A particular form of international business which involves transfer of capital, assets, management etc. over to a foreign institution is known as Foreign Direct Investment (FDI). There are certain ways of investing or FDI in a foreign country; which may include partnership, franchising, acquisition of an ongoing business, opening a branch or may be incorporating a subsidiary company. Among all these a subsidiary deserves some consideration from a legal point of view. It is largely because FDI through a subsidiary often creates a legal vacuum, in relation to the control, between the Home Country Company (Parent Company) and the Host Country Company (subsidiary). This blog addresses few of the issues regarding the lack of accountability of the Multinational Corporations, and some of the ways the courts have adopted over last few years to circumvent those legal lacuna.
FDI by a Multinational business enterprises often benefits the host country in various ways. For example, by transferring resources, technology and management knowledge to the host country which is otherwise non-accessible to it. They may contribute to the employment of the host country, to a certain degree, by opening business institutions or by substituting the importation of goods and services with production. It may add benefits, to a certain extent, to the balance of payment of the host country by exporting those goods and services. Quite often, though, the adverse effect may outweigh the benefits. For example, sometimes, they adversely affect the competition on the host country market, closing down small industries that ultimately adds to the effect of unemployment. These corporations repatriate their profits to the home country that in turn creates problem with balance of payment to the host country. Some even worry that MNC’s may threaten the sovereignty of the host country as they are often the key player in their economy.
In addition to that there is the problem of the accountability of these corporate giants. As already mentioned MNC’s usually operate with a subsidiary in the host country. These subsidiaries are considered a national of the host country and are regulated by the laws of that country. But in most of the circumstances the key controls lie with the parent company, and when any wrong is done, the company is called to account for its acts in a court of law, the parent companies simply take the defence of separate legal entity, that is the parent company cannot be held liable for the actions of its subsidiary. This defence was challenged in the Barcelona Traction, Light and Power Co[i], where the ICJ was asked to ignore the separate legal entity of a Canadian Corporation (incorporated in Canada), principally owned by Belgian nationals, but the ICJ refused to do so. Even when this defence might be overlooked by the Court, the parent company may call in the defence offorum non conveniens. That is the home/host country Court is not the right forum to initiate the case. The classic example of the forum non conveniens might have been the Bhopal Disaster case[ii]. This illusory nature of the Multinational Corporations has led to the legal problem of holding them responsible for wrongs done or rights violated in the host country.
Practical Pictures of Control over MNC/TNC
Host Countries
Regulating the Multinational Corporations and holding them responsible for any wrong doing has always been difficult. Multinational Corporations operate in more than one country and therefore have different nationality. Whenever in a host country they are held liable for any violation of laws they always manage to escape the liability and establish its operation in a more favourable environment. In the international level also there is no sufficient mechanism to hold them accountable. Efforts have also been made by the international community to establish accountability of the MNC’s in the regional level. None of these mechanisms have yet proven successful. These controlling mechanisms are, as such, divided into three different levels, namely: at the national level of the home and host country, at the regional level; at the international leave.
In the national level, however, both in home and host countries Governments can adopt policies to regulate the activities of the MNC’s. But this is more difficult from the perspective of the host countries. It is because of the fact that host countries are basically the least developed countries that needs the foreign investment in their economy. There is also the fact that most of the host countries suffers from infrastructural incapacity, corruption in the government level and delay in the justice system which fuels the violation of human rights, labour and environmental laws.
Sri-Lanka, for example, has setup Free Trade Zones in 1978 as a part of structural adjustment programme by the World Bank. As a policy to attract the foreign investment these FTZ have a comparatively lower level of rules and regulations. This leads to violation of workers’ rights. Report shows that most of these free trade zones do not recognise trade unions or workers union, there are no living facilities for the workers, the pay rate is lower than minimum international standard and yet there has been no action taken by the government to make the situation better.[iii]
Collusion at the government level is also a reason for the lack of accountability of MNC’s in the host country. It is partly because of the fact that the host countries are basically the least developed countries which needs the MNC’s for their economy and partly because in some cases the MNC’s prove to be a threat to its economy which the host states government cannot alienate. One of the examples of government collusion with MNC’s is that of Unocal and Burmese government. The case of Doe v Unocal Corp[iv] shows that Unocal became involved in a pipeline project a during 1990’s when it purchased a 28 percent interest from Total S.A., a French oil company that had entered into an agreement with Myanmar’s military government and Myanmar Oil and Gas Exploration (MOGE), a state-owned monopoly. Construction began in 1992 and the pipeline was completed in 1999. International human rights groups including Amnesty International and Human Rights Watch have reported that during construction Myanmar’s military regime subjected villagers along the pipeline route to forced relocation, forced labour, murder, torture and rape. A class action was brought against the Unocal Corporation in 1996, which after much discovery the Court ruled that it could go to trial and was settled out of court in 2005.
Similarly in Nigeria the collusion between the government and the Multinational Oil Companies like Shell, Texaco, Chevron have lead to social and political unrest. A lack of environmental law creates an environmental heaven for these companies whereas a worldwide threat to environment. According to Green Peace[v], "since the beginning of Shell's operations in the Niger Delta, the company has wreaked havoc on neighboring communities and their environment. Many of its operations and equipments are outdated, in poor condition, and would be illegal in other parts of the world." The U.S department of Energy[vi] calculated a release of methane from Nigerian flares[vii]. The oil issue in Nigeria has served as a catalyst for political and social unrest. Report shows that the Multinational Corporations finance the military security and operation in their vicinity by the Nigerian Government. Where more than 90% of the country’s export counts for gas and oil, these oil companies also threatens the sovereignty of the country. For example, following an increased ethnic-induced violence in 2003, Chevron, Texaco and Shell suspended its oil production. During that time an approximate 216,000 barrels of oil per day was lost representing an approximately 13 percent of Nigeria’s total average production of 2.1 million bbl/d.
Thus the collusion in the level of government with the MNC’ has created a legal vacuum in the Developing and Least Developed countries, making it impossible for the plaintiff to sue anyone in the host country. An effort has, therefore, always been made to hold the MNC’s responsible in their home countries. It is because of the fact that the Multinational corporations the usually homed at the developed country, where the justice system is more favourable, in contrast to the least developed or developing host countries, as discussed above. Where it takes long time to decide cases and most of the people do not have access to the courts and justice system.
Home Countries
In the United States a number of claims have been made through Alien Tort Claims Act. This law gives a US court jurisdiction in a number of cases. For instance, in cases of Human Rights violations (violation of customary international law) as long as the defendant is the subject of USA. This law also covers the area of slave labour, collusion in genocide, collusion in torture and collusion in extrajudicial murder etc. As discussed above the case of Burmese people Doa v. Unocal was brought in Californian district court under this Act. However, there are some criticisms of exercising jurisdiction under this Act. One of them is that of interfering with the sovereignty of other states. In the Ecuadorian case of Aguida v Texaco[viii], a class action was brought against the Texaco. Allegedly the company during its mining operations from 1972-1992 had destroyed a large area of the Amazonian rain forest by bumping a large amount of oil and produced water directly into the rivers. They had sprayed oil on the native roads which had completely destroyed the lifestyle of some eight indigenous tribes in the area. The pollution of the river waters, which the plaintiff community used to bathe, drink, cook and for fishing were contaminated and caused numerous health problems. The plaintiff’s also contended that the pollution had reached the neighbouring country of Peru. The US district Court dismissed the claim on the grounds of forum non convenience, alleging that Ecuador was unlikely to produce enough evidence to show that Texaco’s acts were international tort to invoke US jurisdiction. The plaintiff filed an appeal to the US Court of Appeal for the second circuit. The Appellate Court upheld the decision of the District Court, however, on different ground.
Beside the Alien Tort Claims Act, United States also hosts certain unfair competition laws or antitrust laws as they are known. One of these laws is called Sherman Antitrust Act. This Act forbids any combination or contracts to restrain or monopolize the interest of United States in national or international business. United States has several times exercised this law successfully to control the corporate behaviour of Multinational Enterprises. In the case of United States v Aluminum Co. of America[ix] charge was brought against the defendant Alco and Aluminium Ltd. of illegal conspiracy to restrain domestic and foreign commerce in the manufacture and sale of aluminum ingot. The trial Court dismissed the complaint and on an appeal to the Second Circuit Court of Appeals, the court held that the company had made certain agreement which set up a quota system to export aluminum ingot to US and therefore, violated the Sherman Antitrust Act.
This extra-territorial application of the US anti-trust laws has lead to considerable criticisms. A lot of countries including UK have enacted what is known as ‘blocking statute’. These statutes obstructs the extraterritorial application of U.S. antitrust laws by limiting a plaintiff’s rights to obtain evidence or to enforce a judgement and also allows the defendant to bring suit locally to recover punitive damages paid in the United States. In the case of Midland Bank Plc v. Laker Airways, Ltd[x], the Midland Bank Plc had sought an injunction against the liquidator of Laker Airways to stop him from instituting a suit in USA under the US Antitrust Law, against itself and its US subsidiary. The trial Court had granted the Interlocutory injunction but later on discharged when the defendant shown that the plaintiff had a subsidiary in US. But the Appellate Court held that the trial court was wrong to discharge the injunction.
In England, the legal standard used under English Law is the ‘Duty of Care’. It applies to everyone in UK, including organizations. The central issue of whether the Parent company in UK has a duty of care to the people affected by the operations of its subsidiaries is answered by these tests:
· The parent company, domiciled in England, exercised control, including financial control, of operations from its home base;
· Practices unacceptable in the country of domicile were exported to other countries;
· The profits are repatriated to the home country.
If the answers are positive then there is a duty of care and violation of the duty imposes legal liability.
One of the leading cases in UK corporate responsibility is the Sithole & Others v. Thor Chemical Holdings Ltd[xi], the company was operating a mercury recycling plant in Margate, Kent, England during 1970’s. The UK Health and Safety executives closed the plant down in 1987 due to excessive mercury poisoning in the surrounding areas and in the blood stream and urines of the workers. But the company moved its plant in South Africa and opened in 1988. The first series of action had begun against the company and its chairman in the English High Court. The first and second of the actions, involving a total of 20 workers were ultimately settled out of the court in April 1997 for £1.3 million. A third, which had begun in 1998 on behalf of further 21 workers, settled out of court early in October 2000 for £270,000.
Similarly in the case of Lobbe v Cape Plc[xii] the House of Lords decided in July 2000 that some 3000 South African citizens suffering from asbestosis and mesothelioma could continue to bring an action in England against Cape plc an England based mining company, formerly with South African mining interest. The fact of this case was that the Cape Industries, through its subsidiary units in South Africa involved in the mining and milling of blue and brown asbestos in various location between 1939 and 1979. The plaintiffs were either the direct victims of the hazard having worked or lived in the vicinity of the mining and milling operations or the dependants of the deceased victims. The company objected to the suit on the grounds of Forum Non Convenience, arguing that the natural forum for the suit was South Africa. In the present case the Judge in the first instance dismissed the case on the ground forum non conveniens but on appeal the House of Lords reversed the decision.
It is evident from the above discussion that currently there is no effective mechanism in the national level to hold the MNC’s responsible, specially in the host countries. The home countries for last two decades have been taking the responsibilities of the parents of the MNC’s into consideration. Though there has been no effective law to hold them responsible, USA and UK courts are trying to formulate a way to account the parent company for the acts of their subsidiaries in the host countries. It has to be taken into consideration here that the United States do tend to hold national or international multinationals responsible for their corporate behaviour under its anti-trust laws. But that is limited exclusively in US and that provides only for acts done in restraint of trade or monopolization of trade and has no connection with violation of human rights or environmental laws. On the other hand UK is recognizing and trying to hold its multinationals responsible through courts but there is yet any decided case. All the cases that are brought before the UK courts for corporate torts are settled out of the Courts after preliminary discovery. In the international level control over the Multinational Corporations has been sought both regionally and internationally. In the regional level there has been attempt in the European Union and in the North American Free Trade Agreement (NAFTA) region.
Regional and International Level
NAFTA contains specific provisions which allow citizens to bring claims for environmental or labour violations against companies operating in the NAFTA region. However, the protection provided under the charter itself quiet incomprehensive. This problem is however has been solved by two supplements of the main charter, namely; North American Agreement on Environmental Cooperation and North American Agreement on Labour Cooperation.
The European Union is interested in the corporate responsibility since long. It has also issued a series of directives on working conditions with relevance to MNC behaviour. The existing EU mechanisms include the European Court of Human Rights, human rights contained in Amsterdam (1997) and Maastricht (1992) treaties, collective complaints provision of the EU Social Charter and Brussels Convention (1968). There is also been a work underway to draw a model of European Code of Conduct for European Enterprises Operating in Developing Countries.
There are 30 member states of Organization for Economic Co-Operation and Development or OECD [xiii]. Most of them are industrialized developed countries. The organization has a series of agreements and guidelines for member states concerning corporations. These instruments are drawn up for the governments to incorporate them in their national legislation, but the member governments rarely do this. There is also the criticism about OECD guidelines is that the implementation of these rules are very weak and mostly voluntary.
Attempts have been made in the international level to frame a mechanism to hold the Multinational Corporations more accountable. However, it seems that the states have resisted formulating such a mechanism as it may give the Multinational Corporations international personality which might prove to be difficult in the long run. Despite these concerns United Nations specialized agencies and ILO are trying to adopt certain instruments that would deal with the MNC’s regarding the violation of human rights.
The United Nations human rights mechanism has begun to address the fact that many of the human rights problems they deal with has their root in the corporate conduct, therefore, the Sub-commission on Human Rights has a working group dealing with these issues. The working group is trying to formulate a code of conduct which will have a binding character. It also wants to require the MNC’s to prepare regular impact assessment.
International Labour Organization has adopted a convention to regulate the behaviour of the multinational corporations in 1977 which is known as the Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy. The instrument lays down ‘guideline to MNEs, governments, employers and workers organization in such areas as employment, training, conditions of work and life’. This instrument is of a non binding character and describes some voluntary code. Beside this code ILO also has a number of conventions to address issues like forced labour, freedom of association, collective bargaining, prevention of discrimination in employment, equal pay for equal work, minimum age for employment and child labour, industrial accidents, health and safety etc.
Beside the UN Sub-commission and International Labour Organization there are other key players in the international business spheres and have a vital role in controlling the multinationals. World Trade Organization, for example, holds a key position in controlling and regulating the behaviours of the Multinational Enterprises. There is, However, criticism that WTO has been more favourable to the corporations than the host country governments and any individuals. The role of WTO in promoting free trade and removing trade barriers makes it a potential problem rather than the solution.
Conclusion
It is fair to conclude that there is yet no mechanism to hold the MNC’s accountable directly for their actions in the host countries. It is already settled that it is hard to attach liability of subsidiaries on parent companies due to the concepts of corporate personality and limited liability in corporate groups. It is clear that beyond that lies the difficulty of choosing the appropriate forum to pursue the action. Victims who choose their local jurisdiction, run the risk of failing to enforce the judgement. If they pursue the parents where they are based, the latter may succeed to block the action there on the grounds of Forum Non Conveniens.
Developing countries face the dilemma of trying to attract investment on one hand and to protect their citizens and environment on the other, and quite often, they end up choosing the former at the cost of later. This kind of attitude needs to be changed. The courts of the developed countries can play a big role by holding the Parent companies in their jurisdiction responsible for the actions of their subsidiaries in the developing and the least developed countries. Thus the responsibility falls on both the home and the host country to fill the legal vacuums in their jurisdiction. After this has been achieved only then holding the MNC’s responsible in the International sphere can be fruitful.
END NOTES
[1] ICJ Reports (1970), vol. 1970, p.3
2 Re: Union Carbide Corporation Gas Plant Disaster at Bhopal, 809 F. 2d 195 (1987) United States Court of Appeals (2nd Cir)
3 http://www.tni.org/detail_page.phtml?page=asem-seoul_008weerasuriya
4 963 F Supp 880 CD Cal 1997
5 Greenpeace International, Shell-Shocked. The Environmental and Social Costs of Living with Shell in Nigeria, Researched and Written by Andrew Rowell, July 9, 1994.
6 Jennifer Huan. (2002) Natural gas Burns, and Communities Cry Foul; Independent News Desk; http://www. Arts and media.net/cgibin/dc/newsdesk/2002/c!2-earing-2,july 14,2003
7 Flares or flare stack is an elevated vertical stack or chimney used in oil wells, oil rigs, refineries, chemical plants and landfills, used for burning off unwanted gas or flammable gas and liquids released by pressure relief valves during unplanned over pressuring of plant equipment.
8 142 F. Supp. 2nd 534
9 United States, Court of Appeals, Second Circuit, 1945. Federal Reporter, Second Series, vol. 148, p. 416 (1945)
10 England, Court of Appeal, Civil Division, 1985. All England Law Report, vol. 1986 pt. 1, p. 526
11 [2000] WL 142 1183
12 [2000] 1 W.L.R. 1545
13 Slovak Republic is the 30th member of the OECD, who ratified the instrument on 14th December 2000
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