary across countries, they typically include clauses about HRDD, covering aspects like risk assessment, stakeholder engagement, risk prevention, risk mitigation, remediation, review and monitoring, and grievance mechanisms.Footnote 98 In some cases, these contracts are supported by (mining) legislation and are enforced by the state.Footnote 99 For example, bauxite mining communities in Sierra Leone entered into a CDA with Sierra Minerals Holdings Limited pursuant to section 140 of the Mines and Mineral Act, 2009,Footnote 100 to promote sustainable development in the community. Provisions in the CDA include stakeholder consultation under the Extractive Industry Transparency Initiative.
When assessed against MacNeil’s behavioural norms checklist (role integrity, mutuality, consent, flexibility, and contractual solidarity), discussed in section 2, it becomes evident that CDAs exhibit a relational nature because, primarily, they incorporate HRDD clauses or elements. The first norm that CDAs satisfy is the integrity criterion for the defined expectations that they establish between MNCs and local communities. MNCs meet societal expectations through HRDD and are rewarded with a SLO. If a MNC does not conduct a HRDD in the process leading up to contract execution and performance, it will not act in the integrity of its role and, therefore, will not receive a SLO from the local community. In effect, MNCs must continuously seek an SLO throughout the project’s lifecycle, a characteristic that further points to the relationality of CDAs.
With respect to the second norm — mutual expectations — CDAs are expected to produce a win-win outcome for local communities and MNCs. Local communities desire CDAs to improve their socio-economic lives without negatively impacting human rights and the environment. They also seek a form of self-actualization through meaningful participation and consultation in matters that concern them.Footnote 101 Conversely, MNCs wish to maximize profit through a stable and peaceful political economy, enhance corporate reputation, and reduce the risk of doing business.Footnote 102
The third norm — the effectuation of consent — is expressed in the continuous nature of a HRDD-informed CDA.Footnote 103 Stakeholder engagement at the project’s inception implies that MNCs would seek and receive consent from local communities throughout the project’s lifecycle. For example, during an initial risk assessment, local communities must be informed and approve the project.Footnote 104 However, this agreement comes with the mutual understanding that as the project unfolds and harm occurs, local communities will be consulted on issues relating to remediation and company-led grievance mechanism processes.Footnote 105 These are matters that may not be determined at the outset. The relational nature of a CDA ensures that parties can fill in the gap as the project unfolds.
The fourth norm of relational contracts is flexibility. Principle 17(c) of the UNGPs recognizes that human rights risks may change as MNC operations evolve, requiring flexibility for the parties to redesign their relationship. Commentary to Principle 31 also encourages MNCs to be flexible. A HRDD-informed CDA involves continuous risk assessment, requiring parties to adapt to dynamic human rights risks.Footnote 106 Therefore, rightsholders’ engagement, based on MNCs’ preventive, mitigation, or remediation efforts, must be adjusted according to the nature and size of the MNCs at a given time.Footnote 107 For example, a party initially involved in a low-risk venture must be flexible and ready to redesign its HRDD procedures when undertaking a high-risk mining project. This aligns with Principle 18 of the UNGPs, which mandates periodic reviews of HRDD policies.
The last behavioural norm — contractual solidarity — is connected to concepts like cooperation, transparency, and accountability to rights holders during stakeholder engagement in the UNGPs. Footnote 108 Principles 22 and 23 of the UNGPs stipulate that MNCs should cooperate and be transparent with rights holders when designing company-level grievance mechanisms. Principle 18 also provides that MNCs should engage in meaningful consultation with affected parties. The International Council on Mining and Metals’s model template for CDAs specifically states that, in the pursuit of “the goals and objectives of the CDA,” the parties must be committed “to the principles of cooperation, mutual respect, and good faith.” In effect, CDAs are negotiated and performed in an atmosphere of trust and transparency.Footnote 109 In effect, HRDD contributes to the relational character of CDAs. When viewed through the prism of the relational theory discussed in section 2 and reconceptualized as an internationalized contract, the process leading to the execution and performance of CDAs carries a notion of good faith — an obligation of honesty and cooperation in negotiation and contract performance.Footnote 110 However, compared to the role of good faith in investor-state contracts, the utility of good faith in CDAs remains unexplored.
The next section argues for a duty of good faith in CDAs, especially to inform the obligatory contours of HRDD. It compares HRDD and the FET standard as important elements of internationalized contracts. It contends that the role good faith plays in investor contracts should be transposed to CDAs, particularly to define how MNCs should discharge HRDD obligations.
6. Making a case for good faith in CDA contracts
It is important to draw similarities between the purpose of HRDD and a FET standard. Both concepts are designed to protect the weaker party in investment relationships. While a FET standard protects MNCs’ property and contractual rights in investor-state contracts, HRDD protects local communities’ human and environmental rights. HRDD and a FET standard ensure parties adhere to due process when contracting. Therefore, when a party’s conduct deviates from the legitimate expectation of the other party, an arbitral tribunal intervenes to enforce the contract.
Like the FET standard, HRDD is a vague contract term in most CDAs, allowing MNCs room for cosmetic compliance.Footnote 111 One factor contributing to HRDD cosmetic compliance is the ambiguity surrounding HRDD itself.Footnote 112 The language used to prescribe HRDD creates considerable scope for corporate discretion, especially when the process is not mandated to produce any specific human rights-related outcome.Footnote 113 It is unclear what “meaningful” rights-holder engagement entails. Who defines what is meaningful — the local community, the state, or the MNC? Since the HRDD exercise is context specific and depends on the size and nature of the business conducted, it grants MNCs discretion in how they conduct HRDD.Footnote 114 This raises the question of determining an appropriate level of conduct that satisfies the HRDD requirement — how do MNCs know when they have done enough? The discretion in discharging a HRDD obligation results in opportunistic behaviour that MNCs exploit.Footnote 115 Gabriela Quijano and Carlos Lopez conclude that “cosmetic compliance with HRDD at the internal company level replicates the high-level political uptake of the UNGPs with very little substantial action and verification of actual results.”Footnote 116
Another factor contributing to corporate cosmetic compliance is the lack of transparency in the HRDD exercise.Footnote 117 Although the UNGPs stipulate that MNCs should communicate how they address human rights impacts, this is only an “expected” voluntary conduct,Footnote 118 not a binding obligation. This lack of mandated transparency incentivizes MNCs to superficially conduct HRDD and to selectively disclose information to create an appearance of corporate responsibility.Footnote 119 Consequently, “the lack of transparency renders it very difficult, if not impossible, for external stakeholders and/or quasi-regulators to verify whether the information provided is accurate, let alone to assess whether a business is implementing processes that are capable of effecting real change.”Footnote 120 In sum, the ambiguity surrounding HRDD easily makes the process susceptible to corporate capture.
The foregoing discloses an apparent gap in the interpretation of HRDD obligations created by the ambiguity in the scope and application of the concept. To close this gap, it is necessary to clarify how MNCs should discharge their obligation. By this, I mean to create a standard of expected conduct against which MNCs’ HRDD exercise should be measured to determine compliance with the spirit and intent of the UNGPs. Since the UNGPs offer little guidance, good faith would help fill this gap. It would help to clarify the manner in which HRDD obligations should be discharged because “the principle of good faith can make valuable contributions to clarifying and refining the content of specific obligations under international law.”Footnote 121
Similar to how good faith influenced the contour and scope of the FET standard, good faith should influence the contours of the HRDD exercise in international relational contracts. If MNCs can take advantage of the good faith principle in investor-state contracts, why should they avoid it in CDAs? It could be argued that good faith is justified in relationships between states and investors because of the unequal power balance between the parties. However, this argument undermines MNCs’ economic and political power, which often outweigh those of many countries, especially developing ones.Footnote 122 Even if one assumes that MNCs are weaker than states, the same argument applies to the relationship between local communities and MNCs — local communities are typically weaker than MNCs. Therefore, local communities require legal protection against MNCs who act in bad faith — what is good for the goose is also good for the gander.
Using good faith as an interpretative tool and a standard of conduct in discharging HRDD obligations bridges the BHR and IIL worlds.Footnote 123 As Nicolás Perrone noted, “the strong separation of investor rights and obligations into two distinct fields that rarely communicate with each other remains puzzling.”Footnote 124 Similar to investors’ “legitimate expectation” claims before ISA tribunals, and due to the relationality of the BHR and IIL fields, local communities should be able to rely on good faith to give specific contours to HRDD obligations in negotiating and performing CDAs.Footnote 125 Local communities can make good faith claims in national courts. Considering that some national courts, including Canada and the United States, acknowledge that obligatory international law norms bind MNCs,Footnote 126 it is arguable that good faith, as an international law norm, should inform the interpretation and enforcement of HRDD. Also, when CDAs are conducted pursuant to state legislation, including mandatory human rights due diligence laws, good faith as a matter of domestic law can influence the interpretation of the HRDD standard. Beyond domestic litigation, ISA may be another avenue to make a good faith claim, given that investors rely on this principle to enforce their rights against states in the same forum.
Even so, transnational litigation is often procedurally complex and unsuccessful due to jurisdictional barriers such as forum non-convenience, locus standi, and extraterritoriality.Footnote 127 Similarly, ISA tribunals may be reluctant to hear local communities’ good faith arguments because they do not have locus standi to bring claims against foreign investors.Footnote 128 This is because “[ISA] as we know it today provides preferences to foreign investors in comparison to local stakeholders including domestic investors as well as third parties impacted by the foreign investment.”Footnote 129 Perrone concludes that “ISDS … may not be the right forum in which to decide on both foreign investor rights and obligations. The challenge is to find (or create) the appropriate institutional mechanism.”Footnote 130
Considering the launch of the Hague Rules on Business and Human Rights (Hague Rules) in 2019, local communities may have more forum options to make a good faith argument.Footnote 131 The Hague Rules implement Pillar III of the UNGPs, which enjoins states to provide an effective remedy to victims of human rights violations.Footnote 132 It is a special international arbitration (BHR arbitration) where local communities can claim pecuniary and non-pecuniary damages for climate change, environmental harm, and human rights abuses arising from business activities in host states. Parties to the arbitration agreement may include “business entities, individuals, labor unions and organizations, States, State entities, international organizations, and civil society organizations, as well as any other parties of any kind.”Footnote 133 In effect, local communities and MNCs can incorporate a BHR arbitration agreement into CDAs as part of the dispute resolution mechanism.
The Hague Rules specifically address the unique requirements of human rights issues in business (including contractual) disputes.Footnote 134 Essentially, it is the adoption of the Hague Rules that classifies an arbitration proceeding as a BHR arbitration.Footnote 135 BHR arbitration offers (1) a potentially neutral forum for BHR dispute resolution, independent of both parties and their states; (2) a specialized dispute resolution process in which parties can select competent and expert adjudicators on BHR; (3) the possibility of obtaining binding awards with limited judicial intervention and enforceability across borders; and (4) the autonomy to choose both procedural and substantive laws governing the proceedings.Footnote 136 BHR arbitral awards are enforced under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards in contracting states.Footnote 137
Unlike ISA, local communities can access BHR tribunals for contractual remedies.Footnote 138 When CDAs incorporate a BHR arbitration clause, arbitration tribunals have jurisdiction to arbitrate such claims.Footnote 139 In these cases, BHR arbitrators must recognize that a general principle of good faith guides the negotiation and discharge of HRDD exercises. Therefore, when MNCs conduct HRDD as a sham to shield them from liability, local communities could defeat such claims by invoking the good faith principle and highlighting the arbitrary nature of the exercise. Conversely, when MNCs do not meet the reasonable expectations of local communities and there are several human rights abuses, local communities should be able to ground a cause of action in good faith. In effect, local communities can use good faith as a sword when MNCs’ actions fall below the expected standard of conduct.
It remains to be decided what a good faith standard looks like in the BHR field. Since the application of good faith is a contextual exercise, existing soft law provides a context for the obligatory contours of good faith in this area. For example, John Ruggie prescribes principles for responsible contracting in the context of investor-state contracts.Footnote 140 Principle 2 states that MNCs must make provisions to prevent and mitigate human rights risks through HRDD before the contract is finalized.Footnote 141 It further states that investment contracts should reflect the parties’ responsibility to negotiate in good faith and participate in grievance mechanism procedures.Footnote 142 These principles can be extrapolated into a multi-actor investment framework to influence the negotiation and performance of CDAs. This is particularly relevant as the UN BHR Working Group on HRDD confirmed to the UN General Assembly in 2018 that corporations have a duty of good faith to collaborate and consult with local communities.Footnote 143 Indeed, it has been noted that “primarily, due diligence implies the obligation to act in good faith.”Footnote 144
Although Ruggie did not clarify good faith, other guidelines give context to it. The Organisation for Economic Co-operation and Development (OECD) Due Diligence Guidance for Meaningful Stakeholder Engagement in the Extractive Sector require parties to negotiate in good faith.Footnote 145 It defines good faith engagement as “the genuine intention to understand how stakeholder interests are affected by enterprise activities.”Footnote 146 This speaks to a duty of honesty. It also defines meaningful stakeholder engagement as an “ongoing engagement with stakeholders that is two-way, conducted in good faith and responsive.”Footnote 147 This definition is reiterated in the 2023 OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, a meaningful engagement with rights holders that requires good faith.Footnote 148 Although these guidelines are not binding, they provide an authoritative source for interpreting good faith in the BHR context.
The World Bank’s International Finance Corporation’s (IFC) Guidebook on Stakeholder Engagement in Emerging Markets expressly provides for good faith in MNCs’ negotiations with Indigenous peoples. Drawing from the International Labour Organization’s Convention no. 169 Concerning Indigenous and Tribal Peoples in Independent Countries, the IFC imposes a duty to negotiate in good faith during stakeholder engagements.Footnote 149 It further elaborates that “[g]ood faith negotiations are transparent, considerate of the available time of the negotiating parties, and deploy negotiation procedures and language readily understood and agreed to by all parties.”Footnote 150 Therefore, good faith engagement, especially with Indigenous peoples, requires consultation in the spirit of international guidance instruments, including the UN Declaration on the Rights of Indigenous Peoples and the UN Declaration on the Rights of Peasants and Other People Working in Rural Areas. Footnote 151
To complement and build a good faith interpretative framework for HRDD obligations, resort should be made to the arbitral practice of good faith interpretation in ISAs. Good faith in the BHR context should be interpreted as a source of rights that protects the relational nature of HRDD. First, good faith should prohibit MNCs’ arbitrariness and prejudice towards local communities without a legitimate purpose during contract negotiation and performance.Footnote 152 For example, when MNCs arbitrarily dispossess local communities of their lands or use state power to suppress dissenting voices in local communities during contract negotiation, this conduct would be prejudicial to the community’s interest.Footnote 153 Therefore, good faith in this context would prohibit using rights-holder engagement inappropriately to gather information from local communities to suppress resistance. Furthermore, similar to how arbitral tribunals use good faith to pierce the veil of artificial legal constructs aimed at securing investment protection, courts and BHR arbitral tribunals should scrutinize the HRDD process to identify abuses of the process when HRDD is not conducted transparently and is solely intended to enhance corporate reputation or serve as a shield against potential lawsuits. Good faith should prevent MNCs from using HRDD as a marketing strategy or to create an appearance of regulatory compliance. Such conduct should be considered as falling below a good faith standard.
Good faith should also protect local communities’ legitimate expectations from MNCs’ representations or investment-inducing measures. For example, Biofuel Norway, a MNC, promised residents of a village near Kusagwu in northern Ghana, food, electricity, and job opportunities for leasing their land to the company.Footnote 154 However, these promises were never fulfilled, echoing a common narrative in many community projects, particularly in developing countries. Therefore, when MNCs make representations that the HRDD process will be adhered to, or that local communities will significantly benefit from a project, they should be estopped from reneging on these commitments.
In effect, good faith in the BHR context should be interpreted as a source of rights to shield local communities from MNCs’ abuse of power during the HRDD process. Given that the application of good faith hinges on the dynamics of the relationship between the parties involved, it is challenging to outline exhaustive scenarios that would fall under its purview. Consequently, arbitrators and courts must adjudicate each case contextually. While this approach may introduce some level of uncertainty, its efficacy cannot be discounted, considering “good faith has been used so often in the law that it cannot be wished away on the basis that subjectivity needs to be eliminated.”Footnote 155 Tribunals and courts must rely on relational principles of trust and cooperation to determine when MNCs’ conduct deviates from the expected standard.
7. Conclusion
Arguing that CDAs are relational, this article has pinpointed that MNCs engage in relational contracts with states and local communities as international actors. It asserts, too, that the efficacy of relational contracts is situated in cooperation, trust, and good faith and that arbitral tribunals uphold these values in internationalized contracts involving states and MNCs through the FET standard. However, the concept of good faith in CDAs — particularly, in the context of conducting HRDD — has not received significant attention from courts and tribunals. This article, therefore, contends that, like its application in investor-state arbitration practice, BHR arbitral tribunals and courts should impose good faith obligations on MNCs to discharge their HRDD responsibilities. As an interpretive framework, this approach would serve to (1) curb MNCs’ superficial compliance with HRDD principles; (2) enhance transparency in the HRDD process; and (3) provide local communities with a basis for holding corporations accountable for violations of their international relational contract obligations.
It is obvious that interpreting good faith in BHR is a contextual endeavour. It demands of tribunals and courts to account for the juridical implications and consequences for MNCs of the relational principles that underpin interactions between local communities and MNCs within the obligatory context of the agreements that institute those interactions. As argued, this exercise would pay for itself by ensuring that fair and equitable outcomes are assured not only for MNCs but also for the local communities the beneficial exploitation of whose real property resources is the raison d’etre of the relational contracts they commonly enter into with the MNCs. Although this article has focused on good faith in international law, future research may consider contractual good faith expressions in local and Indigenous norms, such as Ubuntu in Africa.Footnote 156 A congruent good faith interpretation between international and local norms will further impel corporate accountability.
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