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Marc Morros Bo (4º GED) y Sergio Garrido Vallespí (BGG 22′, MUA+IBL 23′)


Human rights due diligence (HRDD) is the process by which enterprises “assess[…] actual and potential human rights impacts, integrat[e] and act[…] upon the findings, track[…] responses, and communicat[e] how impacts are addressed,” according to Principle 17 of the 2011 United Nations Guiding Principles on Business and Human Rights (UNGP). As opposed to the financial due diligence (DD) undertaken before proceeding with a merger or acquisition, HRDD focuses not on the financial statements regarding a separate target company,1 but rather, on the internal conduct of a given company when operating in the market.

Section 11(b)(3) of the U.S. Securities Act of 1933 established the first category of DD,2 with a carve-out for liability in cases where there is a misleading or omitted material fact in a securities registration statement and the company has conducted “reasonable investigations.” The express category of HRDD, however, would not appear until 2011. Eight years prior, an effort had already been made through the 2003 U.N. Draft Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (U.N. Draft Norms).3 The Commentary to Article 1 of the

U.N. Draft Norms states that enterprises should conduct “due diligence in ensuring that their activities do not contribute directly or indirectly to human rights abuses, and that they do not directly or indirectly benefit from abuses of which they were aware or ought to have been aware.” Although the U.N. Commission on Human Rights did not pass the

U.N. Draft Norms in the end,4 they introduced a different logic to look at Corporate Social Responsibility (CSR).

1 Corporate Finance Institute. (n.d.). Overview of Due Diligence in an M&A Transaction. Retrieved from:

2 Selvaratnam, S. (2019). The Rise of Human Rights Due Diligence (Part I): A Short Genealogy. Doing Business Right Blog. Retrieved from: human-rights-due-diligence-part-i-a-short-genealogy-by-shamistha-selvaratnam#_ftn1.

3 Id.

4 Pavel Miretski, P; Bachmann, S. (n.d.). Global Business and Human Rights – The UN “Norms on the Responsibility of Transnational Corporations and Other Business Enterprises with Regard to Human

Leaving aside residual domestic laws, the adoption of international CSR standards had always been optional, including Chapter II of the 1976 Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises.5 With that in mind, the U.N. tried to solidify relevant soft law by coming up with more effective rules.6 To that end, the U.N. Secretary-General appointed Harvard Kennedy School of Government Professor John Ruggie as Special Representative in July 2005.7 Finally, his proposal, the Protect, Respect and Remedy (PRR) Framework, was approved by the U.N. Human Rights Council (which replaced the U.N. Commission on Human Rights in 2006).8 The States’ commitment to operationalize the PRR Framework would become the UNGP, discussed infra. Henceforth, HRDD has persisted as the object of multiple regulations worldwide.

The present Article examines HRDD regulations in the United States and the EU. To that end, it has been divided into two parts. First, it will provide a comparative law analysis and explanation of the most significant trends in HRDD. A deeper look at the UNGP will open the first section, followed by an approximation to the U.S. legislation, both at the federal and state levels. Then, it will examine EU law touching on HRDD and differentiate between secondary EU law and domestic law of the Member States. Second, the Article will move from an objective description of the regimes to a subjective analysis by entering into an evaluation of those international, U.S., and EU regulations from a corporate and dispute resolution perspective. The first part will analyze how both legislators abandon a laissez-faire approach, decide to actively intervene through regulation, and avoid full market reliance. The second part will determine whether both the United States and the EU, including their companies, abide by the UNGP regarding HRDD and will discuss how to make those entities comply with the UNGP through investor-State and commercial arbitration if they do not. The Article will close with a conclusion that examines the future of HRDD.

Rights” – A Requiem. University of Lincoln Institutional Repository. Retrieved from:

5 Today, after its amendment in 2011 to include risk-based DD for enterprises, developed as recently as last year, they are putted at the same level of the UNGP, which is discussed below.

6 Skadegaard Thorsen, S; Meisling, A. (2004). Perspectives on the UN Draft Norms. Submitted for the IBA/AIJA conference on Corporate Social Responsibility in Amsterdam. Retrieved from:

7 Department of Public Information, News and Media Division. (2005). Secretary-General Appoints John Ruggie of United States Special Representative on Issue of Human Rights, Transnational Corporations, Other Business Enterprises. Meeting Coverage and Press Releases, United Nations. Retrieved from:

8 Human Rights Council. (2008). Resolution 8/7. Mandate of the Special Representative of the Secretary- General on the issue of human rights and transnational corporations and other business enterprises. United Nations. Retrieved from: BBC. (2006). UN creates new human rights body. Retrieved from:

Comparative law analysis and trends

    1. U.N. Guiding Principles on Business and Human Rights

De jure, the UNGP are yet to become binding international law. Most countries, if not all (the United States is a clear example according to its Points of Clarification on Resolutions adopted at the 52nd Human Rights Council),9 regard U.N. Human Rights Council resolutions, such as Resolution 17/4 of 16 June 2011, where the UNGP is endorsed, as non-binding instruments. They do not even reach the status of customary international law.

However, looking at the UNGP from a de facto view makes the contrast between the UNGP and the pre-2011 soft law pertinent. Principle 1 of Section I (State duty to protect human rights) notes that “States must protect against human rights abuse within their territory […] by […] business enterprises,” while its Commentary affirms that “the duty to protect against human rights abuse by […] business enterprises” is included in the “States’ international human rights law obligations.” Such Commentary is consistent with the General Principles Section, which states that “[n]othing in these Guiding Principles should be read as creating new international law obligations, or as limiting or undermining any legal obligations a State may have undertaken or be subject to under international law with regard to human rights.” Therefore, it seems to us that, as if using Socrates’ maieutics, Harvard’s Ruggie unearthed through Section I of the UNGP a hidden obligation for States to regulate HRDD: Principle 3, an operating principle of Principle 1, goes on to say that States should ensure that their laws make methods that match the above-seen definition of HRDD in Principle 17 mandatory or enforce them if they do not exist. At the same time, Section II of Principle 15(b) (Corporate responsibility to respect human rights) provides for the “responsibility” of companies to have in place a “human rights due diligence process to identify, prevent, mitigate and account for how they address their impacts on human rights.” As opposed to what happened with Principle 1, no Commentary to Section II indicates that companies have the international law obligation to engage in HRDD. Such an obligation, we understand, would only arise if the States complied with the current status of international law by making HRDD mandatory for enterprises or enforcing them. That is how companies would comply with Principle 15(b) of the UNGP, not because they are binding and thus compel enterprises, but based on a national law made in compliance with a currently existing international law obligation for States. In this way, the UNGP are not soft law, but an affirmation of current international law calling for HRDD.

It goes beyond the reach of this Article to delve into the details of the UNGP HRDD characteristics in Principles 11 to 24 of Section II. A Harvard faculty colleague of John Ruggie, John Shermann III, already does that in his paper Beyond CSR: The Story of the

9 U.S. Mission Geneva. (2023). Points of Clarification on Resolutions adopted at the 52nd Human Rights Council. U.S. Mission to International Organizations in Geneva. Retrieved from: human-rights-council/.

UN Guiding Principles on Business and Human Rights.10 Instead, it must be noted as a final message that the legislation that we are now about to describe is, in a certain way, the response by the United States, the EU, and its Member States to the UNGP language reminding countries of their international law obligations towards human rights.

United States legislation

      1. Federal law

At the federal level, U.S. legislation that requires HRDD is sector-specific. We observe three main groups depending on the regulation focus.

First, there is an effort by Congress to make sure SEC-listed companies dealing with “conflict minerals”11 originated in the Democratic Republic of the Congo (DRC) or one of its nine adjoining countries disclose such activity and submit a “Conflict Minerals Report.” Certainly, this Conflict Minerals Report is no different from an ad-hoc DD process with certain human rights equities for mining companies, where the enterprise has to describe “the measures taken to exercise due diligence, the description of the products and the facilities used to process them, the country of origin of the conflict minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity.” What is interesting about this regulation, apart from its content, is that it appeared as a section of Dodd-Frank (Section 1502), the 2010 U.S. legislative response to Wall Street’s conduct during the 2008 financial crisis. Even though there is no law in the United States similar to the generic EU Directive that will be analyzed below, Congress at least understood that consumer protection should go beyond the financial sector and encompass humanitarian crisis favored by armed groups as in the DRC.12

Second, most U.S. laws on HRDD concern forced labor. In a response to a “consumptive demand” loophole that allowed non-extensive importation of labor- produced goods, 13 Section 307 of the Tariff Act of 1930 (19 U.S.C. § 1307) prohibits the importation into the United States of all goods and merchandise mined, produced, or manufactured wholly or in part in any foreign country by forced, convict, and/or indentured labor under penal sanctions, including forced child labor, through the issuance

10 Sherman, III, J. (2020). Beyond CSR: The Story of the UN Guiding Principles on Business and Human Rights. Corporate Responsibility Initiative, Working Paper No. 71, Harvard Kennedy School. Retrieved from:

11 “Conflict minerals,” as defined by the US legislation, currently include the metals tantalum, tin, tungsten and gold, which are the extracts of the minerals cassiterite, columbite-tantalite and wolframite, respectively. Downstream companies often refer to the extracts of these minerals as 3TG (Responsible Business Aliliance, 2023).

12 U.S. Securities and Exchange Commission. (2017). Fact Sheet – Disclosing the Use of Conflict Minerals. Retrieved from:—related-materials.html.

13 U.S. Customs and Border Protection. (n.d.). Trade Facilitation and Trade Enforcement Act of 2015 – Repeal of the Consumptive Demand Clause – Frequently Asked Questions (FAQs). Retrieved from: clause-faqs.pdf.

of “Withhold Release Orders” (WRO). That way, the U.S. Customs and Border Protection organization recently issued a WRO that prevented the importation of forced labor- produced sugar-based products in the Dominican Republic no matter whether the imported quantity was high or low.14 Similarly, the 2020 United States-Mexico-Canada Agreement (USMCA), which substituted the 1994 North America Free Trade Agreement (NAFTA), requires the three countries to take measures to prohibit not only the importation of goods produced by forced labor (the 19 U.S.C. § 1307 arguably plays that role), but also violence against workers exercising their labor rights, sex-based discrimination in the workplace, and the lack of protection of migrant workers under labor laws.

Going further, in 2021, President Biden signed the Uyghur Forced Labor Prevention Act (UFLPA) in light of the Uyghur minority being forced to work in the autonomous region of Xinjiang, China.15 In it, a juris tantum presumption was made that all goods mined, produced, or manufactured entirely or in part in Xinjiang were done so by one of the prohibited types of labor in 19 U.S.C. § 1307, and thus their importation was deemed illegal. The Xinjiang company that intends to export to the United States is meant to undertake HRDD to prove to the Commissioner of U.S. Customs and Border Protection that the presumption is rebutted. Finally, this regulatory trend reflected in the USMCA and Biden’s presumption in the UFLPA related to 19 U.S.C. § 1307 possibly originated from the 1999 Executive Order 13126. There, the annual publication—today still ongoing—of a “List of Products Produced by Forced or Indentured Child Labor” was mandated to the U.S. Department of Labor so that federal parties could guarantee that they had introduced mechanisms to avoid child labor during the production processes of the items supplied.16 This State-crafted list thus facilitates today the then-unknown HRDD.

Lastly, a third U.S. regulation focuses on trafficking in persons. According to the 2015 Federal Acquisition Regulation Ending Trafficking in Persons, contractors, contractor employees, subcontractors, and subcontractor employees are prohibited from engaging in specific types of trafficking-related activities. To ensure compliance, the law would require contractors in contracts performed outside the United States exceeding

$500,000 to develop a compliance plan, which amounts to HRDD for the above-seen violations. Notable in this last focus, however, is that the Federal Acquisition Regulation

14 U.S. Customs and Border Protection. (2022). CBP Issues Withold Release Order on Central Romana Corporation Limited. Retrieved from: withhold-release-order-central-romana-corporation.

15 Davies, N. (2022). Are US Businesses Falling Behind On Human Rights Due Diligence? Businesses & Human Rights Centre. Retrieved from: falling-behind-on-human-rights-due-diligence/.

16 Bureau of International Labor Affairs. Mission and Offices. U.S. Department of Labor. Retrieved from:

Ending Trafficking in Persons only applies to traffic in federal government contracts,17 leaving it optional for private parties to engage in HRDD to make sure human trafficking is not occurring (which obviously does not mean that private parties are allowed to engage in human trafficking).

State law

State law governing HRDD seems to make the same mistake as federal law: states, emulating the federal government, prefer to give priority to certain human rights to the detriment of others when making processes comparable to HRDD mandatory.

Principle 12 of the UNGP establishes that “[t]he responsibility of business enterprises to respect human rights refers to internationally recognized human rights—understood, at a minimum, as those expressed in the International Bill of Human Rights and the principles concerning fundamental rights set out in the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work.” In Massachusetts, as in Rhode Island, different laws, such as the Act Relative to the Commercial Exploitation of People or the Child Welfare Service Needs of Sexually Exploited Children (for Rhode Island, see the Uniform Act on Prevention of and Remedies for Human Trafficking and the R.I. Gen. Laws Ann. § 11-9-1(c), 11-9-1(b) and 11-9-2), took some steps to combat human trafficking, forced labor, and sexual exploitation. Why is it that the right not to be discriminated against is not included? Illinois’ Business Supply Chain Transparency for Slavery, Trafficking and Child Labor Act, requires that certain retailers and manufacturers doing business in the state with annual worldwide gross receipts of over $100,000,000 (under Washington’s Transparency in Supply Chains Act, over $75,000,000) shall disclose their efforts to eradicate slavery, human trafficking, and child labor from their supply chains. Why is it that environmental rights are not included? In New Jersey, its Drug Price Transparency Act, SB1615, implements reporting obligations on the entire process of drug pricing across the supply chain in a similar manner to that of HRDD. Why is it that human trafficking, forced labor, and sexual exploitation are not included?

Overall, the U.S. states do not include all human rights when establishing processes similar to HRDD. Among those same states, however, attention must be drawn to California, as its Transparency in Supply Chain Act (CTSCA) is the most expansive legislation on forced labor and trafficking in corporate supply chains. Only two of the numerous human rights are touched upon, albeit they are addressed thoroughly. For sellers and manufacturers that do business in California and have annual worldwide gross receipts exceeding $100,000,000, the CTSCA requires them to disclose on their web pages their efforts to eradicate slavery and human trafficking from their supply chains. Precisely, these are i) verification of supply chains, ii) auditing, iii) certification, iv) internal accountability, and v) training. As good as that may sound, these are primarily enforced through consumer awareness and public scrutiny, since the CTSCA does not impose penalties for noncompliance with its disclosure requirements, in clear opposition

17 Office to monitor and combat trafficking in persons. (n.d.). Strengthening Protection Against Trafficking in Persons in Public Procurement. U.S. Department of State. Retrieved from:

to the abandonment of a laissez-faire approach underlying HRDD, more broadly addressed in section 3.1 of this Article.

EU legislation

      1. Secondary law18

The EU is well ahead of the United States in the HRDD field. This has not always been the case, though. Before last December, EU law was as dispersed as U.S. law is. Conflict minerals, battery, deforestation, forced labor, and raw materials were separately regulated with an HRDD logic through multiple secondary law sources.19

On January 14, 2024, the EU Parliament and Council finally seemed to agree on what they would call a Corporate Sustainable Due Diligence Directive (CSDDD).20 As the EU Parliament reported, the new CSDDD would set “obligations for companies to mitigate their negative impact on human rights and the environment [(“HREDD,” one could say)] such as child labor, slavery, labor exploitation, pollution, deforestation, excessive water consumption or damage to ecosystems.”21 It must be noted that the usage of the term “such as” reflects that this is not a numerus clausus list. Here, some may read the proposed 2021 U.S. Corporate Governance Improvement and Investor Protection Act as an equivalent to the CSDDD. It also avoids sector-specificness when imposing a DD obligation, and instead requests companies to periodically disclose information related to environmental, social, and governance (ESG) performance metrics. However, besides the fact that this U.S. law still needs the approval of the Senate to enter into force, ESG protection is arguably not as broad as human rights protection. The only human rights that the proposed ESG Corporate Governance Improvement and Investor Protection Act

18 Secondary law makes reference to the differentiation in the EU between primary EU law, consisting of the EU treaties, which don’t touch specifically on HRDD, and secondary EU law, consisting of EU regulations, directives and decisions, which do in the terms of this section 2.3.1.

19 Lubitzsch, H.; Neely, S. (2023). Human Rights Due Diligence in the EU. Norton Rose Fulbright. Retrieved from: rights-due-diligence-in-the-eu. Respectively to the sectors enumerated above, those sources would be the 2021 Regulation (EU) 2017/821 (conflict minerals), the 2023 Regulation repealing Directive 2006/66/EC and amending Regulation (EU) No 2019/1020 (battery), the 2023 Regulation (EU) 2023/1115 (deforestation), the 2022 Proposal for a Regulation on prohibiting products made with forced labor on the Union market (forced labor), and the Proposal for a Regulation establishing a framework for ensuring a secure and sustainable supply of critical raw materials and amending Regulations (EU) 168/2013, (EU) 2018/858, 2018/1724 and (EU) 2019/1020 (raw materials).

20 Thomson, D. (2024). Corporate Sustainability Due Diligence Directive provisionally agreed by the EU Council and Parliament. Clifford Chance. Retrieved from: insights/2023/12/corporate-sustainability-due-diligence-directive-provisionally-agreed-by-the- council-and-parliament.html.

21 News European Parliament. (2023). Corporate due diligence rules agreed to safeguard human rights and environment. Retrieved from: room/20231205IPR15689/corporate-due-diligence-rules-agreed-to-safeguard-human-rights-and- environment.

will certainly protect are the labor rights present in the Xinjiang region of China, with clear reference made to the UFLPA in the same rule.

The CSDDD identifies six different human rights-high-risk sectors: i) manufacture and wholesale trade of textiles; ii) clothing and footwear; iii) agriculture; iv) manufacture of food and trade of agricultural materials; v) extraction and wholesale trade of mineral resources or manufacture of related products; and vi) finance. Then, it establishes economic requirements in global turnover and number of employees for companies to fall within the scope of the CSDDD.

In our view, if passed, the two most important obligations that should be complied with are ensuring that business strategies and plans are in line with the 2015 Paris Agreement, as well as requiring that the enterprise applying HREDD end its relationships with companies of the value chain if it identifies non-avoidable or preventable actual or potential adverse impacts.22 Regarding the first of these obligations, it would seem that the EU is finally dealing with the problem of enforcing one of the most famous environmental treaties to date.23 Indeed, the CSDDD provides for civil liability and damages, as will be developed in section 3.1 of this Article. For the second obligation, it appears that the EU is more concerned with upstream partners in the supply chain than downstream ones, given that it limits the application of the CSDDD in downstream supply chains to transport, storage, and disposal, expressly excluding the financial sector. One could view this as a reasonable approach, since the raw material, the suppliers, and the manufacturing actors (upstream) could have more margin to impact human rights and/or the environment as opposed to a distribution actor that may, at a maximum, generate concern in the environmental field or the final consumer (downstream).

Member States national laws

Contrary to U.S. states, the problem with the HRDD regulation of EU countries is not reflected in the kinds of industries they address, but in the extent of the liability regime after a violation has occurred. Following the logic of University of Michigan Professor David Hess in his paper The Management and Oversight of Human Rights Due Diligence, three groups may be differentiated:24 i) those requiring HRDD but not providing for civil liability; ii) those requiring HRDD and providing for civil liability with the burden of proof on the victim of human rights violations seeking a remedy; and iii) those requiring HRDD and providing for civil liability with the burden of proof shifting to the company in alleged human rights violation of the one seeking a remedy. We would add a fourth

22 Loyens Loeff. (2023). The CSDDD deal has been sealed; provisional agreement reached on 14 December 2023 on the CSDDD. Retrieved from:– events/news/the-csddd-deal-has-been-sealed-provisional-agreement-reached-on-14-december-2023-on- the-csddd/.

23 Georgetown Law Library. (2023). International Environmental Law Research Guide. Retrieved from:

24 Hess, D. (2021). The Management and Oversight of Human Rights Due Diligence. American Business Law Journal 2021. Retrieved from:

category to that list consisting of passive States, as not all EU Member States have regulations requiring HRDD.

An example of the first group could be the Netherlands for its 2019 Child Labor Due Diligence Act. The fact that the Netherlands followed this path catches us by surprise, though, as its courts seem favorable to having UNGP HRDD enforced. In fact, a Dutch court ruled in mid-2021 that the company Shell should “limit […] the aggregate annual volume of all CO2 emissions into the atmosphere (Scope 1, 2 and 3) due to the business operations and sold energy-carrying products of the Shell group to such an extent that this volume will have reduced by at least net 45% by the end of 2030, relative to 2019 levels,”25 mostly relying on the UNGP and the already mentioned OECD Guidelines for Multinational Enterprises. Germany would also fall into this category, but its 2021 Supply Chain Act would provide for an extensive administrative enforcement system and a sanctions regime.26

There is less to say about the second, third, and fourth groups. The French Duty of Vigilance law is evidence of a system requiring HRDD and providing for civil liability with the burden of proof on the victim of human rights violations seeking a remedy, while a similar Swiss proposal that was finally rejected in a 2020 referendum would serve as an example of the third category.27 Spain and Italy, for their part, represent the countries in the fourth group, only entering into HRDD regulations indirectly through Legislative Decree No. 254/2016 and the Spanish Companies Act, respectively, among other laws.28


    1. A corporate view

The rise of interventionism through commercial laws

The regulations described above show that, in recent years, we have witnessed a rise in legislative interventionism aimed at safeguarding human rights in the supply chain process, be it fully developed or not. Fields of law like commercial legislation are experiencing a transformative shift and focusing on material concerns. The traditional focus on corporate formalities and procedural matters has been abandoned. This break

25 HA ZA 19-379. Retrieved from:!/details?id=ECLI:NL:RBDHA:2021:5339.

26 Chiomenti, Cuatrecasas, Gide, Gleiss Lutz Legal Joint Paper. (2022). Corporate due diligence duties within the EU framework on sustainable corporate governance. Retrieved from: framework-on-sustainable-corporate-governance-620153dc857f6134801374.pdf?v1.65.0.20231214.

27 Herbert Smith Freehills. (2020). Switzerland set to adopt human rights reporting and limited due diligence law after referendum on stricter proposal fails. Retrieved from: and-limited-due-diligence-law-after.

28 Id [26].

calls for a closer look at the legislator’s intentions, which are quite similar in all Western countries, but the degree of intervention differs.

The rationale of the measures

The contemporary legal trend suggests a departure from the traditional focus and reflects i) an increase in human rights protection and ii) the legislator’s distrust towards consumers. Although societies are fully aware of the disgraces occurring in large companies’ supply chain processes, legislators prefer to intervene and ensure a minimum layer of human rights protection. In other words, rule-makers are knowledgeable of the ethical purchasing approach by consumers, but they prefer to intervene in the form of laws disregarding full market reliance.

Leaning in favor of a non-liberalist approach reflects that relying solely on consumers’ ethical considerations might not yield the desired outcomes. The underlying assumption might be that consumers do not prioritize factors such as sustainability or transparency and decide to purchase cheaper products manufactured under unknown— and probably, poor—conditions. In our eyes, end users are sufficiently informed about supply chain issues, but their prioritization will very likely and substantially depend on consumers’ purchasing power and price differences among other factors. Natural market forces would not encourage businesses to respect ethical practices voluntarily, a premise which is perfectly coherent with an existing skepticism concerning the efficacy of the laissez-faire economics approach.29 However, a departure from trust in the market’s self- regulatory mechanisms has its pros and cons.

On one hand, legislative intervention supporters contend that additional regulation is needed where voluntary compliance may fall short, and a more assertive regulatory approach is required when ethical considerations are not prioritized. Said actions in HRDD establish uniform frameworks ensuring that companies of all sizes and sectors are subject to the same moral standards. Through the creation of level playing fields, this consistency encourages justice and accountability and helps businesses abide by common human rights standards. Furthermore, the imposition of strict penalties through legislative measures constitutes a strong incentive and deterrence for companies to include HRDD in their core business processes. Proactive compliance harmonizes fair business practices and permits consumers to receive clear information about enterprises’ human rights policies. Once this framework becomes applicable, it will convert informed consumers into powerful change agents making better decisions and prioritizing ethical factors.

On the other hand, critics like Robert McCorquodale have argued that legislative intervention may distort the natural dynamics of the market.30 In fact, well-known scholar Justine Nolan has emphasized over time the relevance and effectiveness of incentives or

29 The traditional laissez-faire tenet contends that the market, driven by the choices of informed consumers, can effectively ensure ethical business practices.

30 Aizawa, M.; Bradlow, D.; & Wachenfeld, M. (2018). International financial regulatory standards and human rights: connecting the dots. Manchester Journal International Economic Law, 12–36.

deterrent fines over rigid regulations.31 Regarding the severity of the latter, it raises questions about the potential unintended consequences of stringent measures. These can especially and disproportionately affect small enterprises, implying that an aggressive punitive approach might involve an important burden for them. Nevertheless, legislative intervention cannot be analyzed generally, since the appropriateness of the measures depends on the specific industry. Therefore, each country’s context requires a different balance between legislative action and market autonomy.


When analyzing the rise of commercial legislative interventionism, a crucial aspect is its enforcement mechanisms.

To take the EU, we have witnessed there how the CSDDD imposes strong penalties, calling for i) “naming and shaming” sanctions and ii) monetary fines equal to at least 5% of net global turnover. European legislators aimed to create a strong incentive for companies to integrate HRDD into their daily operational fabric. These usually have two purposes in the field of data protection: acting as deterrent instruments as well as punitive measures. Their severity immediately reminds us of current data protection frameworks and raises the question of why such harshness is thought to be required.

In our eyes, for fines to become useful instruments to discourage enterprises from violating human rights, they need to be both proportionate—as they are nowadays—to the business’ size and to the company’s turnover, and effectively enforced—as we will now discuss.

There exist three dimensions when examining the efficacy of states’ efforts to fulfill their duty to prevent human rights abuses: the legal system’s i) effectiveness in ensuring compliance with its explicit requirements, ii) capacity in implementing changes in corporate conduct, and iii) effectiveness in preventing undesired outcomes. However, research has shown that obtaining evidence of effectiveness is particularly complex because of the need for continuous intentional monitoring and inspection implementation systems. Moreover, every human rights effectiveness assessment must be contextualized within its period. Bearing that in mind, when sanctions as a deterrent measure are concerned, there are four pieces of data that are worth mentioning.

Research based on the German government’s 2016 National Action Plan (NAP) to implement the UNGP shows that said country sought to avoid HRDD legislation if a sizable portion of enterprises had effectively integrated core HRDD procedures by 2020.32 One could argue that the sanction for German enterprises would be that were they not to comply, they would be facing a stricter human rights regime in the future.

31 McCorquodale, R., Nolan, J. (2021). The Effectiveness of Human Rights Due Diligence for Preventing Business Human Rights Abuses. International Law Review, 325–465. Retrieved from:

32 The NAP was drawn up between 2014 and 2016 and describes Germany’s Federal Government to protect HHRR and pools the strengths of the various stakeholders, along the supply and value chains in said country and worldwide. Retrieved from: https://www.auswaertiges-

Nevertheless, less than 20% of organizations were able to provide proof of NAP compliance and as a result, the German Federal government introduced the above seen Supply Chains Act in 2021 to address the absence of significant business action.33

In 2017, the Corporate Human Rights Benchmark (CHRB) analyzed compliance policies and practices of more than 220 companies from the following four industries: i) apparel, ii) ICT manufacturing, iii) agricultural goods, and iv) extractives. Less than 21% of corporations could demonstrate an effective, solid, and consistent commitment to human rights protection. Although most firms had implemented compliance regulations, most of them were obsolete and not carefully carried out. When this research was published, a group of investors overseeing assets worth over $4 trillion responded to the low scores. They urged for improvement by writing a letter to the 95 companies that received a zero on HRDD indicators in the 2019 CHRB evaluation. Out of these corporations, 16 made progress in their HRDD, while the rest did not take further measures.

Furthermore, in 2020, as a result of a collaboration between Walk Free, WikiRate, and Business and Human Rights Resource Centre, the modern slavery statements of more than 70 asset management companies were identified.34 This research revealed the bargaining power that investors and shareholders have in terms of requesting more protective human rights measures and stricter DD. However, less than 26 of these firms carried out compliance and HRDD in their activities. Investor proactive engagement on HRDD and complete non-financial reporting is crucial for the effectiveness of regulations and sanctions, but as highlighted in several recent studies like the abovementioned, well- known scholars like Amol Mehra and Sara Blackwell have described shareholders’ engagement in this field as “unreliable and of poor quality.”

Experts have also tried to investigate how firms have responded to the introduction of HRDD. In 2018, Smit conducted research in which only 37% of firms were actively involved in HRDD and less than 50% implemented DD across the whole value chain process.35 Furthermore, 34% of them ignored environmental protection measures, non- discrimination procedures, or health, safety, and general labor rights. Although only 2.5% of large companies completely avoided the implementation of DD, the vast majority of them failed to carry out meaningful HRDD in accordance with the UNGP (recall that

33 Bold, F. (2017). Comparing the implementation of the EU Non-Financial Reporting Directive in the UK, Germany, France and Italy. Retrieved from: financial-reporting-directive.pdf.

34 Walk Free, WikiRate, Business and Human Rights Resource Centre (2020). Beyond compliance in the financial sector: a review of the statements produced by asset managers under the UK Modern Slavery Act. Retrieved from: nceSector_210318.pdf.

35 Smit, L.; Bright, C.; McCorquodale, R. et al (2020). Study on due diligence requirements through the supply chain. Retrieved from b8b7-01aa75ed71%20a1/%20language-en. & Smit, L.; Bright, C.; Pietropaoli, I.; Hughes-Jennett, J.; & Hood, P. (2020). Business views on mandatory human rights due diligence regulation: a comparative analysis of two recent studies.

companies do not have a binding obligation to follow it, but only a non-enforceable responsibility).

A dispute resolution view

      1. Enforceability issues

The premise that must guide this section 3.2. of the Article is that a binding law is of no relevance to neither of two subjects if it cannot be enforced: neither those to which it creates obligations nor to those it grants rights. Pillar III of the UNGP responds to this note: it calls for access to effective remedies before “business-related human rights abuse” (Principle 25). That, nevertheless, is partially of our interest. As recalled by the title of this Article, our purpose is not to look at human rights protection broadly, but to focus our efforts on HRDD. Accordingly, when looking at HRDD from a dispute resolution perspective, we should only analyze whether the “duty” of States (Pillar I) to make HRDD mandatory (Principle 3) and awaken the “responsibility” of companies (Pillar II) to put in place such HRDD (Principle 15(b)) is obeyed or not, and how to make those entities comply if they do not. Observe that such inquiry is made regardless of whether a human rights violation has occurred: a State may not comply with Pillar I even though businesses in its jurisdiction always respect human rights; and a company may not follow Pillar II, even if it does not cause human rights damage.

At first glance, the EU seems to secure for itself a clear victory against the United States in terms of the first question (whether Pillar I in relation to Pillar II is complied with or not). An EU Directive requires EU Member States to adopt its content into their national laws as they wish, as long as the final national version achieves the Directive result (Directives are granted with indirect effect). Therefore, there is little room to doubt that once the CSDDD enters into force, all EU Member States will make HRDD mandatory in their territory, and thus awaken the responsibility of companies to put them in place, so that not complying has consequences, given its enforceability effect.36 On the other side, the United States, as highlighted, seems reluctant to escape from a dispersed and industry-based approach to HRDD.

Amy Lehr and, again, John Shermann III, may provide an answer to that in their paper Human rights due diligence: is it too risky?37 There, the two scholars put forward the idea that HRDD could be seen as a process that increases a company’s risk of liability given

U.S. regulations on Alien Tort Statute claims, negligence claims, misrepresentation claims, confidentiality, and immunities. That said, they reach a rebutting conclusion at the same time: the company’s exposure to litigation should be reduced in an HRDD context because, by using HRDD, they can spot potential human rights risks and prevent them from happening. We consider this rebuttal appropriate, particularly because the

36 European Commission. (n.d.). Types of EU Law. Retrieved from: making-process/types-eu-law_en.

37 Sherman, III, J; Lehr, A. (2010). Human Rights Due Diligence: Is It Too Risky?. Corporate Social Responsibility Initiative, Working Paper No. 55, Harvard Kennedy School. Retrieved from: anlehr.pdf.

Commentary to Principle 17 of the UNGP establishes that “[c]onducting appropriate human rights due diligence should help business enterprises address the risk of legal claims against them by showing that they took every reasonable step to avoid involvement with an alleged human rights abuse,” as if the company followed the In re Caremark International Inc. Derivative Litigation rationale by engaging in legal DD to protect the board from mismanagement claims by shareholders.38 The United States has, as a result, no excuse to overlook Pillar I of the UNGP.

The second question seems more challenging to answer—that is, how to ensure that States and companies in those States respect Principles 3 and 15(b) of the UNGP if they should, but in fact do not. Under the current scenario, U.S. citizens should be more concerned about the first Principle (how to make the United States comply with Pillar I), as the country still has to start the legislative process from zero to make HRDD mandatory, whereas EU nationals should be rather worried about the second Principle (how to make EU companies comply with Pillar II), as the entering into force of the CSDDD, making HRDD mandatory, is almost complete, only requiring imminent formal procedures.39 Both collectives’ concerns, we defend, could be addressed appropriately in arbitration.

The role of arbitration

        1. Investor-State arbitration

The arbitration species that would help U.S. nationals is that consisting of a dispute between a State and an investor of another State.40 Our way of thinking is as follows.

In an era of globalization, every step of the supply chain could be located in a different country. Be that as it may, it could happen that the supplier is a U.S. company, while the distributor is a non-U.S. business operating in the United States. In that case, the U.S. supplier would not have to engage, for example, in HREDD, as the U.S. regulation does not provide for it, as opposed to the EU CSDDD, and would thus not respect the Paris Agreement. The U.S. supplier would be engaging in an environmentally unfriendly practice to provide petroleum to a manufacturer for refinery purposes, say, and the foreign distributor would transport the resulting fuel to U.S. gas stations. Some time afterward, it is not unimaginable that a widespread report could appear overnight saying that the U.S. supplier was not complying with the Paris Agreement, and the result of such news could be a drop in demand from U.S. gas stations that the non-U.S. company provides fuel for, making it lose a great amount of money. Now, supposing that the foreign business has jurisdiction under Article 25, it could start

38 Lipton, M; Savitt, W. (2019). Director Liability—“Caremark Protection”. Wachtell, Lipton, Rosen & Katz. Retrieved from:

39 Id [20].

40 We will be presuming that such a dispute is governed by the 1966 International Centre for Settlement of Investment Disputes (ICSID) Convention.

arbitration against the United States.41 It would claim that had the United States made HREDD mandatory for the supplier, which is an obligation under international law under Principle 3 of the UNGP as discussed in section 2.1. In addition, the non-U.S. business would not have suffered any injury as the U.S. company would have faced the results of its HREDD or would at least have been able to sue the U.S. partner for not complying with U.S. law. One must recall that section 2.1 made clear that the business responsibility to engage in HRDD would only arise as an obligation if the State complied with the current status of international law by making HRDD mandatory for enterprises (the difference between “duty” in Pillar I and “responsibility” in Pillar II).

The non-U.S. company would have to look at one of the standards of treatment inside the investment treaty and claim its violation. To consider the most famous examples, if the treaty provided for expropriation claims, the investor could argue that the fact that the United States did not make HRDD mandatory triggered an indirect expropriation in the terms of Starrett Housing Corporation v. Iran,42 passing the grotesque deprivation test. Even though the standard is high according to Richard Happ and Noah Rubins,43 it seems that it could be met if the non-U.S. investor had to file for bankruptcy after the public report. That said, the other standard, the fair and equitable treatment (FET) clause, would only require a lower bar. Even though it is interpreted differently by tribunals since Neer and Neer v. United Mexican States,44 a predictability head of claim could work if the arbitrations applied CMS Gas Transmission Company v. The Republic of Argentina,45 disregarding a need for specific commitments. Despite the investor entering the U.S. market knowing that the United States did not have an HRDD obligation in place, it was predictable that it would have it, given the particular international law status of Principle 3 of the UNGP established in section 2.1.

Both unlawful expropriation (unlawful here because when a State does not adopt HRDD regulations it does not compensate those companies affected by that action (in

41 In the context of a non-ICSID Convention investor-State arbitration, the jurisdictional requirements would be those present in the investment treaty, as well as preconditions that may have been added by States, such as a cooling-off periods.

42 Starrett Housing Corporation, Starrett Systems, Inc. and others v. The Government of the Islamic Republic of Iran, Bank Markazi Iran and others, IUSCT Case No. 24. Retrieved from: others-v-the-government-of-the-islamic-republic-of-iran-bank-markazi-iran-and-others-final-award- award-no-314-24-1-friday-14th-august-1987.

43 Happ, R.; Rubins, N. (2009). Digest of ICSID awards and decisions 2003-2007. UN Library Catalogue. Retrieved from:

44 L. F. H. Neer and Pauline Neer (U.S.A.) v. United Mexican States, UN Reports of International Arbitral Awards. Retrieved from:

45 CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award. Retrieved from:

disregard of due process)46) and FET violations are remediated through reparation under Article 34 of the International Law Commission’s Articles on State Responsibility (ILC Articles). In fact, some arbitral tribunals such as the one in Yukos Capital Limited v. Russian Federation permitted moving the valuation date to when the award was made if that benefits the claimant.47 Thus, as the last paragraph is only an invented example of what could happen with other companies in dissimilar positions of the supply chain (i.e., a manufacturer and a supplier) or in a multiplicity of unalike sectors, it may motivate the United States to act when it knows about the consequences of not doing so portrayed in the beginning of this paragraph. This is because if such a claims trend was observed in investor-State arbitration, the United States would have an economic reason to begin regulating HRDD more extensively in other areas than conflict minerals, forced labor, and trafficking in persons. In closing, let us say that this incentive system, which has yet to be observed, is similar to the EU strategy of ensuring that EU Member States transpose into their national systems the content of a Directive. Complementing Yvonne van Duyn v Home Office,48 the Court of Justice of the European Union ruled in Pubblico Ministero v Ratti that if a directive has not been adopted and the deadline for State adoption has passed, its content can still be used by a private EU subject when he, she, or it acts as a claimant against the State that refused the adoption.49 In fact, this could well happen after the CSDDD enters into force if an EU Member State mirrored the United States’ passivity in regulating—by not adopting the CSDDD.

All things considered, even with investors seeking investor-State arbitration against the United States on the above reasons, the country would not be accepting losing any dispute it encountered by not making HRDD mandatory. Reparation under Article 34 of the ILC Articles can be limited by Article 39’s proportionally to the “contribution to the injury by wilful or negligent action or omission of the injured […] person or entity.” Nothing in U.S. law prevents companies from implementing HRDD in their supply chains, which is completely different from not being obligated to do so. In consequence, the supply chain actor that has suffered the injury on the grounds of a U.S. failure to comply with Principle 3 of the UNGP could have avoided the injury by putting HRDD in place. We believe that should amount to the contributory fault in Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of

46 Reinisch, A. (n.d.). Standards of Investment Protection. Oxford University Press. Retrieved from: propriation_ar.pdf.

47 Yukos Capital Limited (formerly Yukos Capital SARL) v Russian Federation, UNCITRAL (Geneva Tribunal), PCA Case No. 2013-31, Final Award. Retrieved from:

48 Judgment of the Court of 4 December 1974, Yvonne van Duyn v Home Office, Reference for a preliminary ruling: High Court of Justice, Chancery Division – United Kingdom, Public policy, Case 41-74. Retrieved from:

49 Judgment of the Court of 5 April 1979, Criminal proceedings against Tullio Ratti, Reference for a preliminary ruling: Pretura di Milano – Italy, Dangerous preparations, Case 148/78. Retrieved from:

Ecuador,50 where the claimant deliberately took the risk of caducidad (in English, “expiration”) through legislative measures coming from Ecuador, and the tribunal ended up reducing damages against the country by 25% (the dissent, by 50%). Just as Occidental assumed a certain risk, the non-U.S. investor knew that in the United States HRDD is not mandatory, and even knowing that, it went on to do business with a U.S. supply chain actor without subjecting it to HRDD.

Commercial arbitration

Once the CSDDD is put in place, the responsibility of companies to engage in HRDD under Principle 15(b) of the UNGP is converted into a duty. That is what the UNGP demanded of States, or of the EU in its case, and that is what the EU has done. Investor- State arbitration, therefore, is of no interest in this instance. There is nothing else that can be required from the EU. The time has come for commercial arbitration to appear with a different mission from the one that investor-State arbitration adopts in the United States: here, commercial arbitration plays a role in making EU companies comply with a now- activated Pillar II. It would be far from realistic, however, to say that commercial arbitration should be the only dispute resolution mechanism to guarantee compliance. University College Cork Professor John Gaffney said in Business and Human Rights: Arbitration Can Provide Access to Effective Remedies that “the drafters of the Hague Rules [on Business and Human Rights Arbitration (a soft law instrument that applicable in an arbitration procedure if parties do not agree otherwise)] […] accept that those affected by business-related human rights violations would typically have recourse to national courts so long as they are functioning effectively and can provide victims of human rights abuse with a genuine remedy.”51 This position taken by the drafters is not questionable in our view, but at the same time, commercial arbitration is useful not only to ensure compliance as an appropriate forum to resolve the failure to conduct HRDD (courts could also do that), but also to put pressure on companies to engage in HRDD in two different situations following the same logic.

Contracts are a conditio sine qua non for business operations to occur. That said, and generally speaking, in those contracts the parties can agree to incorporate an arbitration clause for any dispute arising out of that relationship. One of them, if not both, may be especially concerned about human rights protection and expect from the other regular HRDD in accordance with the CSDDD. This could be the case of a business in an advanced position of the supply chain that has a lot to lose if its partners are proven to violate human rights (i.e., because it is a retailer known for its sustainability policies). Conversely, a worker who could suffer him or herself human rights violations would be at least as worried as that company could be. Both of them, thus, could try to negotiate to make arbitration the chosen forum to submit their differences on the supply chain or employment agreement, respectively, an agreement which at the same time could include

50 Occidental Exploration and Production Company v. The Republic of Ecuador, LCIA Case No. UN3467, Final Award. Retrieved from:

51 Gaffney, J. (2022). Business and Human Rights: Arbitration Can Provide Access to Effective Remedies. Faculty of Law Blogs, University of Oxford. Retrieved from: blog/blog/2022/03/business-and-human-rights-arbitration-can-provide-access-effective.

the obligation to comply with the HREDD in the CSDDD. The business in an initial position in the supply chain or acting as employer, which would in either case intervene here as the counterpart of the agreement, would thus be compelled to respect Principle 15(b) of the UNGP, given the speed with which an arbitration on its compliance with the agreed HREDD is generally conducted (speed in the resolution is largely accepted as one of the commercial arbitration advantages to court litigation).52 In our view, this reasoning may only encounter one problem. Precisely, as put forward in the U.S. case Michael J. Lewis v. Circuit City Stores, Inc.,53 some jurisdictions may make employment arbitration clauses invalid. That could happen in certain EU Member States, no doubt about it, but, even then, when the employment contract is concluded with an arbitration clause and the dispute arises, the counterpart could perfectly waive its right to object to the arbitration agreement’s enforceability. This is so because of another important advantage of arbitration: if the employee had started arbitration and the EU employer moved to courts refusing any waiver, a ruling that could well affect its reputation by showing that it did not comply with the HREDD in the CSDDD could be made public, and not remain confidential as an award would (confidentiality is another of the commercial arbitration advantages to court litigation).54


Internationally, the UNGP have been the foundation of HRDD for more than ten years. A systematic interpretation of its text allows us to say that States have an obligation to regulate HRDD broadly, while the corporate responsibility to conduct it will only become a duty when States abide by its prior obligation. The United States seems not to have done that, having only regulated HRDD for specific fields of human rights at a federal level, as well as on a state basis. As proof of that, the Dodd-Frank (Section 1502) concerns conflict minerals, 19 U.S.C. § 1307, USMCA, UFLPA, and Executive Order 13126 all focus on forced labor, and the Federal Acquisition Regulation Ending Trafficking in Persons touches on trafficking in persons. Regarding the latter, Massachusetts and Rhode Island have laws on human trafficking, forced labor, and sexual exploitation; Illinois and Washington legislation emphasize slavery, human trafficking, and child labor in the supply chains; New Jersey deems relevant drug pricing; and California has the most expansive rules on forced labor and trafficking in supply chains. In contrast, dispersion in the EU does not exist thanks to the recent CSDDD. Nevertheless, the laws of EU Member States approach the enforceability aspect of HRDD with substantial variety, going from a liberal Netherlands to a very pro-human rights holder position in a proposed regulation in Switzerland, with other countries such as Spain and Italy having yet to regulate HRDD, while others like France could be located in a middle

52 Mulaj, V. (2018). The Advantages and Disadvantages of Arbitration in Relation to the Regular Courts in Kosovo. Hungarian Journal of Legal Studies. Retrieved from:

53 Case No. 05-4001-JAR (D. Kan. Sep. 7, 2005). Retrieved from: city-stores.

54 Id [52].

ground arena. From this point onwards, the Article moves from the descriptive part to the subjective one.

After the corporate analysis carried out, we have seen how the legislator has opted for active legislative activity and believes that the market itself will not encourage businesses to integrate—in a serious and effective manner—HRDD into their supply chain voluntarily. In other words, the rise of interventionism in recent years and the predictions of even more binding regulations show that authorities do not rely on natural economic forces. In this sense, we can reasonably predict more mandatory texts and stricter obligations for companies. Regarding the associated penalties to future enacted HRDD rules, there is still work to do to establish solid enforcement mechanisms. Albeit with an increasing role, sanctions, which, as we have seen, are also created to be deterrent measures, are still not having the desired effect on enterprises and most large corporations are not fully incorporating environmental protection, non-discrimination procedures, or health, safety, and general labor rights obligations into their daily operations. We will see how it evolves.

Our dispute resolution view draws attention to the aim of the Article, which is to remain in the HRDD field and not to look at human rights protection broadly. Therefore, a dispute resolution section in such a context can only try to answer three questions: i) whether the “duty” of States to make HRDD mandatory according to Principle 3 of the UNGP is observed; ii) how to make States comply with it if they do not; and iii) how to ensure enterprises abide by the legislation on HRDD if the State has observed Principle

3. The objective part of the Article already provides an answer to the first question, and so we should move to the other two. We have considered that an appropriate way to do that would be to look at HRDD from an alternative dispute resolution perspective, without that meaning undermining the role of litigation in courts. Investor-State arbitration could answer the second question and thus put pressure on the United States to regulate HRDD, while commercial arbitration would provide the third question a solid reply both in EU supply chain agreements and employment contracts.

All in all, we are in the initial phase of seeing HRDD become of mainstream legislative interest. The EU is currently the role model, but not that much blame should be directed toward the United States. As we have observed, a few months ago, the EU had regulations as dispersed as the United States’. Noticeably, both jurisdictions centered a great part of their legislative efforts on the regulation of HRDD in mining, likely originating from the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. This reality adds to the idea that a general HRDD regulation in the United States will arrive in the future; having taken that seriously, the OECD directives make evident that, sooner rather than later, the UNGP will be followed as well. In any case, we hope that this becomes a reality—a reality that takes into consideration our corporate and dispute resolution reflections, but overall, one that prevents tragedies like the Rana Plaza collapse in Bangladesh from ever occurring again.55

55 Butler, S; Begum, T. (2023). Abuses “still rife”: 10 years on from Bangladesh’s Rana Plaza disaster. The Guardian. Retrieved from: rana-plaza-disaster-safety-garment-workers-rights-pay.


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