Responsibility of States for acts of Transnational Corporations: A dwelve upon the Jurisprudence of Liability

The horizon of International Law is expansive. The ambit and scope of the subject keeps increasing with the changing scenario. Although the basic principles are still the same, its veracity and applicability have undergone a diverse modification. The limitations on Sovereignty, once considered preposterous have, now, become a reality. A change of similar nature seems to occur in the scope and ambit of the applicability of the Principle of State Responsibility. With the introduction of the policy of Globalisation, the change in aspects of State Responsibility has now become imperative. This Paper would delve upon the diverse modes by which responsibility for the acts of Transnational Corporations [hereinafter, referred to as TNCs] or Multinational Corporations [hereinafter, referred to as MNCs] can be pinned. With Cross-border operations by Corporations at its epitome, it is imperative to look into the ambit of ‘State Responsibility’, an aspect of International Law that is likely to require a new outlook. The pinning of State Responsibility for lawful acts carried out by TNCs, emerged from the dichotomy between Industrial activities and Environment Protection, is sought to be addressed in this work.

Theory of Corporate Personality

The theory of Corporate Personality, a fiction like the concept of Reasonable man, a development from the Common law holds that an Association or Body of Persons, who, once incorporated take the form of an individual, artificial, not natural, distinct from the members of such association or body. The need for this theory arises because, when large number of persons are involved, it becomes difficult, if not impossible, to deal with them individually.[1]Further, the process of Incorporation, also gives an advantage to the business personnel, whereby he can maintain a distinction between his personal liability and the liability that accrues to him because of the business operations.[2]

The realm of this theory has taken a broad horizon in the era of Globalisation, whereby, there are Corporations that derive its existence from a particular State, and seek to exercise functions or operate at other States. The nexus for these cross-border operations has been provided by the era of Globalisation. The OECD defines globalization as “The geographic dispersion of industrial and service activities, for example research and development, sourcing of inputs, production and distribution, and the cross-border networking of companies, for example through joint ventures and the sharing of assets.”[3]

State Responsibility

The General Theory of State Responsibility is that responsibility can arise only from a breach of a specific primary obligation and therefore only from a wrongful act.[4]  The Liability of States, pinned upon by the justification given by the Theory of Objective Responsibility or the Fault-based Theory, whether Psychological or Normative Fault.[5] The Fault-based Theory has been criticized mainly because of the dogmatic approach that is circumscribed to the aspect of fault. The Objectivist Theory uses the scheme of determining “lack of diligence”, as a pre-requisite to pinning of responsibility. The divergence between the two, has led to a third-front of authors who have attempted reconciliation between the two theories, by adopting an eclectic approach to the determination of State Responsibility. International Responsibility is sometimes founded on Fault, sometimes based on breach of obligation, and yet sometimes on the concept of risk and sometimes on the basis of International Courtesy.[6]

A practical approach to the Problem of State Responsibility, can be to deviate from the traditional norms of ‘Fault-Theory’ and ‘Objective-Theory’ to a reconciliation that is show-cased by the international practice of due diligence, that seems to be a viable solution.

The Norm of Due Diligence

Diligentia Quam In Suis or Due Diligence, in common parlance, is founded by practice and forms a part of Customary Principle of International Law.[7] The Draft Articles of the ILC codified the existing customary obligations for activities not internationally prohibited but involving a risk of causing significant transboundary physical harm, namely the obligations such as diligent control of activities likely to cause transboundary harm to other States.[8] Due diligence requires the state “to use all the means at its disposal to avoid activities which take place in its territory, or in any area under its jurisdiction, causing significant damage to the environment of another State”[9]

The realm of State responsibility extends not only to the actions of agents of the State, but also to third parties over whom the State has or should have control.[10] A State is also responsible for the acts of non-State entities if the private conduct is directed or controlled by the State.[11]  The non-State entities are not State organs and the conduct does not have to involve “governmental authority”.[12] Nationality is the quality of an individual of being a subject of a certain State.[13]

Corporations and State Responsibility

In the case of corporations, to imputation to a Government is determined by two factors: (i) the structural test, (ii) the functional test.[14] The functional test requires:

(a) the performance of an act of a public nature inclusive of any activity which provides benefit to the public at large,

(b) the presence of police powers,

(c) whether financial considerations are the primordial factor to be considered.[15]

The traditional rule is to regard the State of incorporation as the State whose nationality the company has.[16] In International Law, the nationality forms an important link between the individual and the State.[17] In the Nottebohmcase, ICJ observed that, “Nationality is a legal bond having at its basis a social fact of attachment, a genuine connection of existence, interest and sentiments, together with the existence of reciprocal rights and duties. It may be said to constitute the juridical expression of the fact that the individual upon whom it is conferred, either directly by the law, or as a result of act of the authorities is in fact more closely connected with the population of the State conferring nationality than with any other State.”[18]

The U.N. Special Representative noted that “there is increasing encouragement at the international level, including from the treaty bodies, for home States to take regulatory action to prevent abuse by their companies overseas.”[19]

The modern era, is one where the State is no longer constrained to Police Activities, such as those of administration alone, rather the State has evolved into a welfare state, wherein the State carries out various activities, commercial and non-commercial, administrative and other activities.

2000 Baia Mare Cyanide Spill[20]

On January 30th  at 22:00, there was a break in a dam encircling a tailings pond operated by gold miningcompany Aurul, jointly owned by Australian company Esmeralda, Exploration Limited(50%) and the Romanian Compania Nationala a Metalelor Pretiosasi si Neferoase (REMIN)(44.8%), in Baia Mare, northwest Romania. As a result the contaminated  spill of about 100,000 cubic meters of liquid and suspended waste containing about 50 to 100 tonnes of cyanide, as well as copper and other heavy metals were released into the rivers Sasar, Lapus, Somes, Tisza and Danube before reaching the Black Sea. According to the report[21]  by U.N the Surface water data shows that concentrations of cyanide and heavy metals decreased rapidly towards the lower Tisza region, thus it concluded that the aquatic organisms in the lower Tisza region of Hungary were not completely destroyed by the spill; however situation in upper Tisza region is more complex.

As per the design concept of the Company, the waste was to be transported away from the city where waste from the extraction process could be recovered using efficient novel technology. Thus, the dam was designed to be environmental friendly which helped clean the existing polluted ponds. In light of this, the plant obtained all necessary permits under Romanian legislation. Despite the issue of the said permits, a breach in the dam resulted in the cyanide spill.

Once the Romanian authorities were informed, they ordered Aurul to stop activities and do the needful, informed Hungarian authorities about the accident and alerted the local authorities downstream. Later Yugoslavia received official information about the spill from Hungary. A U.N team, headed by the Director of UNEP’s Regional Office for Europe was set up to collect and review data related to the spill and its environmental implications, and prepare recommendations for future action and prevention.

The mining industry has repeatedly tried to avoid liability for accidents of the like nature. Likewise Brett Montgomery, chairman of Esmeralda Exploration, was trying to reduce the importance of the incident saying that reports have been 'grossly exaggerated', that it is not an environmental catastrophe and environmental impacts are due to "a number of unrelated events."[22]

Local municipalities and individuals in Hungary and abroad started a legal action against Aurul. The Romanian government had entered negotiations with Hungary regarding compensation for the spill. Esmeralda on the other hand, entered “voluntary administration”, a type of insolvency in Australia where an external administrator decides whether a company can go into liquidation.[23] According to Romanian media, Aurul was fined the equivalent of 166 US dollars for the spill. The mine is still in operation, despite numerous calls from Greenpeace and other environmental groups to shut the facility down.[24]

The Baia Mare Crisis has led to the dilemma as to the pinning of liability for acts of corporations that are state-owned and have an operation in other State-territories. The same may be resolved by looking into the various modes as to pinning of liability, viz. the Notional Nationality Principle, the Territorial Principle and the Effects Doctrine and the Doctrine of Horizontality, which provide for viable solutions for pinning of liability.

Pinning Liability

The Responsibility for acts of TNCs has brought forth and imperative change in the jurisprudentia of liability. Several principles have been evolved and can be looked into to arrive at a viable solution so as to the pinning of Responsibility, either on the TNCs themselves.

The Notional Nationality

International law has developed rules to determine the nationality of corporations[25]. States are entitled to regulate the activities of companies incorporated under their laws on the basis of the nationality principle. However, states do not as general rule prescribe laws for foreign subsidiaries of locally incorporated parent companies. The US position as set out in the American Law Institute’s 1987 Third Restatement on Foreign Relations Law[26] (the US Third Restatement), is as follows:

a state may not ordinarily regulate activities of corporations organised under the laws of foreign state on the basis that they are owned and controlled by the nationals of the regulating state. However, it may not be unreasonable for the State to exercise jurisdiction for limited purposes with respect to activities of affiliated foreign entities:

(a) By direction to the parent corporation in respect of such matters as uniform accounting, disclosure to investors, or preparation of consolidated tax returns of multinational enterprises, or

(b) By direction wither the parent or the subsidiary in exceptional cases depending on all relevant factors, including the extent to which

(i)  The regulation is essential to implementation of a programto further a major national interest of the state exercising the jurisdiction

(ii) The national program of which the regulation is a part can be carried out effectively can be carried out only if it is applied to foreign subsidiaries.

(iii) The regulation conflicts or is unlikely to conflict with the law or policy of the state where the subsidiary is established.

(c)  In the exceptional cases referred to in paragraph (b) the burden of establishing reasonableness is heavier when the direction is issued to the foreign subsidiary than when it is issued to Parent Corporation.[27]

There have been instances where a subsidiary has been treated as a notional alter ego of the Foreign Parent Company, so that the jurisdiction may be exercised over the Parent Corporation by the State where the subsidiary is located.[28] This principle is extended as a result of the doctrine of ‘single enterprise’ of the nationality of related TNCs, therefore disregarding the concept of separate identity of each member corporation of an integrated group of corporations.[29]

Parent based extra-territorial regulation involves subjecting foreign subsidiaries to extra territorial regulation by the home state through the parent. For example, the parent can be placed under a legal obligation to ensure that a subsidiary follows a certain course of conduct which can then be enforced against the parent company. While seemingly less contentious, parent-based extra territorial regulation through the parent company is also capable of creating tensions between companies and between states.

The Territorial principle and the Effects Doctrine

Each state has the jurisdiction to regulate activities taking place within its territorial boundaries. This principle has been extended under the doctrines of subjective and objective territoriality to give states a degree of extra territorial jurisdiction over criminal offences that have been commenced in one jurisdiction and concluded in another. For instance, a state may legitimately claim jurisdictions over criminal activity that was planned or directed from that jurisdiction, notwithstanding that the offences were completed elsewhere.[30] The USA has developed the idea of extended territoriality even further, asserting extra territorial jurisdiction over activities taking place overseas merely on the basis that those activities produced prohibited effects within the USA.[31] According to the US Third Restatement a state has jurisdiction to prescribe law with respect to conduct outside its territory that has or is intended to have substantial effect within its territory.[32]

The Doctrine of Horizontality

The States have a duty to protect the cultural, economic and social rights of its citizens. Considering this, a novel concept emerges in the form of Doctrine of Horizontality in which the States can be pinned liability in international law for any action violating the human rights of an individual by private entities including TNC’s & MNC’s  that fall in the purview of the State’s jurisdiction. The Doctrine is also called the vicarious, indirect or subsidiary human rights liability by scholars. [33] Doctrine of Horizontality does not require the States to commit or acquiesce to the violation or breach.[34]

The development of notion of horizontality is a notable novelty in International law. What some scholars call the horizontal application of International human rights-and others vicarious, indirect or subsidiary human rights liability- “has the effect of imposing responsibilities on States for the actions of those within their jurisdiction, such that the State can be held liable in International law for human rights violations perpetrated by private entities, including corporations.”[35]

Conclusion

The dilemma of pinning liability on States in the era of Globalisation for lawful acts by MNCs/TNCs is a perpetual debate. However Doctrines such as the Doctrine of Notional Nationality wherein the States can regulate ,if not all, at least limited activities of subsidiary companies in foreign states; the Territorial principle and Effects Doctrine that grants States extra-territorial jurisdictional powers where the State can regulate activities of subsidiary companies; and the Doctrine of Horizontality in which States can be pinned liability for acts of Companies within its jurisdiction, all provide viable solutions for the existing, locked debate. It is thus disputable whether corporations as distinct entities can be pinned liability for the acts performed by them, the State in which the companies are incorporated may also be held liable and responsible to its people and a further reasoning could be to pin liabilities on States in which the parent company is situated.