September 26, 2007
Contracting Human Rights? Ruggie Teams with IFC on Study
by Bill Baue
Empirical research conducted by John Ruggie and the International Finance Corporation examines if
foreign investment contract clauses enable human rights violations.
A clarion call of concern over the often-dangerous crossroads between business and human rights has
been sounding of late, most prominently trumpeted by Harvard Professor John Ruggie as Special
Representative to the UN Secretary-General on Human Rights and Business. His April 2005 mandate
calls for mapping potholes in the road where business adversely impacts human rights and proposing
solutions to fill them. He and his colleagues--dubbed Team Ruggie--are focusing attention on
concrete practices where business and human rights intersect.
Last month, Team Ruggie announced a collaborative study with the
International Finance Corporation (IFC), the private sector arm of the World Bank, to examine just
such a juncture: so-called stabilization clauses in contracts between host governments and project
finance investors. These obscure mechanisms--which seek to reduce investment risks by freezing
laws that apply to investors or compensating them for the costs of complying with new laws--carry
significant implications for human rights.
The concern: when governments strengthen
domestic human rights regulations, often to comply with international law, do these clauses exempt
companies from compliance or governments from enforcement obligations? What is happening in
practice on the ground?
To answer these questions empirically, Team Ruggie added human
rights lawyer Andrea Shemberg in June to work with Motoko Aizawa, head of the policy and standards
unit of IFC’s environment and social development department. Shemberg wrote a 2003 report for
Amnesty International spotlighting human rights implications of the Baku-Tbilisi-Ceyhan (BTC)
pipeline that prompted BP to amend its contract and perform a Human Rights Undertaking that altered
the legal terms and human rights implications of BTC’s stabilization clause.
IFC-Ruggie partnership, which activists may question, grew organically, according to Aizawa. She
told SocialFunds.com that Ruggie’s initial research and IFC’s revision of its performance standards
on social and environmental sustainability (which she spearheaded) followed parallel paths and
“Our initiatives intersected, and I observed at a couple of
consultation sessions that John organized, the stabilization clauses kept on coming up,” said
Aizawa. “NGOs have said that these clauses actually create human rights violations because they
tie the hands of governments, which are responsible under various international agreements to
improve their domestic human rights legislation, and companies may be inadvertently helping
governments not perform their obligations.”
“We recognize that the debate has been
ongoing, but I have not seen any research out there that really analyzes what happens on the
ground,” she added, underscoring the need for this empirical study.
Shemberg thinks “it is
absolutely fundamental that IFC is involved because they operate at this intersection advising
clients on social and environmental issues, so if this research discovers potential risks of
negative impacts on human rights performance of the state, IFC may be part of forging solutions.”
The IFC connection also gives Shemberg access to the dealmakers--businesspeople, lawyers, and
politicians that IFC interacts with regularly on project finance deals—that NGOs or academic
researchers might not be able to access.
One of the key questions Shemberg is asking is
why stabilization clauses exist in the first place. Broadly speaking, the clauses minimize the
financial risk of investors losing money--but in doing so, they may increase the reputational risk
of companies being perceived as violating human rights. Stepping back, however, a common sense
perspective gives pause.
“In principle, these clauses butt right up against what human
rights law says states have to do,” said Shemberg. “From a human rights lawyers’ perspective, a
contract that on the face of it says a new law can’t apply is seemingly posed in opposition to the
state’s international legal duty to regulate.”
Human rights activists who are versed on
stabilization clauses agree.
“UNCITRAL--the United Nations Commission on International
Trade Law, the inter-governmental body that makes recommendations on investment rules--makes the
rather obvious point that corporations, like citizens, should expect changes in the law: indeed,
such change is part and parcel of democracy,” say Nick Hilyard of The Corner House in the UK and Antonio Tricarico of
the Campaign to Reform the World Bank in Italy.
“Stabilization clauses should therefore be limited in their scope, only covering ‘specific
legislative changes that target the particular project, a class of similar projects or privately
financed infrastructure projects in general,’ according to
UNCITRAL, or changes in economic circumstances that could not reasonably have been foreseen at
the time of the contract being signed.”
Hilyard, who wrote a book chapter on stabilization
clauses, and Tricarico point out that the Organization for Economic Cooperation and Development
(OECD) similarly recommends such specificity in stabilization clauses. They also raise concern
about the lack of transparency of project finance contracts.
“If investment is to be for
the public good, it is critical that the public has the opportunity to shape the terms of the
investment--contract transparency is thus essential,” Hilyard and Tricarico told SocialFunds.com.
“Our experience with the Host Government Agreements for the BTC project in Azerbaijan revealed that
even sovereign Parliaments sometimes were not fully informed of the clauses in the agreement,
ratifying it under pressure, even though it gave a blank check to companies.”
which is still in early stages and is slated for release in early 2008, does not encompass the
problem of transparency within its scope, though Team Ruggie and IFC will hold consultations with
NGOs later in the process that may raise this concern. In addition to identifying whether and to
what degree stabilization clauses negatively impact human rights, the study will advance
recommendations for solving these problems.
“You can change the way contracts are written
to avoid negative human rights impacts if they exist,” said Shemberg, though she notes that
stabilization clauses are only a very small component of the much broader picture of business and
human rights. “We’re not going to resolve all human rights problems by fixing contractual
“That said, I can’t imagine a better context than a UN mandate in which to
undertake this research because of the potential to discuss, identify, and implement solutions,”
SRI World Group, Inc. All Rights Reserved.