[co-author: Graham Nicholson]*

Last week marked the 70th anniversary of the Universal Declaration of Human Rights which seeks to provide "a common standard of achievement for all peoples and all nations".  Conventionally, human rights tended to be invoked by "people" (natural or legal) against "nations".  However, in the last ten years, attention has increasingly focused on businesses and their responsibility to respect human rights.  Businesses, including PE funds, which fall short are increasingly exposed to "hard" legal liability as well as damage to stakeholder relations. 

Would you know if a portfolio company's business was involved in child labour, privacy violations or another human rights impact? What about a supplier or business partner?

Legal Developments

The legal landscape is shifting. “Soft” law such as the UN Guiding Principles is crystalizing into “hard” law. Courts around the world are extending their jurisdiction to human rights impacts which occur extra-territorially and throughout a business’s value chain. Businesses which don’t respect human rights are open to criminal and civil liability, not to mention devastating adverse publicity.

Human rights within the corporate structure

In the last year alone, the English Court of Appeal has handed down three judgements concerning tortious claims brought by claimants against an English domiciled parent company for the adverse human rights impacts allegedly associated with the operations of its overseas subsidiaries. See "Managing human rights risk" 27 September 2018 .The decisions considered the various circumstances where a parent company may owe a duty of care in tort to a third party affected by the operations of its overseas subsidiaries. Although all three cases are due to go to the Supreme Court, as things stand, the circumstances in which a parent company will owe such a duty are broader than previously thought and may be satisfied where the parent: exercises control over or gives advice in an area relevant to the harm; or takes responsibility for a policy which is material to the harm. The Court did not consider as relevant the equity relationship between the parent and subsidiary, meaning that the same principles could be extended to non-equity relationships. 

Supply chain liability under the law of negligence

Last month a court in Dortmund heard arguments in Jabir and others v. KiK Textilien und Non-Food GmbH. It is a case brought against a German retailer, under English law principles of tort in relation to a fire at the factory of a supplier in Pakistan. The claimants contend that KiK, as the main customer of the factory, owed them a duty of care, similar to that of a parent company, to procure a healthy and safe working environment and breached this duty by failing to do its share to prevent the fire, and the resulting harm. Although it is unclear what the outcome of this case will ultimately be, it highlights the risks for businesses in failing to prevent human rights impacts in their overseas supply chains. For a full description of the case see "Supply chain liability under the law of negligence: What does Jabir and Others v KiK Textilien und Non-Food GmbH mean for European companies with supply chains in the sub-continent and other common law countries?”

What do these developments mean for Private Equity?

If a duty of care to prevent adverse human rights impact can be assumed by a parent or customer, it is important to consider the other types of relationship where such a duty might arise. Where a PE fund exercises control over or gives advice to a third party, or where it requires that third party to adhere to a policy or code of conduct, this may evidence a duty of care. Environmental Social and Governance (ESG) matters in general and human rights in particular are now firmly on the radar of the Private Equity industry. In the last few years limited partners have increased their focus on ESG and human rights compliance and accordingly it is an increasingly important issue for PE funds. Most PE funds will have developed both policies concerning human rights and processes to screen for human rights issues in due diligence and across the investment lifecycle. The developments discussed above are indicative of a legal environment where the legal risks are increasing. Perhaps the most important take away from these recent cases is that a policy (for example on ESG or human rights) may create a duty; unless that policy is implemented, that duty will not be discharged. Now is the time for PE funds and their portfolio companies to revisit their policies and ensure that they are being adequately implemented, including by robust due diligence in accordance with the UN Guiding Principles.

*Counsel Knowledge Lawyer

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