Other panelists have talked about the increasing relevance of human rights to bilateral treaty arbitrations between governments and foreign investors. This is a very important development. However, my focus is on how to prevent the disputes that give rise to those arbitrations in the first place. If human rights are not addressed up front, in host state/foreign investor contract negotiations, they will come back to bite people, states, and investors. To do so, I want to talk about the 2011 UN Guiding Principles on Business and Human Rights, and their addendum, the Principles for Responsible Contracts.
Following six years of research, pilot projects, and over fifty multistakeholder consultations, the UN Guiding Principles on Business and Human Rights (Guiding Principles) were unanimously endorsed by the UN Human Rights Council in 2011.Footnote 1 They have since become the authoritative global standard for business and human rights. They provide a blueprint for how states can protect human rights and how businesses can respect them.Footnote 2 And they are increasingly reflected or incorporated in law and public policy, the policies and practices of leading companies, multistakeholder norms, financial and commercial transactions, judicial and nonjudicial dispute processes, and the advocacy of civil society.Footnote 3 As other panelists have pointed out, they have begun to make their way into bilateral treaty arbitration decisions.Footnote 4
During his mandate, Professor John Ruggie, the special representative of the UN Secretary-General on business and human rights, and author of the Guiding Principles, focused on these contracts, because some of the greatest human rights challenges exist in major infrastructure projects funded by foreign investment in countries with weak governance. A downward spiral in trust between foreign investors and communities can result in the loss of a company's social license to operate long before it loses its legal license to operate.
Major infrastructure projects can have positive and negative impacts on human rights. The positive impacts can include job growth, tax revenue, and development of needed infrastructure. The negative impacts can include the forced resettlement of communities without compensation, soil, water, and air pollution, and charges of forced labor, rape, and extrajudicial killings by security forces protecting company assets. The worst problems take place in countries with weak governance and conflict zones.Footnote 5
In addition, community conflict is costly to businesses. Litigation is often the least of a company's concerns. The most frequent cost of company/community conflict is lost productivity due to delay. A 2008 Goldman Sachs study of 190 oil and gas projects showed that the time to come on line had doubled over last decade. The delays were attributed to technical and political complexity; with stakeholder risk—notably including community conflict—constituting the largest category of nontechnical risk. One company estimated that it had incurred US $6.5 billion of delay costs in two years. Extractive company losses are similar: based on studies in Peru, it has been estimated that a $3 to $5 billion mining project will suffer $2 million per day of delay costs from community conflict. The most overlooked cost is management distraction, sometimes as high as 50 percent. And the greatest cost is lost opportunities.Footnote 6
The Guiding Principles are founded on three interdependent pillars: Pillar I is the state duty to protect human rights that businesses may affect. It is based on their obligations under international treaties, and it is addressed by policy making, legislation, investigation, and adjudication. Pillar II is the business responsibility to protect human rights. It is a road map for companies to know and show that they are protecting human rights. It expects that companies will embed respect for human rights in their organization and culture from the top down, use human rights due diligence to identify and manage their human rights risks, and remedy human rights harm that they have caused or contributed to. Pillar III is the need for greater access to remedy by victims of human rights abuses, both judicial and nonjudicial.
The Principles for Responsible Contracts (Contract Principles) are an addendum to the Guiding Principles.Footnote 7 Viewed through the lens of the Guiding Principles, host state/foreign investor agreements sit at the crossroads of the state duty to protect human rights from business-related harm and the business responsibility to respect human rights. Their negotiation offers a critical opportunity to get things right at the outset.
The Contract Principles provide guidance for addressing human rights risks in the negotiation of host state/foreign investor contract negotiations. Their approach is to identify the issues that negotiators should consider. They contain a list of ten principles and recommendations. They don't provide boilerplate language for lawyers to cut and paste.
Three critical principles relate to risk identification, stabilization clauses, and physical security. The risk identification principle recommends that the parties identify human rights risks that the project may pose at the outset, by asking what is the foreseeable harm, whether the parties have the capacity to address them, whether there is quality information about the harm, and where the funding will come from.
The stabilization clause principle recognizes that the stability of a long-term investment project is important for all parties, but cautions that they should allow the state to exercise its duty to protect human rights. They should not be used to tie the state's hands when it acts on bona fide public interest grounds and in a nondiscriminatory fashion.
Finally, the physical security principle recognizes that the parties need to focus attention on negotiating public and private security arrangements, since this is often a potential source of the most severe human rights harm. As a result, it is recommended that the parties agree upon protocols to manage security through project life, including how local law enforcement should be involved, how private and public security should coordinate, and whether they are in line with international and humanitarian security standards. It is also recommended that the parties agree upon operational level grievance mechanisms and community engagement regarding security.
To conclude, host state/foreign investment contracts are at the ground floor of what may become a bilateral investment treaty arbitration. Heading off the human rights concerns at that level through negotiation will greatly serve the interests of all stakeholders.
