Solutions rather than Litigation

The Responsible Business Initiative was launched by a broad alliance of more than 60 non-governmental organisations (NGOs) in April 2015. It calls for the world's strictest liability regulations for businesses to control non-compliance with human rights and international environmental standards. The new liability provisions would be unprecedented worldwide and result in a counterproductive "juridification" of the discussion around human rights violations and environmental protection. This would lead to far-reaching legal, political and economic problems. The Initiative is not the right instrument to address the social and ecological concerns of the people in the business cycle who are directly affected. The solution to social challenges lies in the mutual cooperation between companies, the government and NGOs, and in the establishment of "good governance" structures in newly industrialised and developing countries.

The Responsible Business Initiative was launched by a broad alliance of more than 60 non-governmental organisations and ecclesiastical institutions in April 2015. The Initiative demands additional liability regulations for companies in cases where human rights and international environmental standards are violated.

The topics addressed by the Initiative – human rights and environmental standards – are noble and also in the interest of the business community. The publication "Corporate Social Responsibility from a Business Perspective" provides an overview of the existing measures adopted by companies, the instruments of the Swiss government, and current political developments at the national and international level.

Companies want a constructive dialogue and closer cooperation between all players – a goal that is also promoted by the UN. But this very approach is called into question by the people's Initiative. This is because the Initiative backs the wrong instruments to achieve genuine improvements benefitting humans and the environment.

The name of the Initiative suggests that it is only directed against large group companies. This is wrong for three reasons.

1. All companies, also small to medium-sized enterprises (SMEs), would be affected by the Initiative. It is true that the text of the Initiative says that the legislator would take into consideration the needs of small and medium-sized enterprises when regulating due diligence obligations. But SMEs are clearly also included in the liability obligations. For example, a Swiss SME might have an important supplier abroad that is dependent on it. The provisions of the Initiative would then apply directly to the SME.
    
2. The proposed relief should not detract from the fact that in practice it is destined to be dead letter. The broad wording of the duties of care ensures that smaller companies cannot afford to apply a less stringent liability standard than that of large companies, when considering the risk.
    
3. Even more comprehensive are the indirect consequences for SMEs that act as suppliers of international companies. A multinational company would have to pass the obligations it is subject to on to its suppliers in other countries and in Switzerland. This is because the Initiative stipulates a far-reaching duty of care that not only extends to the company itself but also to all its business partners in the value chain. A large company would hedge its liability risk with "back-to-back" contracts. This ensures that the statutory "liability for consequences" is passed on to the supplier by way of contract. For SMEs the Initiative entails higher risk and a significantly higher administrative outlay. Numerous additional attestations of conformity would have to be provided, and clients would most probably have to monitor the new duties of care more strictly.

Example 1: Company K obtains goods in Switzerland from Supplier 1 (S1). Supplier 1 in turn has a supplier (S2) in another country. K has no direct influence on the procurement procedures of S1. Based on the Initiative a claimant would now be able to sue K directly in Switzerland. To protect itself from this risk, K would pass on liability to S1 with a "back-to-back" contract. S1 would do the same in its relationship with S2, so that the latter legally assumes the entire liability of K, which is measured according to Swiss standards (court costs, lawyers' costs, and compensation). It is even questionable whether S2 can accept liability to such a degree.

Example 2: S2 is a small independent family firm with local production that solely supplies S1. The family at S2 works hard and similarly requires their staff to work with them under precarious working conditions. S1 has repeatedly asked S2 to improve the hazardous conditions, but it cannot do anything but threaten S2 that it would no longer procure the goods from them. K determines that procuring the goods from S2 has become too risky due to the associated liability risk, and decides to buy up S1 and S2, integrating the two suppliers inside the group (horizontal integration). The family receives compensation and the enterprise S2 becomes part of a large group company. As a result, monitoring throughout the whole supply chain is ensured in line with the spirit of the Initiative, but at the cost of ending the existence of small family-owned enterprises.

Swiss law follows the basic principle of "fault-based liability". This means that a person who unlawfully and culpably causes loss or damage to another shall bear liability. Therefore the basic idea is that liability only exists when a wrongdoer him-/herself acts wilfully or negligently.

There are exceptions to this principle. In some cases, no fault on the part of the person liable to pay damages is required, but there has to be a certain legal relationship between the liable party and the damage. The following examples show cases where this "liability based on causality" (strict liability) is applied.

In the case of liability for animals, the keeper of the animal is liable for loss or damage caused by the animal unless he/she proves that he/she took all necessary care in keeping and supervising the animal. The type of proof depends on the specific circumstances.

With property owner's liability, the owner of a structure or property (e.g. a road or a house) is liable for damage caused by a defect in the property. The owner is only exempt from this liability if he/she proves that there was no defect.

In the case of employer's liability, the employer or ordering party is liable for its ancillary staff. This applies even if he/she was not personally at fault. Generally, however, if the entity is an independent company, staff cannot be classified as "ancillary staff".

The employer may be released from liability if he/she proves that he/she took the care that was appropriate under the circumstances to avoid loss or damage. Duties of due care may include the necessary care in selecting ancillary staff, care in giving instructions and directives, care in the supervision, monitoring and control of the ancillary staff, and care in organising the work and the company.

All these types of liability for consequences are already obvious exceptions to the principle of fault-based liability. They all have in common that the loss or damage event entered the sphere of the person liable: The liable party realistically could have prevented the damage, or could gain relief if it can show that no fault can be attributed to the party itself.

From a legal standpoint, a group company is an aggregation of enterprises that form a business unit, where the entities retain their legal independence.

The Swiss Code of Obligations (SCO) describes the group company (indirectly) as a company that controls another undertaking. In colloquial terms, one refers to a group as a parent company.

A group itself, i.e. the totality of its undertakings, cannot be liable. Only the individual enterprises in the group and their administrative bodies (e.g. the board of directors) can assume liability. The parent company, as shareholder of its subsidiaries, in principle is not liable for their obligations. In certain circumstances, however, the parent company may have to accept liability for the obligations of its subsidiary or subsidiaries in Switzerland.

Liability based on a de facto role as administrative body: If the parent company performs tasks that lie within the responsibility of the management organs of the subsidiaries, it may be deemed to be a de facto administrative body and might thus have to accept liability.

Liability arising from "piercing the corporate veil": If the principles of corporate law are violated, the legal separation between individual independent companies within the group may exceptionally be pierced. This "piercing" occurs when the appeal to the presumed legal independence of the subsidiary seems abusive (known as "piercing the corporate veil").

Liability resulting from trust in the group company: The parent company may have to accept liability if it gave rise to certain expectations concerning the responsibility of the group that it did not live up to.

Already today, the management bodies of Swiss companies are obliged to observe the provisions regulating human rights and the environment. Therefore, the parent company's duty of care also extends to the business transactions carried out by the subsidiary. If a Swiss parent company has de facto control over the business transactions of its subsidiary, it can already be sued and sentenced to pay damages in Switzerland.

The obligations of the topmost corporate management already apply to the whole group.

• The obligation to observe the strict standard of care prescribed by the Federal Court.
• The duty to intervene in the event of human rights violations in specific cases, and take countermeasures without delay.
• The obligation to identify the risk of infringements against the law and to set up a group-wide Internal Control System (ICS).
• The obligation to monitor the concrete management of business transactions throughout the group. The companies are required to ensure Corporate Governance in general, and specifically compliance with the new Section 20 of the "Swiss Code" 2014.

A report recently commissioned by the Federal Council shows that no legal system comparable to that of Switzerland (particularly among the OECD countries) provides for a more thorough duty of care of the board of directors than that anchored in existing Swiss law. Yet the Initiative aims to go much further.

Swiss companies do not wilfully violate human rights and environmental standards. On the contrary: they do not only comply with the applicable laws but also follow European standards when operating in newly industrialised and developing countries. In doing so, they do not only create jobs, pay taxes and invest in local infrastructure but also indirectly convey values and standards in dealing with people and nature. This does not only take place via export, but also through their local presence and direct investments in those countries. Therefore, the business activities of group companies are not the problem, but are rather part of the solution for social and economic challenges (see box).

Nonetheless, it has to be clear that it is primarily the duty of governments to ensure that human and environmental rights are respected. The companies have no sovereign powers and no instruments of enforcement. Their scope of action is limited. It is also quixotic to assume that globally active companies – even those with the highest CSR standards – succeed in preventing all abuses at their suppliers. Their ability to influence suppliers and subcontractors is limited or entirely non-existent. Suppliers are independent companies under their own management. So they cannot be controlled in the same way as a business department that is fully integrated within the company (see illustration). Companies already take action against critical incidents in their supply chain and endeavour to prevent them. However, this may prove very difficult, especially in companies that operate outside the group structure.

The Initiative takes a one-sided approach in enforcing penalties for abuses, causing more harm than good for humans and the environment in the process. Implementing the Initiative would lead to a juridification of Corporate Social Responsibility. Today's innovative means of cooperation with NGOs and local groups (communities) would be reduced to purely formalistic and legal questions by the forcefully imposed new risk assessments. This means the Initiative would result in a decline of CSR measures, and may force some companies to withdraw from newly industrialised and developing countries under certain circumstances. It is also likely that local companies would have to be excluded from the value chain, forcing companies to resort to vertical integration. Multilateral companies would become more dominant in the medium term.

Legislative activities in Switzerland must always be seen in the international context. With regard to the competitiveness of companies in Switzerland the consequences are clear: the appeal of the country as a business centre would drop and significant economic costs would arise. International cooperation within the framework of the UN, the EU and OECD would also be affected. Efforts to create a global uniform standard would be undermined. Even more serious is the fact that the Initiative also prescribes instruments that to some extent reduce the decision-making capacity of other countries in the matters (similar to a form of legal imperialism).

Various states are currently issuing new legal provisions in the field of CSR. New CSR legislation has been passed in the EU and in some other countries. However, such far-reaching liability clauses and interventions in the legal system as found in the Initiative have not been proposed anywhere. The foreign regulations basically require the same actions as recommended by the voluntary agreements that are widely accepted in Switzerland. But none of these legislative measures propose specific liability of companies in the event of violations of human and environmental rights. Not even the revised recommendation of the Council of Europe goes beyond the UN Guidelines.

Acceptance of the Initiative would be another blow to Switzerland as a business centre, with possibly serious consequences. Besides the legal uncertainty for all companies – also SMEs – it would call Switzerland's status as a business location for large group companies into question. If the Initiative were accepted, big companies could circumvent it quite easily by shifting their business activities to other countries. Everyone would then be affected since the group companies have a great economic impact that is often underestimated. About one third of all workplaces, tax revenue and the gross domestic product is generated from group companies with international operations. This does not include the interactions between group companies and SMEs serving as suppliers and depending on their local orders.

The Initiative demands the most massive intervention in the existing legal system and disregards fundamental principles of company, liability and private international law. Legally it goes far beyond anything found in the world today. The Initiative demands much more than new duties of care:

• The Initiative demands that companies check and monitor human rights and international environmental standards ("Standards") throughout the entire value chain, which means down to every supplier. Although this aspect is of paramount importance to the Initiative’s design, it is unclear which standards the Initiative actually refers to.
• ­The Initiative demands far-reaching liability provisions for companies if the Standards are not met. This liability extends to all companies that are "controlled" by a parent company in any manner, and here again it is not at all clear how far such controls would go.
• ­The Initiative proposes unconditional liability to the disadvantage of companies in Switzerland. They would be liable in all cases if they cannot prove that they monitor and implement the Standards throughout the whole international value chain (reversal of the burden of proof).
• ­Swiss courts would have mandatory jurisdiction over the legal enforcement, and Swiss law would stringently apply, not only for court proceedings, but also for contracts, encompassing the whole value chain (legal imperialism).

The Initiative demands that companies be obliged to incorporate the protection of "internationally recognised human rights" and "international environmental standards" into all business procedures. In the field of human rights, there are a large number of international standards and agreements. The problem here is that these – when they actually refer to companies – are often formulated as recommendations, so there is an absence of legally precise language. When it comes to environmental standards, the legal fuzziness is even more apparent. There is no indication of which international standards the Initiative actually refers to.

Furthermore, the Initiative demands that the duty of care should also apply to "enterprises controlled by the company" in Switzerland and abroad. It is completely unclear in legal terms how far such controls and duties of care would go, partly due to the differences in wording in the Initiative text. This regulation results in an automatic de facto liability of the parent company for incidents along the supply chain. It is highly problematic that the duties of care extend beyond the enterprises controlled by the parent company, even to subcontractors that may be unknown to it.

The big sham: Companies must de facto assume liability always and for everything.

The Initiative demands automatic liability without fault of the company, and creates new rights to file an action. Companies are expected to assume liability for loss or damage that is caused by an enterprise under their control abroad " in the course of executing business transactions". Exoneration is not possible in practical terms because no company can prove that far-distant suppliers also comply with all the relevant standards. It is not possible to ensure control of the entire supply chain right down to the remote supplier of a supplier. Such an extension of liability would have far-reaching consequences and is tantamount to a paradigm shift in liability law. It would overturn the tried-and-tested Swiss company law and the liability of the group companies described above.

The claims of the Initiative could even be interpreted to mean that the individual members of the board of directors of the parent company are made personally liable guarantors of the whole enterprise. According to this interpretation, they would even be liable if infringements of human rights or environmental protection occurred outside the group company's own controllable area.

The companies are only free of liability if they can prove that they have considered the following points for all their controlled companies or suppliers with which they have some form of business relationship:

• The companies have to determine the actual and potential effects of the actions of the subordinate company on internationally recognised human rights and environmental protection.
• The companies must take suitable measures to prevent violations of internationally recognised human rights and international environmental standards (regardless of whether they are even allowed to impose such directives on their suppliers).
• The companies must end existing violations and report on the measures taken (again, regardless of whether they are even allowed to impose such instructions on their suppliers).

In practice it is almost impossible to produce such evidence in relation to a company that is not directly controlled. With the lack of authority to impose instructions, there is also a lack of means to obtain the required information. However, the Initiative hazards the consequences that these uncertainties may disadvantage the company and benefit the claimant in litigations. The parent company in Switzerland would have to provide evidence on something for which there are no applicable standards, with regard to one of its suppliers abroad over which it cannot exert any influence in practice. This can only mean that the proof of exoneration is doomed to fail, so the parent company is always liable, whether it has complied with the duties of care, or not.

The Initiative asks that Swiss companies be sued in Switzerland for everything that happens anywhere in the world and has some remote connection to them. This would mean that the competence of courts in other countries has to be called into question by the courts in Switzerland. Legal actions would no longer be initiated at the place where the loss or damage occurs.

This would undermine international developments that aim to counteract precisely the propensity of jurisdiction and the place of loss or damage to drift apart. In the past few years, the jurisdiction of courts for global incidents has been limited in many countries (including Spain, Belgium and even the USA).

The political message is also highly detrimental. The country that is actually competent would be told that its law is invalid and its courts do not have capacity to act. This is not only an affront but also represents a serious interference in the sovereignty of the nations in question. Instead of denying them jurisdiction to take up civil proceedings and drawing such cases into Switzerland, it would be much more effective to develop the court systems in the respective countries. Not only the people in developing countries, but also the international companies investing in them have a significant interest in maintaining a properly functioning, local legal system. Such a new type of imperialism in court disputes would result in a forced export of jurisdiction.

The Initiative finally requires that the Swiss court must apply Swiss law in all cases. But this is not always in the best interests of the local contracting party. At present, the parties partly have a choice of law, since different legal systems may be applied. The parties therefore have to decide which legal system they want to use. If contracting parties intentionally or unintentionally fail to use the possibility of choosing a legal system, the law of the country which shows the closest connections to the contract, applies by default. This is usually the country where the seller or supplier has its registered office. This form of facilitation that normally benefits the supplier abroad, would also no longer be available to them according to the Initiative.

If a company domiciled in Switzerland could be sued for an incident at the other end of the world, this would create great difficulties for a court in Switzerland. Even now it is difficult to obtain and evaluate evidence in cross-border proceedings. A Swiss court is not permitted to undertake any evidence-collecting measures on foreign territory, because it is forbidden to conduct official activities outside Switzerland. Thus, for example, Swiss judges are not permitted to travel abroad for a legal inspection or interrogations.

It is true that the law of international civil proceedings offers two possible solutions for this situation. The judge in Switzerland can request the help of authorities abroad via the instruments of international legal assistance (letters of request). They can be asked to carry out legal proceedings or other official activities within their territory and communicate the results to the court in Switzerland. But this authority abroad would generally be the very court that is actually competent for the case, and the Swiss judge submitting the request would have to inform this court that it is not sufficiently competent to handle the case itself. It is easy to imagine how reluctant this court would then be to support the requesting court in Switzerland in the complex enquiries related to a case.

From the standpoint of the foreign claimant, as well, a lawsuit would be a great challenge. The claimant would have to submit a written complaint to the court in Switzerland, name all the evidence in detail, and provide proof of the damages in numbered sections. The claimant would hardly be in a position to do so – for linguistic or financial reasons. An NGO based in Switzerland would most probably have to step in.

The (Responsible) Business Initiative does not provide better protection for humans and the environment in any way, shape or form – quite the contrary. The Initiative not only focuses on the wrong place but also applies the wrong instruments. It is already possible for companies to be sued for damages. There are also established procedures to solve any abuses by means of dialogue. Additionally, the Initiative fails to recognise the great contribution that Swiss companies are already making to development and welfare. It is superfluous, counterproductive for human rights and environmental issues, and dangerous for Swiss business.

The Initiative makes multiple bogus claims. It alleges that companies are intentionally violating human rights and environmental standards. It also pretends to merely establish duties of due diligence and only affect group companies. None of this is true. The Initiative essentially demands an extreme, automatic liability without fault for all activities abroad, which would be unprecedented in the world. SMEs are also not exempt from such liability.

The Initiative is formulated in very broad legal terms and therefore conceals numerous dangers. It violates fundamental principles of company, liability and private international law. It revokes decision-making capacity from newly industrialised and developing countries, and blocks their legal development. What is more, this legal imperialism represents an explosive political issue and would obstruct delicate foreign relations. The Initiative creates great uncertainty in Switzerland and undermines the properly functioning system of addressing conflicts via conciliation proceedings before the government-supervised National Contact Points.

The Initiative would directly and seriously damage the Swiss economy. Switzerland would lose its appeal as a centre for international enterprises, because the world's strictest liability clauses would be introduced. The economic consequences of this Swiss solo venture would also be extensive. The administrative burden on companies of all sizes would grow substantially.

The threatened juridification of the social responsibility of companies shifts the discussion from a constructive search for solutions to the confrontational – into the courtroom. This is of no benefit to anyone. The situation for humans and the environment in various regions would certainly not improve if investments are withheld or companies from countries with much lower standards replace Swiss companies. Therefore, the Initiative would ultimately harm just those whom it allegedly is supposed to protect.