A new wave of binding human rights due diligence legislation is coming into force across Europe. It goes far beyond existing reporting requirements, e.g. under the UK or Australia Modern Slavery Acts, and will require companies 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 whether it can be reverted to provisions typically found in construction contracts.
The changing legal landscape – the transition to 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 recognized standard of conduct that companies 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, this means that both builders and contractors have a responsibility to identify and address human rights issues related to a specific project, regardless of how responsibility for those issues is assigned under the relevant construction contract. These issues can include anything from the land rights of communities that may be affected by the project, the labor rights of workers employed on the project, and any human rights issues related to the supply chain and procurement of equipment and materials needed for the project .
Over the past eleven years, a number of companies have voluntarily introduced these standards. Others have embraced the standards due to pressure from outside stakeholders. For many companies, including those in the construction industry, the responsibility to respect human rights has so far remained in the area of ”soft law”.
However, this is changing. Binding human rights due diligence legislation has already entered into force in France (2017) and Norway (2022). The German Supply Chain Act comes into force in January 2023 and a planned EU Sustainability Due Diligence Directive could come into force as early as 2025.1 This legislation requires qualified companies to take specific steps to identify, prevent and mitigate the human rights impacts in which they are involved, in accordance with the standards first set out in the UNGPs. In addition, this commitment falls outside traditional notions of a distinct corporate personality and, in certain circumstances, may affect human rights issues that arise elsewhere in a corporate group. Failure by a company to meet these obligations can result in administrative penalties (both for the company and directors) and civil liability.
How will this affect companies in the international construction industry?
This new legislation will apply to a number of companies in the construction sector. For example, the proposed EU directive would apply to all companies with a turnover of more than €150 million (€40 million in high-impact sectors, including extractives) in the EU, regardless of where they are based. In practice, however, this legislation will affect many more companies. This is because companies affected by the measures will seek to demonstrate that they have engaged with business partners in their global value chains to address the human rights impacts in which they are involved and have received assurances from their commercial counterparts will ensure that they, too, comply with international human rights standards. In fact, the proposed EU directive requires qualified companies to pass on human rights due diligence obligations to business partners through their commercial contracts. Furthermore, since the Norwegian law was introduced, we have seen examples of qualifying companies requiring foreign suppliers (regardless of whether they have a connection to Norway or not) to disclose the systems and processes they use to address human rights issues in their own have operations and value chains. On this basis, we expect that human rights issues and compliance with international standards will increasingly come to the fore in the bidding and negotiation process for many future construction contracts.
Can companies rely on provisions in their construction contracts to comply with relevant international standards?
Building contracts have not historically been designed to allow companies to meet these standards. To cite just one example – imagine the owner of a project based in a country where the state has a poor track record of protecting workers’ rights, where responsibility for the supply (and welfare) of the workforce is shared is delegated to him as usual by the contractor and if, as is often the case, the contractor chooses to source some of the labor for the project from a less expensive third country.
In order to meet the relevant international standards underlying the new legislation, the owner would likely need to take steps to identify and address the forced labor risk associated with the project, including at the subcontractor and supplier level. However, using the FIDIC 2000 EPCT treaty as an example, neither the “Compliance with Statutes, Regulations and Laws” nor the “Wages and Conditions of Work” provisions (found in Articles 1.13 and 6.2 respectively) offer much help. When local law or practice offers rights owners less protection than equivalent international human rights laws, the owner is expected to take steps to ensure that the standard of protection is respected. It is not an answer for an owner to say that his contractor is responsible for all labor issues; is obliged to comply with local laws; and/or comply with working conditions consistent with industry practice in that country.
Changing these provisions to reflect the standards protected by international human rights law would go some way to addressing this issue. However, an owner has to do more. At a minimum, under the proposed EU directive, they would also need to ensure that contractors delegate human rights due diligence obligations to subcontractors and suppliers and verify compliance with contractual assurances, including through the use of “appropriate industries”. initiatives or independent third-party verification”. Even then, an owner can only rely on these steps to discharge civil liability related to a subcontractor-level human rights violation if the actions it took could reasonably be expected to be adequate to address the underlying problem solve. In practice, therefore, in order to comply with relevant international standards, property owners must take an increasingly proactive approach to labor and other human rights issues related to their projects, building the right to demand and monitoring into their construction contracts and ensuring compliance with these standards . This could include, for example, provisions or changes that:
- Requiring contractors to perform human rights due diligence and ensure certain standards consistent with international human rights law;
- Requiring contractors to delegate human rights due diligence obligations to subcontractors and suppliers;
- Grant the owner the right to request evidence and to audit the contractor’s compliance with relevant contract standards and human rights provisions, particularly at the subcontractor and supplier level (this may include extended rights for owners to inspect and approve subcontracts). ; and
- Allow the owner to address non-compliance with these obligations and sanction the contractor for doing so, including, for example, refusing to approve proposed subcontracts or possible suspension or termination rights.
In light of these changes, contractors (regardless of whether they are affected by one of the new mandatory measures or whether they contract with a company) would be well advised to put in place systems and processes to demonstrate that they comply with the relevant international standards fulfill . This, in turn, requires engagement on human rights issues with their subcontractors and suppliers, particularly when they operate in jurisdictions where the state does not provide adequate human rights protections. This takes 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 potential customers.
1 For more details on some of these mechanisms (including their impact 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 has to be approved by the Parliament and the Council. Before it comes into force, there will be a two-year implementation period during which member states will have to enact enabling legislation.