This article is written by Devina Poonia from Ansal University, Gurugam, and deals with how due diligence evolved in the regime of international human rights and conventions and the need and importance of it. This article has been edited by Ilashri Gaur, from Teerthanker Mahaveer University (CLLS).
Table of Contents
Introduction
The concept of due diligence saw a spike back in the 1930s. The legal term was much in practice from the mid-fifteenth century but it was adopted by the USA and the process was observed as “reasonable investigation” in the US Securities Act of 1933. The endorsement of due diligence and its presence can be felt in each and every aspect of law and general business. Due diligence can be observed in daily aspects of our lives like when a company hires an employee, before finalizing the contract they may feel the need to do necessary background checks on his/her employee regarding the degree, medical records or previous employment history, it is practised as a precaution to overcome or avoid any wrong turns just on the basis of a decision.
Meaning of due diligence
The basic meaning of due diligence is the process of assessing or auditing before investing in shares or bonds or the investigation carried on financial investments before entering into a contract. It is generally termed as a precautionary principle to avoid any uncertainty or risk in the future. Due diligence can, in certain situations, also be turned into a legal objective where the businesses have to tend to extra standard care which is expected out of them before entering into a contract.
International law
The term due diligence found its stepping stone in international law and conventions which are termed as an obligation on the subject of international law where the connection between two elements of law namely the State and its citizens; where if there is no fulfilment of obligations on either part whether its the State or its citizens, either one can be found obligatory and violator on the part of not fulfilling the prospect of due diligence. This framework of law is responsible for dealing with international human rights which was said to be grounded in widely shared social expectations of appropriate business conduct.
General aspects of law
Due diligence finds its importance in every aspect of law whether its the enforcement of an arbitral award or court decisions and a general nemesis invoked by scholarly discussions in State responsibility. This principle has been adopted by paralegals all around the globe while arriving at a decision or an outcome where, if due diligence is not observed it can lead to hazardous results. Principles of due diligence like no-harm, good behaviour, and governance are some areas in which every law needs to explore and adopt those principles in its governance structure. For that, the questions arise whether it can fill in the gap of content and underlying principles? Or whether these principles can be adopted in place of content, scope, and realm of justice? These questions need to be answered in order to apply the principles into the equation of law which will suit the best need of different areas of international and public laws and all types of legal persons.
A standard of conduct in international law
Due diligence, as a standard of conduct, can be traced back to the historic law of Romans where a “diligent” (person) was held liable for his actions for not following the basic standard of conduct for the accidental damage caused to others because of the negligent behaviour of an individual. The term “standard of conduct” in layman words means a standard protocol to be followed by a person with ordinary prudence with respect to living in a society and following the law laid down by the authorities.
The Standard of conduct was practised as a formulated principle to assess the conduct of a defendant against an external standard of expected conduct rather than focusing on the subject matter of the defendant’s motive and his own intentions. The Romans analyzed the concept of due diligence in respect to civil offences like torts and negligent behaviours. The leading idea followed by the Romans and the Europeans was to put the blame on the guilty who is an owner and has to bear the risk or loss of the circumstances of which the blame cannot be put on to the third party. The idea was to interpret the negligence of the person which is opposite to the term diligence (precaution). The word tort has 4 common elements observed namely- harm, causation, duty, and breach which are also observed while conducting the test of diligence.
It is now well settled that the State is bound to use due diligence to prevent the commission of criminal acts within its dominions against another nation or its people. Similarly, in the Wipperman Case, it was held by an arbitral tribunal that the State is not responsible for the acts of individuals in their territory or jurisdiction if reasonable diligence is followed on the behalf of the individual in attempting or preventing the occurrence of a force or an act that is bound to take place. If the conduct of the private parties is directly attributable to a State, then the sovereign will be responsible for its conduct as it was conducted in the first place by the State itself.
In reference to that, it is assumed that the ‘due diligence is concerned with supplying a standard of care against which fault can be assessed’ that is relevant in some circumstances but not in others. It defines the scope and extent of the State to cope up with the standards laid down by the law and whether they are being followed and not violated in terms of infringement on rights related to humans or against the State. The standard of conduct can also change over time as the needs and the laws of the society change bringing in measures for the reformed concept of due diligence as it may depend on the facts of the case pertaining to the law in question and whether the degree of risk does not surpass the conduct of diligence and does not violate the international human rights.
Due diligence as a legal concept
When human rights were recognized, the State was bound to protect them. It was found to be tied up with the subject of due diligence as international treaties are only obligatory on parties if the contracting states have signed upon them. But to protect human rights, in general, the concept of due diligence was observed as a prism to bind each other. It is an emerging general principle under Article 38 of the International Court of Justice and outlays how the appropriate performance of diligence can discharge the duty of an international organization with respect to human rights.
History of due diligence
The modern concept of due diligence can be found in a range of legal fields including international human rights law, international environmental law, international investment law, as well as domestic corporate and tort law. Due diligence may be owed to shareholders of a corporation, employees or customers, and also to third-party sovereigns or individuals. Due diligence may be owed by sovereign states, corporations, employers, boards of directors, and also by international organizations. While there is a continuing debate on their exact nature and formation, the general principles of international law may derive not only from principles developed in the domestic jurisdiction but also from international sources. The breadth of application of the modern principle of due diligence across such a plethora of legal regimes points toward its emergence as a general principle of international law. The following chart summarizes the sources for due diligence standards in various areas.
Modern environmental law
Due diligence first appeared in modern international environmental law as a state’s duty to take affirmative measures to prevent actions taken by third parties within its sovereign territory from causing harm in the sovereign territories of other states. While states are directly liable for their own actions, the duty of due diligence also requires states to prevent or mitigate harms inflicted by non-state parties. This account of the underlying duty is evident in early case law. In the 1941 Trail Smelter Arbitration, an international arbitral tribunal ruled that a state “owes at all times a duty to protect other states against injurious acts by individuals from within their jurisdiction”. This duty was later recognized as customary international law.
The obligation of due diligence is presently considered an obligation “of conduct,” not “of the result.” It is a standard by which to measure the fulfilment of an underlying duty. The ILC, in its Draft Articles for the Prevention of Transboundary Harms, describes due diligence as a duty “to take prevention or minimization measures” but not a duty “to guarantee that significant harm is totally prevented, if it is not possible to do so.” Moreover, the Commentaries to the ILC’s Articles of State Responsibility (ASR) include “due diligence” in the list of standards of behaviour that could be applied to the question of whether an obligation has been breached.
International investment law
Due diligence under international investment law, which pits investors against states in arbitration proceedings, has two prongs. First, the investor must perform due diligence in order to not be held partially responsible for any harm the investor later suffers. Second, the state has the duty to exercise due diligence in order “to ensure the full enjoyment of protection and security” for the investor. The term contributory negligence has been observed by the arbitrators in investment law. If the investors don’t perform due diligence before any transaction they will be liable for the same and hence attract the process of arbitration in the future.
The role of the investor before investing in a project must be to justify the reasonable obligation on his part before performing an action of diligence and to avoid circumstances of a breach of conduct. It is assumed that there is some information that is easily available to investors in advance which must be taken into consideration, failing which will push the investors into unreasonable diligence.
It can be concluded that investors and the State have a duty to follow the code of conduct and not result, and to maintain the level of due diligence to an objective level of research. For the state, the responsibility of due diligence can be between cross-states like deploying police whereas, on the other hand, the duty of the investors would be to negotiate with due diligence in cross-border transactions.
Human rights
International law primarily deals with human rights in the context of internal affairs of humans or their jurisdiction within the State. The term due diligence protects the rights of humans in several ways like preventing, minimizing, or rectifying the violation of the human rights of individuals, foreign or local, within an entity’s jurisdiction. The State makes it obligatory to observe due diligence in human rights through international customary laws and statutory laws. In most cases, the businesses are also ordered to maintain a check and balance over these fundamental rights through active policies and initiatives taken up by the business.
Moreover, there are only a few treaties that have adopted the term ‘due diligence’ into their conventions. These adopted standards are a way to implement and govern their structures to protect human rights as a part of the State’s efforts to help them in subjective assessments of rights. The Human Rights Committee, a treaty body established under the International Covenant on Civil and Political Rights, has stated that a failure to ensure covenant rights may “give rise to violations by State Parties of those rights, as a result of State Parties failing to exercise due diligence to prevent, punish, investigate or redress the harm caused by such acts by private persons or entities.” Similarly, the Convention on the Elimination of Discrimination Against Women (CEDAW) has not adopted the term diligence into its code but lays down the duty of the State to act and avoid circumstances that lead to avoidance of this term.
The occurrence of human rights violation does not mean that the State has failed to incorporate the principles of due diligence as it is more of a conduct than result but reiterates that if a state fails to manage the affairs of private parties in the diligence process it won’t be liable directly, but it is noted that is the states concentrated efforts to mitigate the risk of violation, minimize the ongoing activities, and for abuse of evidence.
Organization for Economic Co-operation and Development (OECD)
It adopted a set of legally non-binding Guidelines for Multinational Enterprises, encouraging them “to respect human rights.” Recent OECD policy guidance also indicates that “do no harm” is a relevant principle for promoting and integrating human rights in development. A corporation or a financial institution makes a policy commitment to follow these guidelines, due diligence is required to give practical effect to the “do no harm” principle. The Ruggie principles declare that corporations “should act with due diligence to avoid infringing on the rights of others and to address adverse impacts with which they are involved. The OECD’s updated Guidelines also require a policy commitment to respect human rights and human rights due diligence.
While the OECD Guidelines and UNGPs remain formally non-binding, they purport to articulate the underlying obligations of actors under domestic and international law and they may also gradually contribute to the emergence of hard law in the area of business responsibility. All these sets of principles recognize that the level of due diligence required varies according to a range of circumstances, although they include different factors that affect the diligence owed. The OECD Guidelines suggest that “the specific steps to be taken, appropriate to a particular situation will be affected by factors such as the size of the enterprise, the context of its operations, the specific recommendations in the Guidelines and the severity of its adverse impacts.”
Due diligence adopted by International conventions
Federal Banking Commission
This commission deals with money laundering cases in accordance with Article 305 and includes Due Diligence Commission in which Article 2-5 reflects how the Swiss Criminal Code protects sensitive information which may be passed on to the banks or other financial institutions for purposes of verification of identity and activities of the investing member, and the nature and origin of the funds which are to be utilized. All parties have an obligation to respect professional secrecy and take all appropriate precautions to protect the confidentiality of the information each holds in respect of the other’s activities. This legal obligation shall remain in full force at all times.
The 1955 UNIDROIT Convention
It holds Article 4 and contains the provisions for due diligence which says that “In determining whether the possessor exercised due diligence, regard shall be had to all the circumstances of the acquisition, including the character of the parties, the price paid, whether the possessor consulted any reasonably accessible register of stolen cultural objects, and any other relevant information and documentation which it could reasonably have obtained and whether the possessor consulted accessible agencies or took any other step that a reasonable person would have taken in the circumstances”.
Article 4(4) requires an increased level of diligence for art market professionals. Among the professionals are: museums, auction houses, art dealers, and collectors. The burden of diligence varies according to the type of market player considered. Below listed are some examples of best practices depending on the subject concerned.
UNESCO Convention, Paris, 1970
The said convention on Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property adopted the principle of due diligence to promote art and cultural ethics, to lay down a standard protocol in purchaser’s behaviour to mitigate the possibilities of illicit trade in trafficked and excavated cultural property. Due diligence found a new meaning within this convention in which the purchaser had to prove that he exercised considerable diligence in securing the required compensation. It further enumerated that there is a need for two types of diligence namely normative and ethical framework in diligence so as to ensure that the necessary purchasers and art seekers have a better knowledge of the art market than the non-professionals so to implement the principles of diligence carefully and more prominently than the others.
Moreover, it also holds additional information on the status of an object which can be easily accessed through publications, journals, news, reports, and museum exhibitions that information available is linked with due diligence with the sole aim to keep a track record of the status and objects which can be acquired and analyzed on the basis of the information provided.
Conclusion
The importance of due diligence has only been on the rise ever since various UN conventions promised to Protect, Remedy, and Respect the guiding principles and adopt them into their structures binding countries all over the world to follow and implement these principles. Since then, businesses are much more active in due diligence and practising and promoting it more to be followed by other organizations in their regime. Experience on the ground and case examples reveal the limits of voluntary approaches, demonstrating the need for a more comprehensive set of legal tools that match the cross-border reach of today’s business relationships.
The States and its citizens are ensured to be guided by these moral principles and understand the need for them and grow a progressive approach to harmonize the balance between the society and laws. Local civil society groups will have to continue their struggles, supported by their international partners, to build pressure for changes in corporate behaviour. Effective human rights due diligence will require rigorous home State regulation, with adequate implementation, including sanctions against companies that do not undertake human rights due diligence as required.
The same applies to host State regulation, where adequate resources must be invested in implementation and compliance so that companies are not allowed to ignore or contravene regulatory measures in the absence of the rule of law. They will look to States to take effective steps to require human rights due diligence, that will bring lasting change and prevent violations of human rights.
References
- https://academic.oup.com/ejil/article/28/3/899/4616670#100347333
- https://www.business-humanrights.org/sites/default/files/documents/HRDD_EN_Final.pdf
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