A new wave of mandatory human rights due diligence legislation is coming into force across Europe. It goes far beyond existing reporting obligations, such as under the UK or Australia’s Modern Slavery Acts, and will require businesses operating in Europe and beyond to take concrete steps to identify and address human rights issues in their international operations and value chains. In this article, we look at how this will affect owners and contractors alike and consider whether reliance can be placed on provisions typically found in construction contracts.

The shifting legal landscape – the move towards mandatory human rights due diligence

Since the adoption of the UN Guiding Principles on Business and Human Rights (the “UNGPs”) in 2011, it has been an internationally recognised standard of conduct that businesses should “respect” international human rights and demonstrate this through a due diligence process.

The scope of this responsibility is wide. In the context of the construction sector, it means that both owners and contractors have a responsibility to identify and address human rights issues associated with a particular project, irrespective of how responsibility for those issues may be allocated under the relevant construction contract. These issues might include anything from the land rights of communities potentially affected by the project, labour rights of workers engaged for the project and any human rights issues associated with the supply chain, and the procurement of equipment and materials needed for the project.

During the last eleven years, some businesses have voluntarily implemented these standards. Others have engaged with the standards as a consequence of external stakeholder pressure. However, for many companies, including in the construction sector, the responsibility to respect human rights has, to date, remained in the realm of “soft law”.

This, however, is changing. Mandatory human rights due diligence laws have already come into force in France (2017) and Norway (2022). The German Supply Chain Act will come into force in January 2023 and a proposed EU Sustainability Due Diligence Directive could come into force from as early as 2025.¹ This legislation mandates that qualifying companies take concrete steps to identify, prevent and mitigate human rights impacts in which they are involved, in accordance with the standards first set out in the UNGPs. Further, this obligation does not conform with conventional notions of separate corporate personality, and may, in certain circumstances, bring into scope human rights issues arising elsewhere in a corporate group. Where a company fails to meet these obligations, administrative sanctions (for both the company and directors) and civil liability may follow.

How will this affect companies in the international construction sector?

This new legislation will apply to a number of companies in the construction sector. By way of example, the proposed EU Directive would apply to any company with turnover generated in the EU of over €150 million (€40 million in “high impact” sectors, including the extractive sector), irrespective of where they are domiciled. In practice, however, this legislation will affect many more companies. This is because companies caught by the measures will look to demonstrate that they have engaged with business partners in their global value chains to address human rights impacts in which they are involved and will seek assurances from their commercial counterparties that they too adhere to international standards on human rights. Indeed, the proposed EU Directive requires that qualifying companies cascade down the obligation to carry out human rights due diligence to business partners through their commercial contracts. Further, since the introduction of the Norwegian Act, we have seen examples of qualifying companies demanding that foreign suppliers (whether they have any connection to Norway or not) disclose the systems and processes which they have in place to address human rights issues in their own operations and value chains. On this basis we expect that human rights issues and adherence to international standards will increasingly become a focal point of the tender and negotiation process for many future construction contracts.

Can companies rely on provisions within their construction contracts to meet the relevant international standards?

Construction contracts have historically not been drafted to enable companies to meet these standards. To take just one example - consider the owner of a project situated in a country where the State has a poor track record of protecting labour rights, where the responsibility for the provision (and welfare) of labour will, as is usual, be placed on the contractor and where, as is often the case, the contractor chooses to secure part of the labour force for the project from a more cost efficient third country.

In order to meet the relevant international standards underpinning the new legislation, the owner would likely need to take steps to identify and address the risk of forced labour associated with the project, including at a sub-contractor and supplier level. However, taking the FIDIC 2000 EPCT contract as an example, neither the “Compliance with Statutes, Regulations and Laws” nor the “Rates of Wages and Conditions of Labour” provisions (to be found in Articles 1.13 and 6.2 respectively) offer much assistance. If local law or practice offers less protection to rights holders than corresponding international human rights law, the expectation is that the owner takes steps to ensure that the more protective standard is respected. It is no answer for an owner to say that its contractor is responsible for all labour issues; is required to comply with local law; and/or observe conditions of labour that are consistent with industry practice in that country.

Amending these provisions to reflect the standards protected under international human rights law would go some way to addressing this issue. However, an owner is required to do more. Under the proposed EU Directive, they would, at a minimum, also be required to ensure that contractors flow the obligation to carry out human rights due diligence down to sub-contractors and suppliers and verify compliance with contractual assurances, including by using “suitable industry initiatives or independent third-party verification”. Even then, an owner will only be able to rely on these steps to discharge civil liability associated with a human rights impact at sub-contractor level if it was reasonable to expect that the measures it had taken were adequate to address the underlying issue. In practice, in order to meet the relevant international standards, owners will therefore be required to take an increasingly proactive approach in relation to labour and other human rights issues associated with their projects, and to build into their construction contracts the right to require, monitor and ensure compliance with these standards. This might, for example, include provisions or amendments which:

• Require contractors to carry out human rights due diligence and ensure certain standards, consistent with international human rights law;
• Require contractors to flow the obligation to carry out human rights due diligence down to sub-contractors and suppliers;
• Provide the owner with the right to call for evidence of and to audit the contractor’s compliance with the relevant contract standards and provisions on human rights, including in particular at subcontractor and supplier level (this may include increased rights for owners to review and approve subcontracts); and
• Enable the owner to address, and to sanction the contractor for, non-compliance with these obligations, including for example withholding approval of proposed subcontracts, or possibly suspension or termination rights.

Anticipating these changes, contractors (whether they are caught by one of the new mandatory measures or whether they contract with a company that is) would be well advised to put in place systems and processes which allow them to demonstrate that they meet the relevant international standards. This in turn will require engagement on human rights issues with their sub-contractors and suppliers, particularly where they operate in jurisdictions where the State fails to offer adequate human rights protection. This requires time and investment. However, contractors who take these steps now will be ahead of the curve when it comes to demonstrating compliance, whether to a regulator, existing or prospective client.

¹ For further detail on some of these mechanisms (including in relation to their effect on non-European companies), see our client updates on the Norwegian Transparency Act and the proposed EU Sustainability Due Diligence Directive. The Directive was proposed by the Commission and now needs to be approved by the Parliament and Council. Before it comes into force, there will be a 2 year implementation period during which Member States are required to enact enabling legislation.