UNIVERSITY OF ESSEX

LAW DEPARTMENT

LLM in International Human Rights Law

2004-2005

DISSERTATION:

The notion of Socially Responsible Investment in the context of State-

Investor 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

(i) The notion and objectives of Corporate Social Responsibility

(ii) Importance of the stakeholder approach

(iii) Socially Responsible Investment and its strategies

(iv) Responsibilities of corporate governance function towards the social investment

(v) Summary

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5

7

8

12

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II. THE RELATIONS BETWEEN TRANSNATIONAL CORPORATIONS AND STATES IN TERMS OF HUMAN RIGHTS OBLIGATIONS

(i) The nature and scope of TNCs’ human rights obligations

(ii) Host State and FDI: the models of good, weak and bad governments

(iii) Political influence of TNCs versus the national sovereignty of the Host State

(iv) The extraterritorial jurisdiction of the Home State towards human rights protection

(v) Summary

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17

21

27

29

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III. THE STATE-INVESTOR AGREEMENT AND FOREIGN INVESTMENT DISPUTES ON HUMAN RIGHTS ISSUES

(i) The legal nature of State-Investor Agreements

(ii) The doctrine of Permanent Sovereignty versus contractual sanctity

(iii) Stabilization clause and government interference with State-Investor Agreements

(iv) State responsibility for injuries to alien property: the legitimacy of nationalization and the concept of compensation

(v) Summary

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34

38

41

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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 rights2 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

literature on the question of whether direct investment per se is good or bad. Rather, it seeks 1 Wallace, Cynthia “The Multinational Enterprise and Legal Control. Host State Sovereignty in an Era of Economic Globalization” (Martinus Nijnoff Publishers, 2002), p.42 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

2

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 TNC-

host 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

legal aspects of international personality of TNCs, the substantiations of corporate

3

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 decision-

making 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

I. CORPORATE RESPONSIBILITY IN TERMS OF SOCIALLY RESPONSIBLE

INVESTMENT4 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.116 Sornarajah, M., “The International Law on Foreign Investment” (Cambridge, 1994), p.47 “Balance of Payment Manual” IMF (1980), para.408

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(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

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 8 “Perspectives on Corporate Social Responsibility” Crowther, D., Rayman-Bacchus, L. (eds), (Ashgate Publishing Ltd., 2004), p.1

5

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

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

9 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.5711 Vassal-Adams “Human Rights, the Interests of Companies and the Law: Striking the Balance”, LL.M. Essex Thesis, 1998, p.6012 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.29414 supra note 9, p.9

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(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

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 15 Freeman, E. and Reed, D. in Dienhart, J.W, supra note 13, p.24916 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.918 supra note 15, p.24719 supra note 8, p.4

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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.

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,

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

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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 Investors25 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:

(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

22 “Self-regulation in the Workplace: Codes of Conduct, Social Labeling and Socially Responsible Investment” Urminsky, M. (ed.), ILO, p.4723 Report on Socially Responsible Investing Trends in the United States, Social Investment Forum (SIF Industry Research Program, Dec 2003), available at http://www.socialinvest.org24 Sparkes, R. “Socially Responsible Investment: A Global Revolution” (West Sussex, 2002), p.4225 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

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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 low-

income 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

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.

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.329 supra note 23, p.530 Baue, William “Top Five Social Investing News Stories of 2003” (SocialFunds, Dec. 2003), available at http://www.socialfunds.com/news/article.cgi/article1299.html

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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.

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

31 supra note 24, p.2932 supra note 23, p.1533 supra note 23, p.1334 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

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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

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

35 Matthew J.Kiernan “Corporate Social Responsibility – the Investor’s Perspective” in John Hancock (ed) “Investing in Corporate Social Responsibility” (Kogan Page Ltd., 2004), p.7536 John Peters in Crowther, D., supra note 8,p.20637 Donna Wood in Addo, M., supra note 3, p.18

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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

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

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.25942 Cooper, S. “Corporate Social Performance: A Stakeholder Approach” (Ashgate, 2004), p.1843 Marens, R. and Wicks, A. in supra note 13, p.260

13

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

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

44 Sheldon Leader “Collateralism” in R Brownsword (ed) “Global Governance and the Search for Justice” (2005), p.5545 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.com46 supra note 44, p.55-56

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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

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

47 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 14049 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.17450 The international criminal responsibility is beyond the framework of this study.

15

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.

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

51 Addo, M., supra note 3, p.1652 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.

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(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

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

53 Asbjorn Eide, UN Doc. E/CN.4/Sub.2/1987/23, 7 July 1987, para 6554 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.

17

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

(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

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

18

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

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

57 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.2859 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.1460 “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

62 Alison Maitland “A Widening Sphere of Influence” (Dec.2001) Available at http://spinwatch.server101.com/modules.php?name=News&file=article&sid=301

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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.

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 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.5864 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

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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

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). 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

(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.

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

68 “Private Direct Foreign Investment in Developing Countries”, World Bank Staff Working Paper No.348, 1979, p.14

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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.

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.

69 Manuel Velasquez “International Business Ethics: The Aluminum Companies in Jamaica” supra note 13, p.30270 ibid71 ibid72 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

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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.

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

73 Kwamena Acquaah “International Regulation of Transnational Corporations: The New Reality” (New York: Praeger, 1986), p.152

24

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

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 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.7577 International Council on Human Rights Policy “Beyond Voluntarism: Human Rights and the Developing International Legal Obligations of Companies” (Geneva, 2002), pp.125-13678 Ken Wiwa v. Royal Dutch Petroleum Co. No.96 Civ. 8386 (S.D.N.Y 1998)

25

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

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

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.181 supra note 80, p.382 Addo, M., supra note 3, p.31

26

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

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

83 Addo, M., supra note 3, p.484 supra note 73, p.6685 supra note 80, p.2686 Patricia H. Werhane in supra note 13, p.296

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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.

(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 ill-

adapted 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

87 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 199888 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

28

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

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.

90 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.63791 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

29

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

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

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.2896 “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)98 supra note 93 p.652, 99 Nicola Jagers “The Legal Status of the Multinational Corporation under International Law” in Addo, M., supra note 3, p.268

30

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 rights-

related 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.

(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 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 3101 supra note 93, p.660 102 supra note 44, p.60

31

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.

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

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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.

(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 State-

Investor 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

103 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.26104 Sornarajah, M., “The Settlement of Foreign Investment Disputes” (Kluwer Law International, 2000), p.85

33

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

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 105 Serbian Loans Case (1929) PCIJ Series A, No.20106 supra note 76, p.27107 supra note 76, p.28108 F.V. Garcia-Amador “State Responsibility in Case of ‘Stabilization’ Clauses”, 2 Journal of Transnational Law and Policy 23 (1993), p.29109 supra note 108, p.33110 ibid111 Memoire Pour le Gouvernement de la Confederation Suisse (Switz. v. Yugo.), 1936 P.C.I.J. (ser. C) No. 78, at 10

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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

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 112 supra note 108, p.27113 supra note 108, p.35114 supra note 76, p.88115 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

35

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

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;

117 supra note 76, p.87118 supra note 76, p.88119 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

36

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

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

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/ENGPOL300282005122 supra note 120, p.7123 Jack N.Behrman in supra note 73, p.44

37

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

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.128 124 Ian Brownlie “Principles of Public International Law” (Oxford University Press, 2003) 6th edition, p.526125 ibid 126 General Assembly Resolution 1803 (XVII) of 14 December 1962 127 supra note 116, p.7128 supra note 126, Para 2

38

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 self-

determination, 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

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

129 Ian Brownlie “Legal Status of Natural Resources in International Law (some aspects)”, 162 Recueil Des Cours, 1979, p. 270130 supra note 76, p.143131 See for example, Case concerning East Timor (‘Timor Gap case’) [1995] ICJ; Southwest Africa Case [1966] ICJ Rpts 6.132 supra note 76, p.331133 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.

39

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.

(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

134 supra note 129, p. 269135 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.23137 supra note 76, p.50

40

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,

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 138 1997 COTCO Convention of Establishment between COTCO and the Government of Cameroon, where COTCO is Cameroon Oil Transportation Company139 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

41

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

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

141 supra note 74, p.16142 Oneryildiz v Turkey, № 48939/99, ECHR, 18 June 2002143 supra note 142, para. 87144 Government of Kuwait v. American Independent Oil Company (Aminoil), 66 I.L.R. 519, (1984)145 supra note 76, p.68

42

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

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 146 supra note 76, p.123147 supra note 73, p.87

43

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

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

148 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. 486149 supra note 115, p.395150 Case of James and Others v. UK Judgment of 21 February 1986, Series A, No. 98, para 46

44

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

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 doctrine155 in Latin

America, insist on paying compensation in accordance with the laws of the nationalizing

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. 153 supra note 124, p.510154 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.

45

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

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 156 supra note 73, p.88157 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.158 supra note 6, p.371159 Lithgow v UK (1986) 8 ECHR 329160 supra note Lithgow case 159, para 121

46

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

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

161 supra note 6, p.405162 supra note 124, p.511163 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.

47

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

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.

165 supra note 6, p.313

48

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

49

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

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

50

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

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.167 166 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,

51

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

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

p.297168 supra note 121169 supra note 6, p.141

52

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.

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48. “National Legislation and Regulations Relating to Transnational Corporations: A technical paper” UN Centre on Transnational Corporations (NY, 1983)

49. Norton, P. “A Law of the Future or a Law of the Past? Modern Tribunals and the International Law of Expropriation” 85 American Journal International Law 474, 1991

50. “Perspectives on Corporate Social Responsibility” Crowther, D., Rayman-Bacchus, L. (eds), (Ashgate Publishing Ltd., 2004)

51. Peter, W. “Arbitration and Renegotiation of International Investment Agreements” (Kluwer Law International, 1995)

52. “Private Direct Foreign Investment in Developing Countries”, World Bank Staff Working Paper No.348, 1979

53. Ratner, S. “Corporations and Human Rights: A Theory of Legal Responsibility” (111 Yale Law Journal, Dec.2001) 443

54. 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

55. Sebok, A.J., “The Supreme Court Confronts the Alien Tort Claims Act: Should the Court Gut the Law, as the Administration Suggests?” (2004) Available at: http://writ.news.findlaw.com/sebok/20040322.html

56. “Self-regulation in the Workplace: Codes of Conduct, Social Labeling and Socially Responsible Investment” Urminsky, M. (ed.), ILO.

57. Sercovich, T. “Engaging with Stakeholders. Output of the Corporate Responsibility Policy and Practice Taskforce” (Business in the Community Research Project, 2003)

58. Shamir, R. “Between Self-regulation and the Alien Tort Claims Act: on the Contested Concept of Corporate Social Responsibility”, Law and Society Review (Dec., 2004)

59. Shen, J. “National Sovereignty and Human Rights in a Positive Law Context”, 26 Brook. J. Int'l L. 41

60. Sparkes, R. “Socially Responsible Investment: A Global Revolution” (West Sussex, 2002)

61. Sornarajah, M., “The International Law on Foreign Investment” (Cambridge, 1994)

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62. Sornarajah, M., “The Settlement of Foreign Investment Disputes” (Kluwer Law International, 2000)

63. “The New Sovereigns: Multinational Corporations as World Powers” Abul A.Said, Luiz R.Simmons (eds) (New Jersey: Prentice-Hall, 1975)

64. Wallace, C. “The Multinational Enterprise and Legal Control. Host State Sovereignty in an Era of Economic Globalization” (Martinus Nijnoff Publishers, 2002)

65. Weiler, T. “Balancing Human Rights and Investor Protection: A New Approach for the Different Legal Order” Oil, Gas & Energy Law Intelligence, Vol.2, issue 02, 2003

66. Vassal-Adams “Human Rights, the Interests of Companies and the Law: Striking the Balance”, LL.M. Essex Thesis, 1998

LIST OF CASES:

1. Ken Wiwa v. Royal Dutch Petroleum Co. No.96 Civ. 8386 (S.D.N.Y 1998)

2. Government of Kuwait v. American Independent Oil Company (Aminoil), 66 I.L.R. 519, (1984)

3. Doe v. UNOCAL, 963 F.Supp. 880 (US District Court, C.D.Cal) March 25, 1997

4. John Doe I, et al. v. Exxon Mobil Corp., et al., No. 01CV01357 (D.D.C. 2001)

5. Re Union Carbide Corp. gas Plant Disaster at Bhopal, India, December 1984, 643 F.Supp. 842 (S.D.N.Y. 1986)

6. Flores v. Southern Peru Copper Corp., 253 F. Supp. 2d 510 (S.D.N.Y. 2002)

7. Ngcobo & Others v. Thor Chemicals Holdings Ltd. & Others (1997)

8. Adams & Others v. Cape Industries plc and another (1990)

9. Serbian Loans Case (1929) PCIJ Series A, No.20

10. Memoire Pour le Gouvernement de la Confederation Suisse (Switz. v. Yugo.), 1936 P.C.I.J. (ser. C) No. 78

11. Aramco Arbitration (1963) 27 ILR 117

12. Case concerning East Timor (‘Timor Gap case’) [1995] ICJ; Southwest Africa Case [1966] ICJ Rpts 6

13. 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)

14. 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.

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15. BP Exploration Co. (Libya) Ltd. v. The Government of the Libyan Arab Republic dated October 10, 1973 (BP Award)

16. Oneryildiz v Turkey, № 48939/99, ECHR, 18 June 2002

17. Case of James and Others v. UK Judgment of 21 February 1986, Series A, No. 98

18. Lithgow v UK (1986) 8 ECHR 329

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

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