The debate about corporate social responsibility has recently moved into new territory: the establishment of what can be called corporate social liability or CSL. CSL goes beyond classic tort and company law and may result in vicarious liability of parent companies for the misconduct of subsidiaries and third-party business partners. Its main focus has been on violations of obligations involving human rights and the environment. In a recent paper, I assess the novel elements of international developments involving CSL.
Various legislative actions and court cases, particularly in Europe, have contributed to the emergence of CSL:
- The EU Council and the EU Parliament as co-legislators agreed in February 2022 on a draft for a “Directive on Corporate Sustainability Due Diligence”.[1] The directive provides for an obligation of parent companies of large international groups to operate a human rights and environmental due diligence system across their group structures and value chains. The directive awaits final approval.
- In Switzerland, a law entered into effect on January 1, 2022, in the aftermath of the rejection of a constitutional initiative on multinational group liability. The law provides for a duty of care of Swiss parent companies covering their subsidiaries as well as their global supply chain towards preventing “child labor” and the trade with “conflict minerals.” Violations of the new duties of care give victims from around the world a potential cause of action against Swiss companies in Switzerland.[2]
- In the Netherlands, the Hague District Court in 2021 ordered the parent company of the Shell group to reduce its carbon dioxide emissions to 45 percent of its 2019 levels by 2030.[3] The decision was based on Art. 162 of the Dutch Civil Code, which makes it a tort to violate “a rule of unwritten law pertaining to proper social conduct.” Shell appealed the decision.
- The Shell parent company was also the defendant in a landmark decision by the UK Supreme Court in 2021.[4] It involved a civil action for damages by victims of an oil spill in Nigeria. The case touched on, among other things, the question of whether the parent owed the plaintiffs a direct duty of care. The Supreme Court affirmed such a duty under common law. It found that group management had a responsibility for “the safe condition and environmentally responsible operation of Shell’s facilities and assets”.
- In Canada, the Supreme Court in Nevsun Ltd. v. Araya[5] dealt with a case of Eritrean workers who had allegedly been subjected to forced labor and other violations of human rights. The court ruled that the actions could proceed and be tried. It held that corporations today do not enjoy a “blanket exclusion…from direct liability” for complicity in violations of universal norms of international law.
- The U.S. was the primary jurisdiction for filing and testing actions against corporations for alleged complicity in human rights. These actions were brought under the Alien Tort Statute. However, the US Supreme Court significantly curtailed the applicability of the law.[6]
Differences among jurisdictions notwithstanding, the recent rise of CSL seems to have developed in three directions:
- New Duties of Care of Companies for Human Rights and the Environment: The new forms of CSL focus mainly on human rights and the environment. Both are hot topics in the current political discourse of Western democracies and both are broadly recognized as crucial to the global value system and the future of our societies.
- Potential Parent Company Liability for Subsidiaries and Business Partners: Typically, the newly emerging corporate duties apply to parent companies. They require overseeing subsidiaries, but may also extend to monitoring third-party business partners. The corollary of these new obligations is a liability risk for negligence or even strict liability.
- Expanded Jurisdiction of Home Countries: By creating parent company obligations to monitor events in host countries, the laws of the host country at least partially replace the laws of the parent’s home country. In addition, the creation of direct parent company obligations to potential victims in host countries opens up home country courts to them, because the violation of these duties makes parent companies directly liable to victims.
In my paper, I emphasize the potential effects of these developments on social efficiency, i.e. global prosperity.[7] My conclusions are that:
- Imposing strict and exclusive liability on companies for any environmental damages and human rights violations in host countries – without any defense reflecting the limits of their ability to monitor their activities there – would create massive moral hazard. A negligence liability rule that imposes realistic and practical monitoring duties on corporations, including their parents, would not be subject to the same moral hazard.
- The ability of parents to monitor a subsidiary depends on how involved they are with the subsidiary. A parent that is merely a shareholder cannot control the events at a subsidiary as well as a parent that itself manages subsidiary operations. Any standard of care should reflect such differences. If it does not, the potential efficiency of decentralized, international group management might be wasted.
- Parent companies, in setting up subsidiaries, are typically granted limited liability for the subsidiary’s debt. This arrangement between the parent, as foreign direct investor, and the host country, as recipient of the investment, should not be lightly compromised. It reflects a basically efficient contractual allocation of political and business risks tested by world markets: The parent puts down a (sufficient) bond in the form of the subsidiary’s equity to cover business risks while the host country, in return, grants the subsidiary limited liability to shield the parent from political risks.[8] Any parent company liability in the context of CSL should therefore only cover the parent’s own negligence beyond its shareholder role.
- While tort liability for all operations in a host country by corporate groups, including parent activity going beyond its shareholder role, should basically be subject to the host country’s rules, narrow exceptions established by home country law can be justified. They should, however, not undercut the liability arrangement between the corporate parent and the host country. Hence, they should be limited and narrow enough not to encroach upon the basic host country rule over the group’s host country activities. To be sure, given that host country law and courts might be dysfunctional, there is a legitimate case for default rules in home country law, e.g. a “public order exception.”
The recent international attempts to shape new forms of CSL should not be dismissed. If crafted diligently, CSL could help improve human rights and a sustainable environment. However, if rushed with idealistic fervor by either legislators or courts and without a view to social efficiency, they might be counterproductive by creating, for example, excessive liability, inefficient corporate structures, or obstacles to corporate investment in third world countries.
ENDNOTES
[1] COM (2022) 71 final, 2022/0051 (COD).
[2] Hofstetter Karl, Gegenvorschlag zur Konzernverantwortungsinitiative und Unternehmenshaftung, Schweizerische Juristenzeitung 117 (2021), p. 571 et seq.
[3] Rechtbank Den Haag, C/09/571932/HA-ZA 19-379 (English version)
[4] Okpabi and others v. Royal Dutch Shell Plc and another, Hilary Term (2021) UKSC 3
[5] 2020 SCC 5.
[6] Jesner et al. v. Arab Bank, 584 U.S.__(2018); Nestlé USA, Inc. v. Doe, 593 U.S.__(2021).
[7] Hofstetter Karl, From “Corporate Social Responsibility” to “Corporate Social Liability”?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4262345
[8] Hofstetter Karl, Multinational Enterprise Parent Liability: Efficient Legal Regimes in a World Market Environment, North Carolina Journal of International Law & Commercial Regulation (1990), p. 299 et seq.
This post comes to us from Professor Karl Hofstetter at Zurich University in Switzerland. It is based on his recent paper, “From “Corporate Social Responsibility” to “Corporate Social Liability”? available here.