Corporate Social Responsibility and the Norwegian Transparency Act: the Importance of Choice of Law

1. Introduction

Corporate social responsibility is an area that is rapidly gaining attention. The traditional approach, according to which a company can isolate itself from liability deriving from the activity of third parties (be it the companyʼs subsidiaries or its suppliers or contract parties), is increasingly challenged. Companies are increasingly deemed to owe third parties a duty of care, or to have to exercise due diligence to prevent infringement of third-party rights in areas such as labour law, environmental law or human rights.

As this article shows, these duties may be based on international sources of soft law, on domestic legislation, on regional codifications or even on public international law. They may be inserted into the contracts, and thus become binding on the parties as contract terms; they may be based on general tort law or on specific sources establishing civil liability for violations in this area; to a lesser extent, they may be based on company law mechanisms. In particular, the construct that bases liability on the parent companyʼs (or, in the case of outsourcing or supply agreements with third parties, the principalʼs) breach of a duty of care or of a duty of diligence is being increasingly encountered in case law as a basis for civil liability claims of torts law.

Increasingly, states codify duties of diligence in their domestic law, meant to be applicable to parent companies or principals active on their territory. The Norwegian Transparency Act is an example of such codification. This creates the illusion that those legal systems are well equipped to ensure a responsible international business activity.

However, a regulation can only achieve its purpose if it is applicable. That a country such as Norway enacts a statute on transparency applicable to Norwegian companies and to companies offering their goods and services on the Norwegian territory, does not necessarily mean that Norwegian law on civil liability for torts will apply to a claim against any such company. In an international setting, the applicability of Norwegian tort law depends on where the damage occurred. If the activity of the subsidiary or supplier has given rise to damage outside of Norway (let us say, in Ruritania), it will be the foreign local law of Ruritania that regulates the question of civil liability in torts. It does not matter that Norwegian tort law imposes liability on the Norwegian parent company or principal; what matters is that the applicable tort law does so.

It must, then, be ensured that Norwegian tort law is applicable, if this is deemed instrumental to the efficacy of the Transparency Act. Bringing a claim before a Norwegian court is not sufficient to render Norwegian tort law applicable.

Norwegian courts apply Norwegian private international law (conflict rules or choice of law rules). The current Norwegian conflict rule for torts identifies the law of the place where the damage occurred as applicable. This will lead Norwegian courts to selecting the tort law of Ruritania as applicable.

This article analyses different bases upon which a Norwegian court may select the law applicable to civil liability for breach of duties of care or of diligence that gave rise to damage abroad. It concludes that a new conflict rule should be introduced in Norwegian law, that permits the victim to choose between the law of the place of damage and the law of the place where the event giving rise to the damage occurred.

2. The Issue

The issue of companiesʼ accountability for the whole value chain is raised with increased frequency,¹ particularly as far as concerns violation of human rights, labour- or environmental law incurred abroad by subsidiaries or suppliers. One of the effects of the (at least, until recently) ever-increasing internationalisation of business since the middle of last century has been a growing openness to each other of the worldʼs economies, cultures and populations. The increased international cooperation has numerous and important positive aspects, but turned out to have also consequences that are not desirable—which is reflected in the growth of a wide-spread political criticism against globalisation.

One of the effects of globalisation is that enterprises increasingly move their production or part of their activity to countries with a lower cost level. This race to cost reduction is mainly dictated by the need to remain competitive in a market in which low-cost products threaten the survival of enterprises which are subject to higher production costs. Enterprises thus reduce their activity in their home country, and move it to low-cost countries (such as, in our example, Ruritania).

Among other consequences, this implies that their activity no longer needs to comply with the home countryʼs standards—for example, in the field of labour law, safety or environmental protection. The activity is to comply with Ruritaniaʼs local standards instead. If the local standards are less stringent than those prevailing in the home country, this would be reflected in correspondingly lower production costs: employees would work longer hours for less pay, payments to welfare and social security would be lower, procedures and practices ensuring safety at work would be less demanding, investment to ensure environment protection would be modest, etc. While all this ensures low production costs and thus the possibility to remain competitive on the home market, it does not contribute to improving the local social and environmental conditions in Ruritania.

For a long time, this has been deemed to be perfectly in compliance with the legal structure applied to organise commercial activity. A company would establish local subsidiaries in Ruritania, these would be independent legal entities with limited liability, and the subsidiariesʼ activity would be treated as separate from the parent companyʼs own activity. Alternatively, a company might have outsourced parts of its activity to third parties in Ruritania, thus enhancing even more the separation from its own activity and that of third part-suppliers.

The principle of limited liability is one of the pillars of economic activity. It permits to circumscribe within the local subsidiary or the supplier any liability for the respect of labour, safety or environmental standards. The parent company or the principal cannot be blamed for having breached its home countryʼs standard, because the activity is not carried out directly by that entity, and, furthermore, the home countryʼs standards do not apply outside of the home countryʼs territory. Therefore, companies can take advantage of the low level of costs in Ruritania, without being held to be in breach of standards that are not applicable there. Increasingly, this state of things has been found to be unsatisfactory.²

3. From Soft Law to Hard Law

Instruments have been developed to induce a responsible corporate and commercial activity, in particular specifying expectations of due diligence when a company relies on a production chain or value chain.³ Among the instruments that received considerable international attention are the UN Global Compact⁴ and Ruggie principles,⁵ which were followed by the OECD Guidelines for Multinational Enterprises⁶ and the OECD Due Diligence Guidance for Responsible Conduct.⁷ National Plans have been adopted to implement these guidelines in a number of countries,⁸ including Norway.⁹

All these initiatives are legally non-binding instruments relying primarily on a voluntary compliance. They represent, therefore, an example of soft law.

However, as briefly explained below, soft law is hardening: in part through its codification by the national legislator or at the regional or international level; in part by operation of commercial parties who refer to soft law standards in their contracts, thus agreeing to be bound by them; in part through case law that increasingly recognises that breach of duties of care and diligence may be a basis for tort liability.

Regarding the first-mentioned method to harden soft law, it can be pointed out that the OECD Guidelines and Guidance are increasingly being implemented in domestic legislation, among others in France and in Germany.¹⁰ In Norway, the Transparency Act was enacted in 2021 with the purpose of imposing on companies which are based in Norway or which offer their goods or services in Norway duties of diligence, transparency and information relating to their entire value chain (including activity outside of Norway) in the areas of fundamental human rights and decent working conditions.¹¹

The EU is working on an extensive regulation of the matter. Most recently, on 23 February 2022, the Commission adopted a proposal for a Directive on corporate sustainability due diligence.¹²

Additionally, public international law is sometimes taken into consideration as directly applicable to corporate activity, notwithstanding that, traditionally, companies are not deemed to be subject to obligations of public international law.¹³ As a result, an emerging duty of care deriving from international human rights law has been observed.¹⁴

Turning to contracts, the hardening of soft law through contractual means was initially promoted by multinational companies which imposed duties of diligence on their contractual parties and requested that these in turn imposed corresponding duties on their contractual parties.¹⁵ Increasingly, these contractual mechanisms rely not only on the partiesʼ voluntary compliance with soft law, but on the necessity to comply with the abovementioned applicable legislation.

Regarding courts, the hardening of soft law through case law has in recent years moved away from the traditional approach, which was based on company law mechanisms, towards an approach based on tort liability. Considering the parent company liable for the subsidiariesʼ activity as a matter of company law, implies the so-called piercing of the corporate veil—that is, setting aside the traditional limitation of liability of legal entities. However, this runs against the whole fundament of economic activity. Therefore, the threshold for allowing to consider that a parent company, in its capacity as a shareholder, is liable for the subsidiaryʼs activity, is very high.¹⁶

Gradually, a new approach is being developed, aiming at permitting to hold the parent company or the principal liable, not for the activity of the subsidiary or the supplier, but for its own breach of a duty to control that activity, or for its own contribution to their activity by adopting a company strategy, business plans or the like. Holding the parent company or the principal accountable for their passivity or for their independent activity does not infringe the principle of limitation of liability that is so important in the corporate structure and in commercial law. Courts are increasingly accepting the theoretical idea that a parent company or a principal may be held liable, as a matter of civil tort liability, for breach of duties of care or of diligence.¹⁷ These duties may be based on the above-mentioned legislation,¹⁸ on general tort law,¹⁹ on a specific tort liability for parent companies²⁰ or for specific torts,²¹ or even on international human rights law.²²

4. The Need to Consider Conflict of Laws Rules

Holding the parent company or the principal liable for its own independent contribution to the subsidiariesʼ or the suppliersʼ activity assumes that the applicable tort law gives a basis to establish that the parent company or the principal were under a duty that they have breached, that the breach caused a damage, and that the damage be quantified.

The mechanisms described in section 3 above establish a duty for the parent company or the principal to take measures necessary to ascertain that the subsidiariesʼ or the suppliersʼ activity do not infringe labour law standards, human rights or the other standards covered by the respective instruments, as well as a duty to report and to give information if so requested.

Under some of these instruments, breach of these duties is explicitly sanctioned with civil liability,²³ whereas other instruments are silent, thus leaving the consequences of a breach to the applicable tort law.

In particular, the Norwegian Transparency Act is silent on the issue of liability, thus leaving the decision of whether there is a liability, and what its consequences are, to the general tort law (or to the specific tort law for shareholders enshrined in the Companies Act). As a matter of fact, under Norwegian tort law, liability is presumed, when a duty is breached.²⁴ This can give the impression that the Norwegian system provides an efficient legal framework to ensure that business activity with links to Ruritania is carried out in the respect of Norwegian standards.

The Norwegian Transparency Act may be praised for striking a satisfactory balance between, on the one hand, the burden it imposes on companies offering their products or services in Norway and, on the other hand, an effective protection of local interests in Ruritania; alternatively, the Norwegian Transparency Act may be criticised for not striking this balance. However, the substance of the Act will be relevant only if Norwegian law is applicable to a claim brought by the victims who suffered damage as a consequence of an activity that does not meet the required standards. It is accordingly essential to verify whether Norwegian law is applicable to that claim.

In an international setting, a plurality of laws are potentially applicable: in our example, Norwegian law and the law of Ruritania. The court will need to determine which of these two laws is applicable. Courts select the applicable law on the basis of so-called private international law rules, also known as conflict of laws rules or choice of law rules. Notwithstanding its name, private international law is a part of each countryʼs own legal system. It is called ‘internationalʼ not because it stems from international sources, but because it has international legal relationships as its object. That said, within the EU, large parts of the private international law have been codified in EU Regulations, and there are some international conventions giving uniform conflict rules in specific areas. These rules have a European or an international source. Furthermore, it is strongly desirable to harmonise the various domestic private international laws. However, this does not change the structure of private international law, which is part of each countryʼs own legal system.

A court always applies its own private international law. Therefore, Norwegian courts will apply Norwegian private international law to determine whether the law applicable to the claim is Norwegian law or the law of Ruritania.

Below, I examine how Norwegian private international law determines which law is applicable to the issue of whether a Norwegian parent company or principal (or a parent company or a principal offering its goods or services in Norway) may be held liable in tort for having breached their duty of care or of diligence, and this breach has caused damages in Ruritania. As will be seen, under the current status of Norwegian private international law, Norwegian courts would have to apply the tort law of Ruritania to the claim. The Norwegian Transparency Act, therefore, is irrelevant to the Ruritanian victims of damages following its breach.

5. Choice of Law Under Norwegian Private International Law

Here, we will assume that Norwegian courts have jurisdiction; indeed, to put it briefly, Norwegian courts always have jurisdiction in respect of claims brought against a Norwegian company.²⁵ We turn therefore to investigating what Norwegian conflict rules say on the law applicable to liability for breach of duties of care or of diligence, when the damage occurs outside Norway.

In practice, the question is whether the victims in Ruritania have remedies, against the Norwegian parent company or principal, for the damages in Ruritania that followed the Norwegian companyʼs breach of its duties. The victims can bring an action before the Norwegian courts. Yet, will they be able to invoke liability under Norwegian law? Or will they have to rely on the law of Ruritania?

6. Recommendation

The above presentation demonstrates that the current status of Norwegian private international law does not ensure that Norwegian courts apply Norwegian tort law to damages in Ruritania following breach of duties established in the Transparency Act. To give the victims of these breaches effective remedies, it is accordingly necessary to introduce a new connecting factor for torts that occurred within the scope of application of the Transparency Act.

The new conflict rule could provide that, for tort liability in this area, the victims can invoke the law at the place where the event giving rise to the damage occurred (ie, the breach of duties of diligence, Norway). This connecting factor would be available to the victims as an alternative to the current connecting factor of the place of damage (Ruritania). This additional connecting factor would give the victims the possibility to choose the law that gives them the best protection. The possibility to choose Norwegian law would give the Transparency Act effective remedies; and the possibility to choose the law of Ruritania would comply with the general expectations within private international law.

Generally, it is not advisable to have alternative connecting factors for determining the applicable law. As noted above, predictability is one of the most important interests in private international law, and alternative connecting factors create uncertainty as to which law is applicable. Therefore, they should be avoided—as opposed to connecting factors for the competence of courts, for which considerations of efficiency prevail.⁵² The desire to protect the victim led EU law, in the abovementioned Regulation Rome II, to designate the law of the place where damage occurred as applicable as the general conflict rule for torts. The rationale is that the victim has a legitimate expectation to be protected by the legal system in which it is located. The party who caused the damage may also have an expectation to be held liable in accordance with the legal system in which it carried out its activity; however, having to balance these two opposed interests, desire to protect the victim led to privileging its interests, and thus prioritising the rule on place of damage.⁵³

There may be a discrepancy between the protection afforded in the place of the event and that afforded in the place of the damage, but, generally, this is not deemed to represent a considerable detriment, and the interest in predictability is therefore given precedence. However, in some areas there may be interests that are more important than predictability. In the field of pollution, both Norwegian law⁵⁴ and EU law⁵⁵ give the victims the choice between invoking the law of the place of the event giving rise to the damage (for example, Norwegian law if the pollution is due to an oil spill in Norwegian waters), and the law of the place where the damage occurred (for example, the English law if the spill reached English waters and caused damage there). The area of CSR seems to be another area in which the victimsʼ interests may be deemed to override the interest in predictability.

Therefore, introducing an alternative connecting factor for the benefit of the victims of damage following breach of CSR duties may be an appropriate way of ensuring that the duties contained in the Transparency Act are accompanied by effective remedies. A similar recommendation has been suggested, for EU law, also by the Group Européen de Droit International Privé (GEDIP),⁵⁶ a group of academics studying the interactions of private international law and European law, and actively engaged in the EUʼs legislative process.

7. Conclusion

This article is not concerned with the substance of Norwegian legislation on transparency; it is about the applicability of Norwegian law to the consequences of a breach of the Transparency Act. A key finding is that Norwegian private international law as it currently stands, does not give Norwegian courts a basis to apply Norwegian tort law to breaches of the duties laid down in the Transparency Act.

The Transparency Act is probably directly applicable and overrides any conflicting rules in the applicable law. This means that the duties imposed in the Transparency Act are overriding mandatory rules and will be applied by Norwegian courts. However, the Transparency Act does not contain a rule on civil liability as a consequence of breaching these duties. It is under Norwegian tort law that breach of duties may be presumed to be a basis for tort liability.

The conflict rule that Norwegian courts have to apply to select the law applicable to tort claims, however, does not designate Norwegian law as the law applicable to torts, if the damage occurs outside Norway. It designates the law of the place of damage. Hence, in our example, Norwegian courts would apply the law of Ruritania to the issue of liability as a consequence of breach of the duties laid down in the Transparency Act. This may or may not be favourable to the victims who suffered damages as a consequence of such breaches—depending on the content of tort law in Ruritania. To ensure the effectiveness of the Transparency Act, however, it is advisable that the consequences that Norwegian law attaches to breaches are applicable also when the damage occurs outside Norway.

Therefore, I recommend the introduction of a special conflict rule for selecting the law applicable to torts liability based on such breaches. Following the example of a conflict rule already existing in Norwegian law and in EU law for liability relating to environmental damage, I recommend here to give the victim the possibility to choose between the law of the place of damage (Ruritania) and the law of the place where the event which gave rise to the damage took place (Norway). This recommendation corresponds to a recommendation made for EU law.