Tort Liabilities of Multinational Corporations in the Perspective of the Principles of Separate Legal Entity and Limited Liability

TORT LIABILITIES OF MULTINATIONAL CORPORATIONS IN THE PERSPECTIVE OF THE PRINCIPLES OF SEPARATE LEGAL ENTITY AND LIMITED LIABILITY

WARDA YASIN

Registration # 10-SF/PHDLAW/S11 Faculty of Sharῑ’ah and Law INTERNATIONAL ISLAMIC UNIVERSITY, ISLAMABAD

A thesis submitted in partial fulfillment of the requirements for the degree of DOCTOR OF LAWS (Faculty of Sharῑ’ah and Law) in The International Islamic University SHAWWAL 1437 /JULY 2016 C.E.

Supervisor: Dr. Samia Maqbool Niazi

APPROVAL SHEET

his is to certify that we have evaluated the thesis entitled “Tort Liabilities of Multinational Corporations: In the Perspective of the T Principles of Separate Legal Entity and Limited Liability” submitted by Ms. Warda Yasin, in partial fulfillment of the award of the degree of Doctor of Laws—Ph.D. (Law). The thesis fulfills the requirements in its core and quality for the award of the degree.

Dr. Samia Maqbool Niazi Supervisor

Dr. Farkhanda Zia Internal Examiner

Professor Imran Ahsan Khan Nyazee External Examiner I

Dr. Ijaz Ali External Examiner II

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DEDICATION

his thesis is dedicated to my late brother Naveed Yasin T whose love and support will always be missed.

ACKNOWLEDGEMENTS

am grateful to God for the numerous blessings that He has bestowed on me, including the special guidance that He has I granted me for completing this task. I would like to express my sincere gratitude to my supervisor Dr. Samia Maqbool Niazi for her continuous support and encouragement so patiently given. Her guidance helped me in undertaking this complex research and then reducing it to writing. Besides my supervisor, I would like to thank Professor Imran Ahsan Khan Nyazee, who helped me immensely throughout my research work. His comments and questions encouraged me to my research from various perspectives.

I thank my friends Dr. Sadia Tabassum and Saira Bashir Dar for all the motivation and for all the fun I have had in last five years. Last but not the least, I would like to thank my family: my parents Muhammad Yasin and Farzana Nigar, my brothers Waleed, Umer, Umair, and my sister Momina for supporting and tolerating me in every thick and thin of my life.

ABSTRACT

The rise of the modern corporation coincides with that of the modern state and both have a fascinating history that revolves around the concept of the artificial legal person, which grants a separate personality to both institutions. The original joint-stock companies, endowed with legal personality, were soon supported by the legal device of limited liability for a large number of small shareholders whose personal assets needed to be shielded from creditor claims. These two devices led to a rapid growth in capital formation, which soon extended their reach beyond their places of domicile to vast continents with immense resources. The corporations, now called multinational corporations, acquired huge sizes and complex structures sometimes making it difficult to identify where the actual ownership lay. The complex corporations spread their tentacles far and wide till they surrounded the resources and wealth of underdeveloped and poor countries. All this history has led us to the conclusion that multinational corporations (MNCs), which usually operate through complex structures of parent and subsiadiries, while doing some good, brutally exploit the natural resources of underdeveloped countries often caring little for the occasional excesses they commit by way of crimes, torts, contractual violations, and environmental disasters, yet they are able to evade all liability by benefiting from the two legal shields of separate legal entity and limited liability of the shareholders that were justifiably intended in the first place for simple rather than complex corporations.

The strategy lies primarily in the law of torts, although other measures may also be

contemplated. This study, therefore, raises the question whether Pakistan has the capacity to deal with these complex and extremely powerful organizations through its law of torts?

It also questions whether the legal system of Pakistan, which has a weak and underdeveloped law of torts, is adequately equipped to deal with the colossal issues sometimes raised by the presence of these giant corporations. In the absence of a developed law of torts, should Pakistan, then, look towards international law and other measures like

CSR, taxation and voluntary codes of conduct to secure itself, its resources and people against the possible excesses committed by the multinational corporations? The situation calls for a comprehensive study that examines the legal environment in Pakistan in the light of the works of the leading thinkers and writers in the field, as well as in the light of measures adopted by other countries, especially India, although India is a giant market as compared to the smaller market available to the MNCs in Pakistan. This study attempts to do all this. It suggests that Pakistan needs to judge whether the solutions proposed for the problems arising out of the operation of MNCs in developed countries and large markets are really applicable to Pakistan. This study, therefore, emphasises that the problems arising out the operation of multinational corporations in developing countries, especially smaller countries like Pakistan, must be viewed comprehensively to take into account not only the remedies found in the law of torts, or amendments required in the fundamentals of company law, but all possible legal and persuasive solutions that may or may not have been considered by modern scholars studying other larger jurisdictions.

The first chapter of this study, after elaborating the serious problem posed by the multinational companies and explaining the investment needs of the country, describes at some length the weaknesses and inadequacies of the law of torts in Pakistan. Added to this

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is the lack of awareness among the masses, even the educated among them, about the impending danger for the people and for the environment in which they live. The chapter also points out that when the assets of a subsidiary are not sufficient to cover the damage caused, it may become necessary to pursue the parent of the subsidiary in its home country or other foreign jurisdiction. The problems posed by legal personality and limited liability within the municipal law, to some extent, acquire a menacing form in the foreign jurisdiction, which requires a thorough understanding of these attributes of the corporation.

There is thus a dire need of assessing the whole situation and determining the remedies and the courses of action available in case of devastation caused by these companies. In addition to this, there is a need to create a proper information system about these MNCs and a monitoring system that will enable the country to take preventive and evasive action prior to its happening. At present there is no such system and it is not even known how many of these giant corporations are present in Pakistan.

The second chapter traces the origin and growth of the multinational corporations, and notes the impact that globalization has had on this growth. It then indicates the nature of the structure—parents, subsidiaries and associated companies—through which these corporations operate, and that enables them to move and manipulate resources on a global scale. The chapter then describes around half a dozen significant cases in which disasters have been caused and litigation has been taken up in the home countries. This is done to highlight the size of the problem that developing countries like Pakistan face, as well as to recognize the nature of the litigation that may ensue after some unfortunate disaster.

Finally, the chapter tries to identify some multinational corporations operating in Pakistan so as to form a representative sample, because a proper source of information is not

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available from which data about these corporations operating in Pakistan can be easily gathered.

The third chapter tries to explain that the direction can only be clear once the two attributes of personality and limited liability—behind which these corporations hide in courts and during litigation—are thoroughly analysed and studied to understand their current jurisprudence in the world. Accordingly, the attribute of personality for the whole group has been examined in this chapter and the implications of limited liability for the group and its members will be analysed in the next. There are several theories that are put forward for the existence or grant of personality. Each theory has its own implications for how far one can go in restricting the movement and actions of these corporations. A study of personality, its underlying theories and the law governing such groups tells us what kind of action is possible for protecting developing countries in the light of remedies available.

A search is, therefore, undertaken in this chapter, in various jurisdictions, to assess whether a law of groups is actually found in some jurisdictions. The studies undertaken by authors like Blumberg, and the law of the “Konzern” in Germany, are surveyed. The conclusion reached is that while the law may treat them as a group where disclosures are required for profit distribution and for taxes owed to the governments, the group is not treated like a group with a single personality for purposes of torts.

After introducing the idea of tort claims and multinationals, the fourth chapter analyses the concept of limited liability and tort claims at some length. The concept is studied in the context of tort claims against multinationals and corporate groups. The different proposals submitted by writers and experts are surveyed and studied. The relevance of limited liability for multinational group is then affirmed. Litigation in the USA under the Alien

Tort Claims Statute (ATS) is studied in considerable detail till the decision in the Kiobel case. The Kiobel judgement spelled out the virtual demise of ATS Remedies. Experts are now contemplating other remedies like direct tort liability of multinationals under State tort laws in the USA. In addition to this tort claims against multinationals are also possible in the UK, Canada, Australia and some European countries. The conclusion, however, is that the enthusiasm that was once visible through ATS litigation is no longer there, and it will take some time before precedents under the other options are developed and are made available.

The last chapter then focuses on the possible actions that are possible for Pakistan in the light of the study that has been undertaken in the previous chapters. These include general proposals like improvement in the law in general as well as specific proposals directed towards identified remedies. These proposals and suggestions are summarized and recorded in the final chapter that deals with conclusions and recommendations.

AUTHOR’S DECLARATION

Warda Yasin, candidate for the award of the Ph.D. degree, declare that the work in this thesis was carried out in accordance with the requirements of the University’s Regulations. It has not been submitted I for any other academic award. Except where indicated by specific reference in the text, the work is the candidate’s own. Any views expressed in the thesis are those of the author.

SIGNED: ...... DATE: ......

TABLE OF CASES

1. Abdullahi v. Pfizer, 2002 2. Adams v. Cape Industries plc, 1990 3. Alvarez-Machain v. US, 2003 4. Babu s/o Thakur Dhobi v. Subashi,1942 5. Baker v. Carr, 1962 6. Bodner v Banque Paribas, 2000 7. Bodo Community v Royal Dutch Shell Plc (RDS) & Shell Petroleum Development Company (Nigeria) Ltd (SPDC), 8. Bodo Community v Shell Petroleum Development Company of Nigeria 9. Bolchos v. Darrel, 1795 10. Burnett v Al Baraka Investment and Development Corporation, 2003 11. Connelly v RTZ Corporation Plc, 1998 12. Dagi v BHP, 1997 13. De La Vergne Refrigerating Machine Co. v. German Savings Institution, 1899 14. Dharni Dhar v. Chandra Shekhar,1951 15. Doe v. Unocal Corp., 1997 16. DPP v. Kent and Sussex Contractors Ltd, 1944 17. Dunant v. Perroud, 1796 18. Estate of Rodriguez v Drummond, 2003 19. Filartiga v. Peña-Irala, 1980 20. Guerrero v Monterrico Metals Plc, 2009 21. Hakim Ali v. Messrs Pakistan Herald Publications (Pvt.) Ltd. through Chief Executive and 4 others, 2007 22. Hempe & Ors v Anglo American South Africa Ltd, 2004 23. Hilton v. Guyot, 1895 24. Kadic v. Karadzic, 1995 25. Khedivial Line, S.A.E. v. Seafarers’ Int’l Union, 1960 26. Khusro S. Gandhi v. N.A. Guzdar, 1970 27. Kiobel, et al. v. Royal Dutch Petroleum Co. et al., 2013

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28. Kushal Rao v. B. R. G. Rao, 1942 29. Lubbe v Cape Plc, 1998 30. M.D. Tahir, Advocate v. Director, State Bank of Pakistan, Lahore and 3 others, 2004 31. Martinez v. City of Los Angeles, 1998 32. Moxon v. The Fanny, 1793 33. Mst. Kaniz Fatima v. Farooq Tariq and others, 2002 34. Murray v. Schooner Charming Betsy, 1804 35. Nawal Kishore v. Rameshwar Nath, 1955 36. Nawal Kishore v. Rameshwar, 1955 37. Ngcobo v Thor Chemicals Holdings Ltd & Desmond Cowley, 1995 38. O’Reilly de Camara v. Brooke, 1908 39. Osprey v. Cabana Limited Partnership, 2000. 40. Parnell & Stewart v. Sinclair, 1797 41. Piper Aircraft v. Reyno, 1981 42. Pramathu Nath Mallick v. Pradymna Mullick, 1925 43. Presbyterian Church of Sudan v. Talisman Energy, 2003 44. Ram Chandran v. S. Khan,1927 45. Re H Ltd, 1996 46. Re Polly Peck plc, 1996 47. Rose v. Cochrane, 1794 48. S. C. Chakravarti v. R.D. De, 1921 49. S.N. Roy v. Dinbhandu, 1914 50. Saladini v. Righelli, 1997 51. Salomon v Salomon & Co, 1897 52. Sarei v. Rio Tinto, 2002 53. Sheikh Muhammad Rashid v. Majid Nizami, Editor in Chief, The Nation and Nawa-e-Waqat, Lahore and another,2002 54. Sithole v Thor Chemicals Holdings & Desmond Cowley, 2000 55. Sosa v. Alvarez-Machain, 2004 56. Surendra Kumar v. Distt. Board, Nadia, 1942

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57. Tachiona et al v. Mugabe and ZANU-PF, 2002 58. Tiruvengoda v. Tripurasundari, 1926 59. Vava & Ors v Anglo American South Africa Ltd 60. Waghela Rajsanji v. Sheikh Masluddin, 1667 61. Walkovszky v. Carlton 1966 62. Waters v. Collot, 1794 63. Wiwa v. Royal Dutch Petroleum Co, 2002 64. Xuncax v. Gramajo, 1995 65. Yukong Lines Ltd of Korea v. Rendsberg Investments Corp, 1998

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LIST OF ABBREVIATIONS/ACRONYMS

1. ATCA Alien Tort Claims Act 2. ATS Alien Tort Statute 3. FDI Foreign Direct Investment 4. MNCs Multinational Corporations 5. MNEs Multinational Enterprises 6. OECD Organisation for Economic Cooperation & Development 7. TNCs Transnational Corporations 8. TNEs Transnational Enterprises 9. UNCLOS United Nations Convention on Law of the Sea 10. UNCTAD United Nations Conference on Trade and Development

TABLE OF CONTENTS

CHAPTER 1 THE LAW OF TORTS IN PAKISTAN AND MULTINATIONAL CORPORATIONS ...... 1 10.1 The Ubiquitous Multinational Corporation or the Multinational Enterprise 3 10.2 The Benefits of the Very Large Multinational Corporation ...... 9 10.3 The Evils That Accompany These Corporations ...... 14 10.4 Potential Threats for Pakistan: Problems Faced by Host Nations by Way of Torts ...... 18 10.5 Obstacles to Tort Liability: Legal Personality and Limited Liability ...... 26 10.6 Can Pakistan’s Tort Law Face the Challenge Posed by the MNCs? ...... 31 10.6.1 The Crucial Role of the Law of Torts ...... 33 10.6.2 The Implementation of Tort Law in British India ...... 35 10.6.3 Developments in Pakistan Including Other Compensation Systems 39 10.6.4 Selective Codification: Defamation Ordinance and Consumer Law40 10.6.5 Causes of Failure of the Law of Torts and Absence of a Comprehensive Statutory Law on Torts ...... 43 10.6.6 Major Torts in the Common Law World That Need to be Implemented ...... 48 1.6.7 Pakistan’s Tort Law and the MNCs...... 51 10.7 Signifcance of This Study and the Methodology Adopted ...... 52

CHAPTER 2 THE CHANGING SHAPE OF THE MNCs AND PRESENCE IN PAKISTAN ...... 56 2.1 The Origins of Multinational Corporations ...... 56 2.2 Growth, Globalization and the Corporations ...... 62 2.3 Modern Structures: Parents and Subsidiaries ...... 68 2.4 Torts Committed Around the World: Historical Overview ...... 73 2.4.1 The Bhopal Disaster: Union Carbide Corporation ...... 74 2.4.2 The Unocal Corporation Case ...... 78 2.4.3 Cape/Gencor Lawsuits: South Africa ...... 79 2.4.4 Apartheid Reparations Lawsuit: South Africa ...... 81 2.4.5 Trafigura Lawsuit: Ivory Coast (Côte d’Ivoire) ...... 84 2.4.6 Shell Lawsuit: (Oil Pollution in Nigeria) ...... 86 2.5 Pakistan and the Multinational Corporations: Securing the Environment ..88

CHAPTER 3 THEORIES OF LEGAL PERSONALITY AND THE LAW FOR

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CORPORATE GROUPS ...... 92 3.1 The Origins of Corporate Personality...... 93 3.2 Theories Governing the Personality of the Single Corporations ...... 99 3.2.1 Three Theories of the Corporation ...... 100 3.2.2 Support and Criticism of the Theories ...... 103 3.3 Corporate Theories From a Slightly Different Perspective ...... 108 3.4 The Meaning of a Corporate Group ...... 109 3.4.1 Why do Corporate Groups Exist? ...... 110 3.4.2 Corporate Groups Defined ...... 115 3.5 Enterprise Concepts and Theories of Corporate Groups ...... 118 3.6 The Law for Corporate Groups ...... 123 3.6.1 Issues or Problems to be Noticed by the Law ...... 123 3.6.2 The Law in the USA and UK ...... 127 3.6.3 EU Law and the German Law of the “Konzern” ...... 130 3.6.4 Corporate Groups and the Law of Pakistan ...... 131

CHAPTER 4 LIMITED LIABILITY, TORTS AND MULTINATIONAL CORPORATIONS ...... 133 4.1 Introduction to Tort Claims and Multinationals ...... 133 4.2 The Concept of Limited Liability and Tort Claims ...... 135 4.2.1 Historical Overview of the Concept of Limited Liability ...... 136 4.2.2 Questioning Limited Liability ...... 141 4.3 Recalling the Relevance of Limited Liability for Multinationals and Groups146 4.4 Tort Claims Under the Alien Tort Claims Statute (ATS) in the USA, and the Future of the ATS ...... 147 4.4.1 The Origin of ATS, its Purpose and Initial Cases ...... 147 4.4.2 Substantive and Procedural Issues Involved in ATS Cases ...... 152 4.4.3 The Kiobel Judgement and the Probable Demise of ATS Remedies165 4.5 Direct Tort Liability of Multinationals and State Tort Laws in the USA .178 4.5.1 Tort Jurisdiction ...... 178 4.5.2 Jurisdiction Under §1331 ...... 181 4.6 Tort Claims Against Multinationals in UK, Canada, Australia and Some European Countries ...... 182

CHAPTER 5 SEEKING SOLUTIONS AND REMEDIES BASED ON DOMESTIC AND INTERNATIONAL LAW FOR TORTS COMMITTED BY

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MNEs IN PAKISTAN ...... 184 5.1 Reviving and Strengthening of Domestic Tort Law ...... 188 5.1.1 A Code for Tort Law in Pakistan ...... 189 5.1.2 Abolishing the Doctrines of Champerty and Maintenance ...... 194 5.2 Corporate Manslaughter: Devising and Introducing a Domestic Remedy204 5.2.1 Manslaughter Under Common Law and Forms of Qatl Under Islamic Law 206 5.2.2 Corporate Liability for Qatl i Khata’ (Manslaughter) and for Qatl bis Sabab in Law and Islamic Law ...... 211 5.2.3 Reform in the United Kingdom and Required in Pakistan for Corporate Liability for Manslaughter ...... 213 5.3 Post-Kiobel Strategies: International Law and Foreign Jurisdictions ...... 217 5.3.1 Holding the MNEs Accountable Under International Law ...... 219 5.3.2 The Concept of the Enterprise and the New Company Law ...... 220

CHAPTER 6 CONCLUSION: THE WAY FORWARD FOR PAKISTAN224 6.1 The First Chapter ...... 224 6.2 The Second Chapter ...... 225 6.3 The Third Chapter ...... 226 6.4 The Fourth Chapter...... 229 6.5 The Fifth Chapter ...... 230 6.6 Recommendations ...... 231

APPENDIX 1 ...... 234

LITERATURE SURVEY ...... 234

SELECT BIBLIOGRAPHY ...... 251

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CHAPTER 1 THE LAW OF TORTS IN PAKISTAN AND MULTINATIONAL CORPORATIONS

1 See, e.g., Roland Portmann, Legal Personality in International Law (Cambridge: Cambridge University Press, 2010); John Dewey, “The Historic Background of Corporate Legal Personality,” The Yale Law Journal 35 (1926): 655–673; David Goddard, “Corporate Personality—Limited Recourse and its Limits,” in Corporate Personality in the 20th Century, ed. Charles E. F. Rickett and Ross B. Grantham (Oxford: Hart Publishing, 2010), 11–70; Phillip I. Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality (Oxford: Oxford University Press, 1993); Jan Klabbers, “The Concept of Legal Personality,” in International Legal Personality, ed. Fleur Johns (Surrey: Ashgate Publishing Limited, 2010), 3–34; Bryant Smith, “Legal Personality,” Yale Law Journal 37 (1928): 79–99; and Arthur Machen, “Corporate Personality,” Harvard Law Review 24 (1911): 1–24. 2 In 1844, the British Parliament passed the Joint Stock Companies Act, which prohibited large unincorporated companies and for the first time admitted the creation of joint stock companies by registration. This Act withheld the admission of limited liability, but it was admitted by the Limited Liability Act of 1855. Another Act consolidated the provisions in 1856. In Pakistan (then India), the first Indian Companies Act was passed in 1850. In 1857 another act was passed and this extended the privilege of limited liability to joint stock companies, except banking and insurance companies. 3 See, e.g., Nick Robins, The Corporation that Changed the World: How the East India Company Shaped the Modern Multinational (Ann Arbor, MI: Pluto Press, 2006) and Geoffrey Jones, Merchants to Multinationals: British Trading Companies in the Nineteenth and Twentieth Centuries (Oxford: Oxford University Press, 2000). 4 Multinational Corporations (MNCs) are corporations that are incorporated in one country but operate in one or more other countries. Peter T. Muchlinski, Multinational Enterprises and The Law (2nd ed. 2007) at 5-8. Other terms found in literature include “transnational corporations” (TNCs) and “multinational enterprises” (MNEs).

complex corporations spread their tentacles far and wide till they surrounded the resources and wealth of underdeveloped and poor countries.5 All this history has led us

to the conclusion that multinational corporations (MNCs), which usually operate through complex structures of parent and subsidiaries, while doing some good, brutally exploit the natural resources of underdeveloped countries often caring little for the

occasional excesses they commit by way of crimes, torts, contractual violations, and environmental disasters,6 yet they are able to evade all liability by benefiting from the

two legal shields of separate legal entity and limited liability of the shareholders that

7 were justifiably intended in the first place for simple rather than complex corporations.

Poor and vulnerable countries like Pakistan, while recognizing that they are in dire need of the vast amount of skills and resources that these organizations bring with them, must adopt some regulatory strategy to deal with the threats that these corporations might pose. The strategy lies primarily in the law of torts, although other measures may also be contemplated. Does Pakistan have the capacity to deal with these complex and extremely powerful organizations through its law of torts? The legal system of Pakistan, which has a weak and underdeveloped law of torts, may not be adequately equipped to deal with the colossal issues sometimes raised by the presence of these giant corporations.8 In the absence of a developed law of torts, should Pakistan, then, look

5 Florian Wettstein, Multinational Corporations and Global Justice: Human Rights Obligations of a Quasi-Governmental Institution (Stanford, California: Stanford University Press, 2009). 6 Ibid.; Edward M. Graham, Fighting the Wrong Enemy: Antiglobal Activists and Multinational Enterprises (Washington, D.C.: Institute for International Economics, 2000); Blumberg, The Search for a New Corporate Personality. 7 William G. Egelhoff, “Evaluating the role of parent HQ in a contemporary MNC,” in Managing the Contemporary Multinational: The Role of Headquarters, ed. Ulf Andersson and Ulf Holm (Cheltenham, UK: Edward Elgar Publishing Limited, 2010), 106–22. 8 See, e.g., Ananyo Basu, “Torts in India: Dharmic Resignation, Colonial Subjugation, or “Underdevelopment”?” The South Atlantic Quarterly 100 (2001): 1053–1070 and Marc Galanter, “Legal Torpor: Why So Little Has Happened in India After the Bhopal Tragedy,” Texas International Law Journal 20 (1985): 273–294.

towards international law and other measures like CSR, taxation and voluntary codes of conduct to secure itself, its resources and people against the possible excesses committed by the multinational corporations? The situation calls for a comprehensive study that examines the legal environment in Pakistan in the light of the works of the leading thinkers and writers in the field, as well as in the light of measures adopted by other countries, especially India, although India is a giant market as compared to the smaller market available to the MNCs in Pakistan. Pakistan, therefore, needs to judge whether the solutions proposed for the problems arising out of the operation of MNCs in developed countries and large markets are really applicable to Pakistan. Accordingly, the problems arising out the operation of multinational corporations in developing countries, especially smaller countries like Pakistan, must be viewed comprehensively to take into account not only the remedies found in the law of torts, or amendments required in the fundamentals of company law, but all possible legal and persuasive solutions that may or may not have been considered by modern scholars studying other larger jurisdictions.

1.1 The Ubiquitous Multinational Corporation or the

Multinational Enterprise

According to a “United Nations statement a few years ago that of the 100 entities with the largest gross national product (GNP), about half were multinational corporations

(MNCs). This meant that by this measure these big MNCs were larger and wealthier than about 120 to 130 nation-states. They still are.”9 According to UNCTAD, in 2010

9 Alfred D. Chandler and Bruce Mazlish, “Introduction,” in Leviathans: Multinational Corporations and the New Global History, ed. Alfred D. Chandler and Bruce Mazlish (Cambridge: Cambridge University Press, 2005), 1. “Today, a new kind of Leviathan has risen from the depths of humanity’s creative powers—the multinational corporation. In its embryonic state, it is found in multinational enterprises (MNEs), the first wave of the modern global economy, which began in the

there were more than 100,000 parent companies that together owned and controlled in excess of 850,000 foreign affiliates with productive assets overseas. And together, they account for about a quarter of the global gross domestic product (GDP)10 We may mention, by the way, that out of these 46 parent corporations and 138 affiliates were also present in Pakistan.11 By way of comparison, an earlier UNCTAD document says that the universe of TNCs12 is large, diverse and expanding. By the early 1990s, there were an estimated 37,000 TNCs in the world, with 170,000 foreign affiliates. Of these,

33,500 were parent corporations based in developed countries. Today, there are an estimated 77,000 TNCs in the world, with more than 770,000 foreign affiliates. These affiliates generated an estimated $4.5 trillion in value added, employed some 62 million workers and exported goods and services valued at more than $4 trillion (UNCTAD,

2006).13 Thus, it can be seen that the growth is phenomenal.

Experts agree that the modern multinational corporation (MNC) is “an economic, political, environmental, and cultural force that is unavoidable in today’s globalized world.”14 In other words, MNCs impact the lives of billions of people on a daily basis in a variety of complex and imperceptible ways.15 The Encyclopedia Britannica defines the multinational corporation (MNC), also called transnational corporation, as “any

1880s in the wake of the Industrial Revolution and modern empires. It took mature shape in a second wave in the multinational corporations (MNCs) of the 1970s. Both in number and power, these multinational phenomena have made a qualitative change in our economic world by the time of the new millennium.” Ibid., 2. 10 UNCTAD, World Investment Report: Non-Equity Modes of International Production and Development (2011) UN Doc UNCTAD/WIR/2011, 24 and web table 34,

corporation that is registered and operates in more than one country at a time. Generally, the corporation has its headquarters in one country and operates wholly or partially owned subsidiaries in other countries. Its subsidiaries report to the corporation’s central headquarters.”16 There are others who define it as MNE or multinational enterprise.

Thus, Mira Wilkins says: “A multinational enterprise (MNE) is a firm that extends itself over borders to do business outside its headquarters country. It operates across political boundaries. It is a firm as economists define ‘the firm:’ an allocator of resources, a producer of goods and services. Most MNEs have only one home (the headquarters country); some come to have more than one—as with Royal Dutch Shell and

Unilever.”17 Richard Caves defines it in the following words: “The multinational enterprise (MNE) is defined here as an enterprise that controls and manages production establishments—plants—located in at least two countries. It is simply one enterprise of a multiplant firm. We use the term ‘enterprise’ rather than ‘company’ to direct attention to the top level of coordination in the hierarchy of business decisions; a company, itself multinational, might be the controlled subsidiary of another firm. The minimum ‘plant’ abroad needed to make an enterprise multinational is judgmental.”18 The multinational corporation, as that term is presently used, refers to any large business corporation in which the ownership, management, production, and marketing extend into several

19 national jurisdictions.

16 Encyclpaedia Britannica, s.v. “Multinational corporation (MNC).” 17 Mira Wilkins, “Multinational Enterprise to 1930: Discontinuities and Continuities,” in Leviathans: Multinational Corporations and the New Global History, ed. Alfred D. Chandler and Bruce Mazlish (Cambridge: Cambridge University Press, 2005), 45. 18 Richard E. Caves, Multinational Enterprise and Economic Analysis, 3rd ed. (Cambridge: Cambridge University Press, 2007), 1. 19 Stephen Zamora, “Book Review—Global Reach: The Power of the Multinational Corporations,” Catholic University Law Review 26 (1977): 450.

It is useful here to note that the terminology used at the international level has also developed with the growth of these large corporations. The term TNC or transnational corporation is usually preferred in United Nations documents. Originally, in the United

Nations (UN) framework, the term “multinational corporations” was used. It was defined as “enterprises which own or control production or service facilities outside the country in which they are based.”20 This term was altered to “transnational corporation”21 A TNC was defined as an “economic entity operating in more than one country or a cluster of economic entities operating in two or more countries—whatever their legal form, whether in their home country or country of activity, and whether taken individually or collectively.”22 As compared to this the OECD and ILO instruments use the term “multinational enterprises.” The OECD Guidelines for multinational enterprises say the following:

A precise definition of multinational enterprises is not required for the purposes

of the Guidelines. These enterprises operate in all sectors of the economy. They

usually comprise companies or other entities established in more than one country

and so linked that they may coordinate their operations in various ways. While one

or more of these entities may be able to exercise a significant influence over the

activities of others, their degree of autonomy within the enterprise may vary widely

from one multinational enterprise to another. Ownership may be private, State or

mixed. The Guidelines are addressed to all the entities within the multinational

enterprise (parent companies and/or local entities). According to the actual

20 Report of the Group of Eminent Persons to Study the Impact of Multinational Corporations on Development and on International Relations (1974) UN Doc E/5500/Rev.1, ST/ESA/6, 25. 21 UN Draft Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, UNCHR, Sub-Commission on the Promotion and Protection of Human Rights (26 August 2003) UN Doc E/CN.4/Sub.2/2003/12/Rev.2 (Draft Norms). 22 Ibid., para 20.

distribution of responsibilities among them, the different entities are expected to

23 co-operate and to assist one another to facilitate observance of the Guidelines.

From all these definitions it appears that the multinational corporations, or transnational corporations or even multinational enterprises are highly flexible organizations and their fluid form defy precise description. What is more important, therefore, is to focus on their characteristics in individual cases beginning with the law of the nation state where they have been incorporated. Apparently, that is the only attachment they have to this state of their origin. This fluidity is probably the main reason why national laws fail to regulate their activity with success.

Stephen Zamora points out that within five years of the publication of Raymond

Vernon’s influential book, Sovereignty at Bay, in 1971 hundreds of books, articles, and studies were published on the subject of multinational corporations.24 Numerous international organizations, including the United Nations Conference on Trade and

Development, the Organization for Economic Cooperation and Development, the

Organization of American States, the International Chamber of Commerce, and the

International Labor Organization had by then studied the problems posed by multinational corporations, and, in some cases, had devised guidelines (“codes of conduct”) to be followed voluntarily by the corporations. The United Nations also made an entity called the U.N. Commission on Transnational Corporations for conducting research and making recommendations regarding the need for common policies towards multinational corporations.25 The studies so undertaken covered nearly every aspect of modern economic activity, because the corporations themselves touch almost

23OECD, Guidelines for Multinational Enterprises (2011), 17-18 (available from http://mneguidelines.oecd.org/text/). 24 Zamora, “Book Review—Global Reach,” 450. 25 S. Rubin, “Reflections Concerning the United Nations Commission on Transnational Corporations,” American Journal of International Law (1976) 70:73.

every aspect of our daily lives; namely, national sovereignty, ownership of the means of production, environmental protection, consumerism, and policies toward organized labour.26 The issues impact not only our way of life, but our way of thinking. Explaining how the global corporations in the new international economy threaten the sovereignty of the nation state, he says, “we mean that [the state’s] principal domestic powers and functions—the power to raise revenues, maintain employment, provide adequate social services, encourage the equitable allocation of income and wealth, maintain sound currency, keep prices and wages in line: in short, the power to maintain a stable social

27 equilibrium for the great majority of its population—is being seriously undercut.”

The above definitions and some ideas have been presented to show that the multinational corporation has acquired “vast amounts of power and influence over social and societal life in general.” In fact, by dominating the global economic sphere the MNCs inevitably turn into major political forces that affect the organization of society as a whole.28 To understand all these definitions and assertions it is essential to trace the historical development of the multinational corporation in a detailed and systematic way. Accordingly, we have devoted the entire next chapter to this topic. The purpose in this section was to provide a brief glimpse.

For the purposes of this study, it really does not matter whether these giant corporations are called Multinational Corporations (MNCs), Transnational

Corporations (TNCs) or Multinational Enterprises (MNEs). Most of the definitions provided above are applicable to the organizations working in Pakistan, while having operations in other parts of the world. The definition that is most attractive for us,

26 Zamora, “Book Review—Global Reach,” 451. 27 Ibid. 28 Wettstein, Multinational Corporations and Global Justice, 180.

however, is the one provided by Richard Caves: “The multinational enterprise (MNE) is defined here as an enterprise that controls and manages production establishments— plants—located in at least two countries. It is simply one subspecies of a multiplant firm.”29 It is the MNC with a plant or several plants located in Pakistan that is of major interest for us, as compared to another organization that is marketing goods that have a lesser impact on the environment in the country or on the health of the citizens of this country. The plant may be serving the local market alone, or it may be serving and working in coordination with other plants or manufacturing facilities in a neighbouring jurisdiction. This does not mean that we will ignore the other types of MNCs, because any such organization has the potential to threaten the environment of this country. The search within Pakistan will focus on such multiplant firms and their operations.

1.2 The Benefits of the Very Large Multinational

Corporation

According to Dunning and Lundan, the most frequent and persistent question that is asked about multinational enterprise activity both citizens a well as policy makers of the nation states in which they operate, is “Is its impact on the economic and social welfare of its citizens a good or a bad thing?”30 The question, they add, is followed by another question, which says: “If it is good, how can it be made even better?”31 Once these two questions have been answered, a third usually follows: “To what extent do we wish our country to be tied in to an international division of labour or to product, process and human resource strategy fashioned or influenced by large foreign-based

29 Caves, Multinational Enterprise and Economic Analysis, 1. 30 John H. Dunning and Sarianna M. Lundan, Multinational Enterprises and the Global Economy (Cheltenham, UK: Edward Elgar, 2008), 295. 31 Ibid., 295.

MNEs?”32 The third question pertains to the next section, but we may address the first two here, very briefly.

The OECD Benchmark Definition of Foreign Direct Investment (1996), defines

“foreign direct investment” by saying that “foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (‘direct investor’) in an entity resident in an economy other than that of the investor (‘direct investment enterprise’).”33 The words “lasting interest” imply the existence of a long- term relationship between the direct investor and the enterprise “and a significant degree of influence on the management of the enterprise.”34 “Direct investment” includes both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.35 A “foreign direct investor” is an individual, an incorporated or unincorporated public or private enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises

“which has a direct investment enterprise—that is, a subsidiary, associate or branch— operating in a country other than the country or countries of residence of the foreign direct investor or investors.”36 For “direct investment enterprise,” OECD recommends that as an incorporated or unincorporated enterprise in which a foreign investor owns

10 per cent or more of the ordinary shares or voting power of an incorporated enterprise or the equivalent of an unincorporated enterprise.37 This will be interpreted as evidence

32 Dunning and Lundan, Multinational Enterprises and the Global Economy, 295. 33 OECD, Benchmark definition of foreign direct investment, 3rd ed. (Paris, France, 19960), 7. 34 Ibid., 8. 35 Ibid. 36 Ibid. 37 Ibid.

of an effective voice in the management. It does not require absolute control by the

38 foreign investor.

FDI is needed by developing economies that are “typically plagued by low levels of productivity leading to low levels of wages and hence low levels of savings and investment, again perpetuating the low productivity levels.”39 An external injection in the form of foreign investment often acts as a vehicle to break away from the “vicious circle.”40 There can be different modes through which an MNE or a foreign investor undertakes the production process in the host country. It can choose between the following strategies: (1) greenfield investment, that is, setting up a new foreign affiliate or plant in the host country to produce goods locally; (2) merger and acquisition, that is, acquisition of a local firm and its production capacity; and (3) cooperation with a local firm by setting up a joint venture.41 In greenfield investment, a parent company

“starts a new venture in a foreign country by constructing new operational facilities and acquiring new fixed assets.”42 It usually includes “all financial transfers from a multinational’s headquarters to its subsidiary that may take the form of equity or loan financing.”43 When FDI occurs in this form, the possible benefits of a multinational investing in a country may include: improving the balance of payments; providing employment (most employees will be locally recruited); it will become a source of tax

38 Ibid. 39 Sarbajit Chaudhuri and Ujjaini Mukhopadhyay, Foreign Direct Investment in Developing Countries: A Theoretical Evaluation (New Delhi: Springer, 2014), 1. 40 Ibid., 1. 41 Ibid., 4. 42 Ibid. 43 Ibid. Sometimes, there is collaboration with a local business and they are referred to as “partners.” These are joint ventures. “Joint venture refers to a venture by a partnership or conglomerate designed to execute a particular business undertaking and share the profits, risk or expertise. The parties create a new entity by both contributing equity and then sharing the revenues, expenses and control of the enterprise. For example, Sony Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to produce mobile phones.” Ibid.

revenue (profits will be subject to local taxes); it will result in technology transfer (the foreign investor will invariably bring with them technology and production methods that are new to the host country); it will usually result in increased exports; and it will

44 improve the reputation of the host country (promising place for investment).

There is a vast literature on the subject of multinationals and economic development, with a number of theories to guide the stakeholders. What, for example, are the options open to policy-makers in developing countries when dealing with multinationals? How can they maximize the contribution of multinational enterprises towards their economic growth?45 It is consistently maintained that economic success of small nations depends on granting a major role to multinationals in the national economy: “Small nations increasingly need to rely heavily on both home-grown and foreign multinational enterprises to achieve domestic economic success in industries characterized by international competition, as these firms augment the domestic diamond determinants with foreign components, thereby permitting sustainable high production and employment per capita as compared with other nations.”46 In response to the questions raised at the beginning of this section, Dunning and Lundan point out that “if there is one lesson to be drawn from a plethora of empirical studies on the

44 See, generally John H. Dunning and Sarianna M. Lundan, Multinational Enterprises and the Global Economy (Cheltenham, UK: Edward Elgar, 2008); Sarbajit Chaudhuri and Ujjaini Mukhopadhyay, Foreign Direct Investment in Developing Countries: A Theoretical Evaluation (New Delhi: Springer, 2014); Richard E Caves, “Multinational firms, competition, and productivity in host- country markets,” Economica (1974): 176–193; Magnus Blomstrom, Host country benefits of foreign investment, technical report (National Bureau of Economic Research, 1991); and Bin Xu, “Multinational enterprises, technology diffusion, and host country productivity growth,” Journal of development economics 62, no. 2 (2000): 477–493. 45 For an analysis of such theories, see James C.W. Ahiakpor, Multinationals and Economic Development: An integration of competing theories. (New York: Routlege, 1990). 46 Daniel Van Den Bulcke, Alain Verbeke, and Wenlong Yuan, “Evaluating the role of parent HQ in a contemporary MNC,” in Handbook on Small Nations in the Global Economy: The Contribution of Multinational Enterprises to National Economic Success, ed. Daniel Van Den Bulcke, Alain Verbeke, and Wenlong Yuan (Cheltenham, UK: Edward Elgar Publishing Limited, 2009), 1.

economic consequences of FDI and the behaviour of MNEs, it is that there is no satisfactory general answer to these questions.”47 The reason they advance is that a lot depends upon the formation of government policy towards MNEs, and on the kind of

FDI being undertaken.48 Further, so much rests on the particular effects of MNE activity with which one is concerned; the time period in which one is interested; and from whose, or which, perspective one is trying to assess the impact.49 The discussion is accurately summed up in the following words:

The impact of multinational enterprises (MNEs) on host country development

is an important but controversial topic. For more than half a century, this subject

has generated considerable disagreement among researchers and practitioners-those

directly engaged in international development policy, finance, and multinational

management strategy. In its simplest form, one side in this debate has hailed the

foreign direct investment (FDI) undertaken by MNEs for inducing economic

growth by complementing domestic savings, transferring technology and

management skills, and increasing competition. On the other side, some have

argued that MNEs crowd out local firms, use technology that is inappropriate for

local circumstances, actively constrain potential technology spillovers, and reduce

(rather than complement) the domestic capital stock and tax basis through transfer

50 price manipulation and excessive profit repatriation.

Nevertheless, it is generally acknowledged that “political opinion concerning FDI has shifted from it being perceived as a source of possible economic exploitation and social disruption, to it being sought after as a desirable means to enhance competitiveness or

47 Dunning and Lundan, Multinational Enterprises and the Global Economy, 295. 48 Ibid. 49 Ibid. 50 Alan M. Rugman and Jonathan P. Doh, Multinationals and Development (New Haven: Yale University Press, 2008), 1.

to jumpstart economic growth.”51 In short, today there are renewed efforts to use FDI as a tool of regional development. Countries like Pakistan, as we will point out later, are thoroughly convinced about the necessity of FDI as an essential tool for their development and may not be willing to take the risk of driving away the multinationals through regulatory measures.

1.3 The Evils That Accompany These Corporations

Despite the great need expressed by the developing countries for investment that multinational corporations bring for promoting their growth and development, there are many who are highly critical of the way these corporations function in these countries.

Writers try to show that these corporations have become so powerful that they are almost like government, perhaps more powerful, or they are like “nations within nations.” The first demand then is to seek, or expect, justice from an organization that is more like a government and has the power to affect the rights of ordinary citizens in most of the ways that a government does. This naturally leads to the violation of human rights by these corporations. The discussion then turns on to what these corporations do to the poor. There is a long list that includes employment, physical environment, child labor, transfer pricing and a host of other things that are analysed in the context of what they do to the poor. In particular, the discussion focuses on the way the multinational corporations alter the environment, sometimes taking away the very sources of income on which the poor, who cannot move anywhere else, rely. We need not delve too much on this topic, as the most important acts in this context are “torts,” which are the subject of this study. A few authors are, therefore, mentioned below by way of illustration.

51 Dunning and Lundan, Multinational Enterprises and the Global Economy, 295.

An important book is one written from the perspective of global justice, human rights and multinational corporations. It is the major assertion of the author that “the multinational corporation has acquired vast amounts of power and influence over social and societal life in general. In a market-controlled society the institutions that shape and dominate the global economic sphere inevitably turn into major political forces that affect the organization of society as a whole.”52 The author maintains that we cannot discuss global justice without taking these powerful institutions into account. The practical realization of global justice, he repeatedly maintains, will be virtually impossible without paying adequate attention to the role of large corporations.53 The author works out a whole philosophy of global justice. He first rejects utilitarianism, notes the failure of the deregulation programme of neoliberals, points out the failure of the concept of justice promoted by John Rawls54 as it grants many concessions to the utilitarianists,55 and then asserts that global justice based on human rights is the true answer.56 Here is what he says:

The most plausible interpretation of global justice, as I attempt to show in this

book, is one based on the concept of human rights. The focus on human rights is

able to overcome the shortcomings of both the utilitarian and the contractarian

perspectives that weigh so heavily on Rawls’s theory. It avoids the radical

individualism underlying the latter without falling into the trap of a potentially

disenfranchising communitarianism of the former. As such, it provides a walkable

path of well-understood universalism that understands individual rights and dignity

as a precondition rather than a contradiction of a functioning community. In our

52 Wettstein, Multinational Corporations and Global Justice, 180. 53 Ibid., ix. 54 John Rawls, A Theory of Justice (Cambridge, MA: The Belknap Press of Harvard University Press, 1971). 55 Wettstein, Multinational Corporations and Global Justice, 7. 56 Ibid.

increasingly global society, the ethical minimum of human rights might be all we

can hope for, but if we value pluralism of cultures, religions, and worldviews, it

might indeed be all we need. The aim and the purpose of human rights are not to

impose a preconditioned set of values on cultures and peoples but to protect their

differences by appeal to our shared humanity. This is an ideal worth striving for,

57 even in a time when it seems to become more distant.

As the multinational corporations have become all powerful, more like nations, the human rights agenda is directed against them as much as it is against nation states. “The obligations of multinational corporations as primary agents of justice start with the general and all-embracing duty to respect human rights. Thus multinational corporations have a direct obligation to refrain from all actions that might be in violation of human beings’ basic rights, whether directly through their normal business conduct or indirectly through their complicity in human rights violations committed by a third party.”58 How far this agenda has succeeded will be examined much later in this study, but our purpose here was to point out that not everyone is ready to welcome these corporations with open arms as are the needy developing countries.

There are others who focus on the poor, who are considered to be at the mercy of the all powerful TNCs. One author, who is an insider having worked for TNCs for more than a decade, states the following in his important book: “Many books have been written about TNCs. But their impact on the poor has barely been examined. This is a serious omission. TNCs are now enormously powerful, more powerful than governments in many respects, not least because they are usually efficient at what they do—and what they do is make money for their shareholders. The cost in human terms

57 Ibid., 7-8. 58 Wettstein, Multinational Corporations and Global Justice, 291.

of commercial success needs to be assessed. The impact of government policies on the poor is frequently analysed. In contrast, TNCs have escaped lightly.”59 He maintains that when “efficiency” is not accountable to people, it can become exploitation.60 He further says: “When the impact of these unelected, and largely unaccountable, undemocratic corporations on materially resource-poor communities is analysed, a picture emerges of damaged livelihoods which brings no credit to the companies. TNCs have used their money, size and power to influence international negotiations and taken full advantage of the move towards privatization to influence the policies of governments.”61 The author then examines a huge array of subjects to show how the poor are affected through the activities of the multinational corporations. These, for example, are: seeds, patents, genetic modification, biopiracy, agrofuels (biofuels), pesticides, tobacco, baby foods, bananas, soft drinks (including fruit, vegetables and flowers), cotton, palm oil, antibiotics, vitamin pills and stimulants, generic drugs, bottled water and so on. What happens to land and forests through mining and logging is another full story, while energy is another. The author devotes separate chapters to topics like child labour, employment and the destruction of the environment. The book is interesting reading, but our purpose was merely to provide a general idea of how the critics may look at the activities of the multinational corporations.

Another interesting book is Toxic Torts: Science, Law and the Possibility of Justice by Carl F. Cranor. The author examines the way evidence based on science is affecting

U.S. tort, or personal injury law. He shows that the “U.S. Supreme Court decisions beginning with Daubert v. Merrell Dow Pharmaceutical altered how courts review

59 John Madeley, Big Business, Poor Peoples: How Transnational Corporations Damage the World’s Poor, 2nd ed. (New York: Zed Books, 2008), vii. 60 Ibid., vii. 61 Ibid.

scientific testimony and its foundation in the law. The complexity of both science and the law mask the overall social consequences of these decisions. Yet they are too important to remain hidden. Mistaken reviews of scientific evidence can decrease citizen access to the law, increase incentives for firms not to test their products, lower deterrence for wrongful conduct and harmful products, and decrease the possibility of justice for citizens injured by toxic substances. Even if courts review evidence well, greater judicial scrutiny increases litigation costs and attorney screening of clients and decreases citizens’ access to the law. This book introduces these issues, reveals the relationships that can deny citizens just restitution for harms suffered, and shows how justice can be enhanced in toxic tort cases.”62 In short, there are a myriad of issues associated with multinational corporations, and writers point these out on a daily basis.

Thus, Jennifer A. Zerk addresses the issue of Social Responsibility,63 and others from

64 yet other aspects like antiglobal activities.

1.4 Potential Threats for Pakistan: Problems Faced by Host

Nations by Way of Torts

The world’s worst industrial tragedy began when poisonous gas silently leaked in the dead of night in northern India releasing a “highly toxic chemical called methyl isocyanate spewed out of a chemical plant owned by Union Carbide India Limited, a subsidiary of the giant American corporation Union Carbide.”65 This happened during

62 Carl F. Cranor, Toxic Torts: Science, Law, and the Possibility of Justice (Cambridge: Cambridge University Press, 2006), cover. 63 Jennifer A. Zerk, Multinationals and Corporate Social Responsibility: Limitations and Opportunities in International Law (Cambridge: Cambridge University Press, 2006). 64 Edward M. Graham, Fighting the Wrong Enemy: Antiglobal Activists and Multinational Enterprises (Washington, D.C.: Institute for International Economics, 2000). 65 Abhi Raghunathan, “The Grand Trunk Road from Salomon to Mehta: Economic Development and Enterprise Liability in India,” The Georgetown Law Journal 100 (2012): 572-73.

the night between December 2-3, 1984. The chemical and fumes moved with the wind toward thousands of destitute squatters who lived in adjoining huts in the city of Bhopal.

The chemicals killed several thousand people, injured hundreds of thousands more, and devastated local crops and cattle.66 Torts by multinationals were known before this, but the Bhopal disaster brought the danger posed by these corporations to the forefront and into the public’s eye all over the world. Litigation, which spawned two hemispheres, resulted in $470 million in damages.67 It also gave rise to a criminal investigation.68

The case also gave rise, once again, to the question: When should a court disregard the corporate form and pierce the corporate veil to hold shareholders directly liable for a corporation’s actions? This question looms large for Pakistan, and so does the possibility of torts by multinational corporations.

Pakistan can come face to face with any kind of tort committed either by its domestic corporations or multinationals, but the torts committed by MNCs are likely to be of a much larger size and scale. In this section, we merely wish to identify the nature of some types of torts that are possible, because these have been committed in the recent past. Thus, the International Labor Rights Forum has listed about 14 of the worst torts on their websites.69 The incidents also include crimes committed by the multinationals.

Some of these are mentioned below. The website says the following (we have added some details where possible):

Several of the companies below are being sued under the Alien Tort Claims

Act, a law that allows citizens of any nationality to sue in US federal courts for

66 Ibid., 573. 67 In re Union Carbide, 634 F. Supp. at 844. 68Bhopal Trial: Eight Convicted Over India Gas Disaster, BBC NEWS (Monday, 7 June 2010), http://news.bbc.co.uk/2/hi/south_asia/8725140.stm. 69International Labor Rights Forum (ILRF), “The 14 Worst Corporate Evildoers” http://www.laborrights.org/in-the-news/14-worst-corporate-evildoers (accessed June 28, 2015).

violations of international rights or treaties. When corporations act like criminals,

we have the right and the power to stop them, holding leaders and multinational

corporations alike to the accords they have signed. Around the world—in

Venezuela, Argentina, India, and right here in the United States—citizens are

stepping up to create democracy and hold corporations accountable to international

law.

1. Caterpillar: For years, the Caterpillar Company has provided Israel with the

bulldozers used to destroy Palestinian homes (specially modified D9 and D10

bulldozers to the Israeli military). In a letter to Caterpillar CEO James Owens,

The Office of the UN High Commissioner on Human Rights said: “allowing the

delivery of your …bulldozers to the Israeli army …in the certain knowledge that

they are being used for such action, might involve complicity or acceptance on

the part of your company to actual and potential violations of human rights ….”70

Peace activist Rachel Corrie was killed by a Caterpillar D-9, military bulldozer

in 2003. She was run over while attempting to block the destruction of a family’s

home in Gaza. Her family filed suit against Caterpillar in March 2005 charging

that Caterpillar knowingly sold machines used to violate human rights. Since

Corrie’s death at least three more Palestinians have been killed in their homes by

71 Israeli bulldozer demolitions.

2. Chevron: The petrochemical company Chevron is guilty of some of the worst

environmental and human rights abuses in the world. From 1964 to 1992. Texaco

(which transferred operations to Chevron after being bought out in 2001)

unleashed a toxic “Rainforest Chernobyl” in Ecuador by leaving over 600

70 Ibid. 71 Ibid.

unlined oil pits in pristine northern Amazon rainforest and dumping 18 billion

gallons of toxic production water into rivers used for bathing water. Local

communities have suffered severe health effects, including cancer, skin lesions,

birth defects, and spontaneous abortions.. In Nigeria, Chevron has hired private

military personnel to open fire on peaceful protestors who oppose oil extraction

in the Niger Delta. The Unocal Corporation, which recently became a subsidiary

of Chevron, is an oil and gas company based in California with operations around

the world. In December 2004, the company settled a lawsuit filed by 15 Burmese

villagers, in which the villagers alleged Unocal’s complicity in a range of human

rights violations in Burma, including rape, summary execution, torture, forced

72 labor and forced migration.

3. Coca-Cola: Coca-Cola leads in the abuse of workers’ rights, assassinations,

water privatization, and worker discrimination. Between 1989 and 2002, eight

union leaders from Coca-Cola bottling plants in Colombia were killed after

protesting the company’s labor practices. Hundreds of other Coca-Cola workers

who have joined or considered joining the Colombian union SINALTRAINAL

have been kidnapped, tortured, and detained by paramilitaries who are hired to

intimidate workers to prevent them from unionizing. In India, Coca-Cola

destroys local agriculture by privatizing the country’s water resources. In

Plachimada, Kerala, Coca-Cola extracted 1.5 million liters of deep well water,

which they bottled and sold under the names Dasani and BonAqua. The

72 The first settlement was in Doe v Unocal, (248 F 3d 915 (9th Cir 2001)) a case in which Burmese villagers sued the California-based energy giant for its alleged direct complicity in abuses committed by the Burmese military, being Unocal’s partner in a natural gas pipeline joint venture. In 2005, Unocal agreed, in a confidential settlement, to compensate the plaintiffs and provide funds for programmes in Burma to improve living conditions and protect the rights of people from the pipeline region (the exact terms of the settlement are confidential). EarthRights International, “Final Settlement Reached in Doe v. Unocal,” The Guardian (21 March 2005) http://www.earthrights.org/legal/final- settlement-reached-doe-v-unocal (accessed June 2015).

groundwater was severely depleted, affecting thousands of communities with

water shortages and destroying agricultural activity. As a result, the remaining

water became contaminated with high chloride and bacteria levels, leading to

scabs, eye problems, and stomach aches in the local population. Coca-Cola is

also one of the most discriminatory employers in the world. In the year 2000,

2,000 African-American employees in the U.S. sued the company for race-based

disparities in pay and promotions.

4. Dow Chemical: Dow Chemical has been destroying lives and poisoning the

planet for decades. The company is best known for the ravages and health disaster

for millions of Vietnamese and U.S. Veterans caused by its lethal Vietnam War

defoliant, Agent Orange. Dow also developed and perfected Napalm, a brutal

chemical weapon that burned many innocents to death in Vietnam and other wars.

In 1988, Dow provided pesticides to Saddam Hussein despite warnings that they

could be used to produce chemical weapons. In 2001, Dow inherited the toxic

legacy of the worst peacetime chemical disaster in history when it acquired Union

Carbide Corporation (UCC) and its outstanding liabilities in Bhopal, India. On

Dec. 3, 1984, a chemical leak from a UCC pesticide plant in Bhopal gassed

thousands of people to death and left more than 150,000 disabled or dying. Dow

still refuses to address its liabilities in Bhopal. Dow Chemical’s impact is felt

globally from its Midland, Michigan headquarters to New Plymouth, New

Zealand. In Midland, Dow has been producing chlorinated chemicals and burning

and burying its waste including chemicals that make up Agent Orange. In New

Plymouth, 500,000 gallons of Agent Orange were produced and thousands of

tons of dioxin-laced waste was dumped in agricultural fields.

5. DynCorp: Private security contractors have become the fastest-growing sector

of the global economy during the last decade—a $100-billion-a-year, nearly

unregulated industry. DynCorp, one of the providers of these mercenary services,

demonstrates the industry’s power and potential to abuse human rights. While

guarding Afghan statesmen and African oil fields, training Iraqi police forces,

eradicating Colombian coca plants, and protecting business interests in

hurricane-devastated New Orleans, these hired guns bolster the security of

governments and organizations at the expense of many people’s human rights.

DynCorp’s fumigation of coca crops along the Colombian-Ecuadorian border led

Ecuadorian peasants to sue DynCorp in 2001. Plaintiffs argued that DynCorp

knew—or should have known—that the herbicides were highly toxic. In 2001, a

mechanic with DynCorp blew the whistle on DynCorp employees in Bosnia for

rape and trading girls as young as 12 into sex slavery. According to a lawsuit

filed by the mechanic, “employees and supervisors were engaging in perverse,

illegal and inhumane behavior [and] were purchasing illegal weapons, women,

[and] forged passports.” DynCorp fired the whistleblower and transferred the

employees accused of sex trading out of the country, eventually firing some.

None were prosecuted.

6. Nestle USA: The problem of illegal and forced child labor is rampant in the

chocolate industry, because more than 40% of the world’s cocoa supply comes

from the Ivory Coast, a country that the US State Department estimates had

approximately 109,000 child laborers working in hazardous conditions on cocoa

farms. In 2001, Save the Children Canada reported that 15,000 children between

9 and 12 years old, many from impoverished Mali, had been tricked or sold into

slavery on West African cocoa farms, many for just $30 each. Nestle, the third

largest buyer of cocoa from the Ivory Coast, is well aware of the tragically unjust

labor practices taking place on the farms with which it continues to do business.

Nestle and other chocolate manufacturers agreed to end the use of abusive and

forced child labor on cocoa farms by July 1, 2005, but they failed to do so. Nestle

is also notorious for its aggressive marketing of infant formula in poor countries

in the 1980s. Because of this practice, Nestle is still one of the most boycotted

corporations in the world, and its infant formula is still controversial. In Italy in

2005, police seized more than two million liters of Nestle infant formula that was

contaminated with the chemical isopropylthioxanthone (ITX). Additionally,

violations of labor rights are reported from Nestle factories in numerous

countries. In Colombia, Nestle replaced the entire factory staff with lower-wage

workers and did not renew the collective employment contract. It is to be noted

that Nestle is the biggest multinational operating in Pakistan.

The website also gives details of the Ford Motor Company, KBR (Kellogg, Brown and Root): A Subsidiary of Halliburton Corporation, Lockheed Martin, Monsanto

(Monsanto is, by far, the largest producer of genetically engineered seeds in the world, dominating 70% to 100% of the market for crops such as soy, cotton, wheat and corn),

Philip Morris USA and Philip Morris International (a.k.a. The Altria Group Inc.),

Pfizer, Suez-Lyonnaise Des Eaux (SLDE), and Wal-Mart. Here we may note that many of the corporations listed here have operations in Pakistan, in one form or the other. In addition to the above, Richard Meeran has provided a list of cases in other

jurisdictions:73 Richard Meeran has conducted most of these cases himself over a period of 17 years:

• 1995–1998: Connelly v RTZ Corporation Plc, [1998] AC 854 (Namibian

uranium mine and throat cancer)

• 1995–1997: Ngcobo v Thor Chemicals Holdings Ltd & Desmond Cowley, Times

L Rep 10 November 1995 (mercury poisoning of South African workers)

• 1997: OK Tedi litigation against BHP, Dagi v BHP [1997] 1 VR 428 (claim by

30,000 Papua New Guineans for damages to land in the Supreme Court of

Victoria, Australia)

• 1997–2000: Sithole v Thor Chemicals Holdings & Desmond Cowley, 2000 WL

1421183 (mercury poisoning of South African workers)

• 1997–2003: Lubbe v Cape Plc, [1998] CLC 1559 (CA); [2000] 1 WLR 1545

(HL) (7,500 South African asbestos miners)

• 2004–2011: Hempe & Ors v Anglo American South Africa Ltd, South Gauteng

High Court, Johannesburg Case No 18273/04 (South African gold miners’

silicosis cases)

• 2008–2011: Litigation for alleged oil pollution damage against Shell commenced

74 in The Hague by Nigerian claimants and Dutch NGO, Milieudefensie.

73 Richard Meeran, “Tort Litigation against Multinational Corporations for Violation of Human Rights: An Overview of the Position Outside the United States,” City University of Hong Kong Law Review 3 (2011): 1–41. 74 Oguru, Efanga & Milieudefensie v Royal Dutch Shell Plc and Shell Petroleum Development Co Nigeria Ltd No. 330891/ HA ZA 09-579 2009. The claimants are represented by Professor L Zegveld and M Uiterwaal.

• 2009–July 2011: Guerrero v Monterrico Metals Plc, [2009] EWHC 2475;

[2010] EWHC 3228 (torture/mistreatment of 33 Peruvian environmental

protesters)

• 2011–2011: Bodo Community v Royal Dutch Shell Plc (RDS) & Shell Petroleum

Development Company (Nigeria) Ltd (SPDC), Bodo Community v Shell

Petroleum Development Company of Nigeria Case No HQ11X01280 (claim by

a Nigerian fishing community in Ogoniland for environmental damage caused by

oil leaks)

• 2011: Vava & Ors v Anglo American South Africa Ltd, Claim No HQ11X03245

(South African gold miners silicosis mass tort claim in England)

The above cases show us the type of torts that have been dealt with by courts in different jurisdictions. We can safely conclude that any of these torts, or worse, are possible in

Pakistan. Pakistan must, therefore, be prepared to handle claims within the country or outside it under international law, as the situation dictates.

1.5 Obstacles to Tort Liability: Legal Personality and

Limited Liability

In this section, we will try to show that the twin concepts of legal personality and limited liability acquire a greater role in the protection of the multinational corporations, especially from tort claims. As our aim in this study is to assess the remedies available to victims of torts committed by MNCs, we will briefly compare the concepts of separate legal entity and limited liability in the case of the domestic corporation with those in the case of the multinational corporation.

The creation of companies by registration was introduced in 1844 and the doctrine of limited liability followed in 1855.75 In 1897, in Salomon v Salomon & Co.,76 the

House of Lords gave a decision that cemented into English law the twin concepts of

77 corporate entity and limited liability.

Incorporation gives the company legal personality, separate from its members,

with the result that a company may own property, sue and be sued in its own

corporate name. It will not die when its members die. In many areas of company

law, the legal rules are shaped by and to some extent flow from the concept of

separate personality. Thus, the share capital, once subscribed must be maintained

by the company, it no longer belongs to the members and cannot be returned to

them except subject to stringent safeguards. The rule that for a wrong done to the

company, the proper claimant is the company itself is similarly largely the result of

this principle. The separate personality concept is often spoken of as though it also

necessarily involves the idea that the liability of the company’s members is limited

but of course this is not always so; it is perfectly possible to form an unlimited

company…. It has no limited liability, but under the corporate entity doctrine it will

have separate legal personality. In practice, most companies are limited companies

78 and so corporate personality and limited liability tend to go hand in hand.

More than a hundred years after Salomon was decided, the courts in the UK settled down to the idea that principle of Salomon had to be followed, unless the situation was what was called the “facade” test,79 that is, the shareholders obviously misusing the idea. In Adams v. Cape Industries plc,80 the idea that a court was free to disregard

75 Ben Pettet, Company Law, 2nd ed. (Essex: Pearson Education Limited, 2005), 23. 76 [1897] AC 22. 77 Pettet, Company Law, 23. 78 Ibid. 79 Ibid., 27. 80 [1990] BCC 786.

Salomon merely because it considered that justice so required was firmly rejected and the court gave strong support to the idea that there is really only one well-recognised exception to the rule prohibiting the piercing of the corporate veil and that is that: “[I]t is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts.”81 A number of subsequent

82 cases have generally followed the Adams v. Cape approach.

A company acts through its servants in the context of tortious liability, and it is well established that it is vicariously liable for torts committed by its servants. Companies are sued on this basis.83 The employee who actually commits the act will also be liable as the primary tortfeasor. There are detailed rules here about the liability of a director, but will not pursue the matter further. Until 1944, companies had no general common law liability for crimes, although the principle of vicarious liability had been used to make companies liable for certain “strict liability” offences, where mens rea was not a required element of the offence. The situation changed with DPP v. Kent and Sussex

Contractors Ltd.84 Gradually, criminal liability has been imposed in certain forms.

Corporations may be held liable for manslaughter now, and there is legislation on the

85 issue as well.

As far as justification for limited liability is concerned, those who favour economic analysis maintain that the principle is indispensable for corporations, because it reduces investment risk through the separation of corporate assets and those of its owners and

81 [1990] BCC 786 at 822, as cited in Pettet, Company Law, 26. 82 Re Polly Peck plc, [1996] BCC 486; Re H Ltd, [1996] 2 All ER 391; Yukong Lines Ltd of Korea v. Rendsberg Investments Corp, [1998] BCC 870, as cited in Pettet, Company Law, 26. 83 Ibid., 29. 84 [1944] KB 146. 85 See, e.g., the UK Corporate Manslaughter and Corporate Homicide Act 2007.

promoters.86 It is said to encourage entrepreneurship, reduce monitoring costs, and to ensure the promotion of the market for corporate control by reducing the cost of shares.87 Nevertheless, when limited liability was introduced in 1855, the public debate then had been about whether it was morally justified and efficient.88 According to

Blumberg:

The ultimate triumph of limited liability in England occurred centuries after the

emergence of the corporation as a legal unit. It came more than a century after the

onset of the Industrial Revolution and decades after limited liability had become

generally accepted both on the Continent and in the United States. The English

experience leaves no doubt that the extension of limited liability reflected a

deliberate political decision in response to commercial pressures to achieve

economic objectives. It was not an inevitable conceptual derivation from the

89 separate jurisprudential nature of the corporate legal entity.

Owing to the relatively undeveloped nature of tort law at that time, no consideration was given to how limited liability would impact on someone who was a tort creditor as opposed to a contract creditor.90 As regards contract creditors, it was felt that limited liability is needed because it encourages the channeling of resources into productive businesses.91 “The encouragement is given by enabling the investor who has capital to invest it in the company without having to worry much about the liabilities being incurred by the company. The main argument against this is that limited liability encourages recklessness in business ventures and innocent creditors have to bear the

86 Peter Muchlinski, “Limited liability and multinational enterprises: a case for reform?,” Cambridge Journal of Economics 34 (2010): 915. 87 Ibid., 915. 88 Pettet, Company Law, 27. 89Blumberg, The Search for a New Corporate Personality, 17. 90 Pettet, Company Law, 27. 91 Ibid.

loss.”92 These economic benefits of limited liability cannot be denied, but it is now maintained that the doctrine needs to be restricted “where it is used to shield the owners and controllers of a company against liabilities to third parties, where justice requires that such liability be preserved.”93 In particular, the use of limited liability to shield multinational corporate groups from liability for personal injuries caused by their overseas operations is now being questioned.

Muchlinski maintains that accidents and injuries arising out of the operations of multinational enterprises (MNEs) pose a major problem for the effective development of the global economy and society.94 In particular, he says, the capacity of MNEs to organise their legal form in such a way as to avoid responsibility for harm caused to the victims of such events is a cause for concern.95 What he means is that as compared to the domestic corporation, the multinational enterprise is able to organize itself by splitting up into multiple personalities with separate liabilities. Often, it becomes difficult to identify the true owner or the person truly liable. He says:

In the context of corporate groups, the avoidance of responsibility can be

achieved by interposing a separate legal entity between the victims and the ultimate

controller of the group, be it a parent company or its controlling shareholders. Such

a use of corporate separation can also be used to “hide” the controlling enterprise

from being present in the jurisdiction where the harm has occurred, thereby making

litigation against it harder. Though in legal terms such devices are entirely normal

and useful for the control of investment risks they are also likely to externalise other

96 risks, in particular risk of harm, in morally and socially unacceptable ways.

92 Ibid. 93 Muchlinski, “Limited liability and multinational enterprises,” 915. 94 Ibid. 95 Ibid. 96 Ibid.

Separate legal personality and limited liability thus perform a more complex function when the corporate groups are involved. They try to limit liability to the subsidiary or branch that works locally, and mostly what is available this way to compensate tort victims is not enough.

1.6 Can Pakistan’s Tort Law Face the Challenge Posed by the MNCs?

When a subsidiary of a multinational corporation commits a tort in the host country, the plaintiffs have several options, and the first of these is to sue the subsidiary in the host country.97 “Corporations are powerful global actors that some states lack the resources or will to control. Other states may go as far as soliciting corporations to cooperate in impinging human rights. These realities make reliance on state duties inadequate.”98 The possibility of success of such suits becomes minimal when the system of justice is inadequate and unfair,99 which is the subject of study in this section.

In addition to this, there might be “insufficient capital sources of subsidiaries or the basic problem of company law principles.”100 In other words, this type of action is feasible when the resources owned by the subsidiary operating in the host country are sufficient to meet the tort claims, and the system of justice being administered in the country is not deficient.

97 Muzaffer Eroglu, Multinational Enterprises and Tort Liabilities: An Interdisciplinary and Comparative Examination (Cheltenham, UK: Edward Elgar, 2008), 97. 98 Steven R. Ratner, “Corporations and Human Rights: A Theory of Legal Responsibility,” The Yale Law Journal 111 (2001): 461. 99 Eroglu, Multinational Enterprises and Tort Liabilities, 97. 100 Ibid.

The second option is to sue the parent corporation in their country of domicile. “This seems the only logical option for plaintiffs to be awarded satisfactory compensation.”101

There are many problems of jurisdiction and forum associated with this type of option.

We will discuss this later along with the Alien Tort Act of USA, especially the changing attitude of the US Courts.102 There is yet another option that pertains to group liability, which has not fully developed, but considerable work has been done by writers, like

103 Blumberg, on the possibilities.

The present section will, therefore, be devoted to the state of tort law in Pakistan. If the law of torts itself is inadequate, unjust, and wasteful, then the pursuit of the first option becomes futile. The plaintiffs have nowhere to go in such a case, because it may be beyond their meagre sources to pursue the second option. The law of torts has, therefore, to be developed and improved. The inadequacy of the system may, however, provide an argument of “jurisdiction by necessity,” or some other strategy to bring an action in the home state of the MNC, provided the plaintiffs have the means to do so.

In other words, it may be argued before the Courts in the US and UK that no adequate form is available in the host country. In any case, the state of the law of torts needs to be examined at length to identify its shortcomings, which are a handicap for the plaintiffs suing the MNCs, or any other tortfeasor.

101 Ibid. 102 See, e.g., Jodie A. Kirshner, “Why is the U.S. Abdicating the Policing of Multinational Corporations to Europe?: Extraterritoriality, Sovereignty, and the Alien Tort Statute,” Berkeley J. Int’l Law 30 (2012): 259–302. 103 See, e.g., Phillip I. Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality (Oxford: Oxford University Press, 1993), and Phillip I Blumberg, “Limited liability and corporate groups,” J. Corp. L. 11 (1985): 573.

1.6.1 The Crucial Role of the Law of Torts

The modern world views the law of torts, the law that addresses civil wrongs as distinguished from crimes, as a powerful institution performing a large number of social functions. It is viewed as the primary means of securing rights,104 as a substitute for revenge,105 as a system of compensation,106 as a mechanism for distributive justice,107 and even as a protection against the culpable and unjust invasion of moral rights.108 The powerful role of the law of torts in any legal system is not confined to common law countries, as the most important means for securing the rights of the people, but has been taken up most comprehensively in Europe as well since the end of World War

II.109 In the developed common law countries, the law of torts has made great strides,

104 Stephen Perry, “Torts, Rights, and Risk,” in Philosophical Foundations of the Law of Torts, ed. John Oberdiek (Oxford: Oxford University Press, 2001), 38–64. 105 Scott Hershovitz, “Tort as a Substitute for Revenge,” in Philosophical Foundations of the Law of Torts, ed. John Oberdiek (Oxford: Oxford University Press, 2001), 86–102. 106 Mark A. Geistfeld, “Compensation as a Tort Norm,” in Philosophical Foundations of the Law of Torts, ed. John Oberdiek (Oxford: Oxford University Press, 2001), 65–85. 107 Hanoch Sheinman, “Tort Law and Distributive Justice,” in Philosophical Foundations of the Law of Torts, ed. John Oberdiek (Oxford: Oxford University Press, 2001), 354–386. 108 Gerald J. Postema, “Introduction: Search for an Explanatory Theory of Torts,” in Philosophy and the Law of Torts, ed. Gerald J. Postema (Cambridge: Cambridge University Press, 2001), 1–21. “Reflecting on these substantive and structural features of torts, a theoretically inclined observer might entertain the hypothesis that the primary objective of tort law is to vindicate the moral rights of individuals unjustly invaded by the culpable actions of others and to hold injurers to their moral duties to compensate the losses they wrongfully cause their victims. A moral theory of torts seems to be indicated by the dominant vocabulary of tort. For to act with careless disregard for the rights and interests of others seems not only legally wrong but also a moral failing, and people ought to bear the costs of their moral failings. Tort liability would seem to back up these moral judgments. It punishes these failings and grants redress to those who suffer the harm they cause.” Ibid., 2. The dominant theory in the past has been based on separation of moral vocabulary snd judgements from the law, as in the writings of Holmes (“Path of the Law” Holmes, 1920) and others. Holmes rminded us that law has a logic and life of its own, and only confusion results from taking its vocabulary at face value. According to some writers, therefore, tort theory must begin its theorizing from a resolutely non-moral quarter. John Goldberg and Benjamin Zipursky, “The Moral of Macpherson,” University of Pennsylvania Law Review 146 (1998): 1752–69. 109 “The European Group on Tort Law (formerly also called ‘Tilburg Group’) is a group of scholars in the area of tort law established in 1992. The group meets regularly to discuss fundamental issues of tort law liability as well as recent developments and the future directions of the law of tort. The Group has drafted a collection of Principles of European Tort Law (PETL) similar to the Principles of European Contract Law drafted by the European Contract Law Commission ("Lando Commission").” http://www.egtl.org/ (accessed 15.12.2014). The Group and its various centres have produced yearbooks

and many new torts have been identified with swift remedies. There have been stirrings in India too, especially after the Bhopal tragedy, but the progress is extremely slow.110

In Pakistan, the law of torts left by the British has become shriveled acquiring a shrunken posture leaving the poor and the downtrodden without remedies enjoyed by the rest of the world. The law of torts in Pakistan needs to be resurrected from its grave and given a modern form if the rights of the less privileged citizens are to be protected and secured, especially against such powerful organizations as the MNCs.

Strange as it may sound, many professionals working in senior positions within the legal system of Pakistan can be heard saying that the law of torts does not exist in

Pakistan. Is this true? Is Pakistan not a common law country? Does the common law have nothing to do with Pakistan anymore? Before these questions are answered it may be stated at the outset that incredibly the law of torts has a very limited role to play in

Pakistan. As a result of this, the rights of many people are trampled upon with impunity and the legal machinery is unable to secure these rights. The rich may obtain relief through some mechanism of influence, but it is the poor people who are the main losers and have nowhere to go. The situation calls for immediate redressal and rejuvenation of the law of torts. There are many causes of this neglect, but before we assess the causes it is important to identify how far tort law has lagged behind in this country as compared to the rest of the world. All this, however, is not possible unless we first understand how tort law was introduced in this region and how it has been operating.

on tort and insurance law. See, e.g., Tort and Insurance Law Yearbook—European Tort Law 2007, Helmut Koziol and Barbara C. Steininger eds. (Vienna: Springer-Verlag/Wien, 2008). 110 Galanter, “Legal Torpor,” 293.

1.6.2 The Implementation of Tort Law in British India

The word “tort” it is said was used by Britton, a writer of law during the end of the 13th century, as a title of a chapter on some of the minor offences “De Plusours, Totz.”111

The application of English common law in India started in earnest in 1726, through the

Parliamentary Charter of George I. Mayor’s courts were established in Madras,

Bombay and Calcutta. These courts were required to apply the English common law with “justice and right.”112 The power and influence of the British increased gradually till a Supreme Court of Judicature was established in the Presidency towns, with the authority of King’s Bench in England, applying the law of torts, among other laws, through “justice, equity and good conscience” with adjustments according to local conditions. A variety of courts existed till the Indian High Courts Act, 1861 was passed.

The jurisdiction of British courts and hence the application of the law of torts increased till the partition of India.

We may mention here a 1942 case in which the position of the law of torts in India is made very clear through the statement of the deciding judge. This was a case in which one party wanted to use a highway, but the other party obstructed him. Justice B. K.

Mukerjee held that this was not a case of public nuisance. He then discussed the applicability of the law of torts in India. His statement is quite instructive: “In the case

111 See H. A. L. Fisher, ed., The Collected Papers of Frederic William Maitland: Downing Professor of the Laws of England, vol. 3 (Cambridge: Cambridge University Press, 1911), vol. 2, 400 passim. 112 “The phrase ‘equity and good conscience’ was used to embody the principles by which judges were to be guided when positive rules, statutory or customary, were not forthcoming. To a magistrate who knew no law at all, these words would mean that he might follow his own notions of ‘natural justice’ and he would probably give more satisfaction to suitors than would his more learned brother, trying to apply confused recollections of Blackstone or Chitty. In commercial matters common sense would be aided by the usage of traders. In cases of Tort native custom was not often available, but as the magistrate who dealt out substantial justice would give what the people had rarely obtained from the native courts, they had no reason to complain of the change.” James Bryce, ed., Studies in History and Jurisprudence, vol. 2 (Oxford: Clarendon Press, 1911), vol. 1, 118.

of tort, there being no Indian statutory law, the Indian courts have always adopted the

English common law as being consonant to justice, equity and good conscience. They have departed from the English law only when the applicable rule was unsuitable to the local conditions.”113 The main idea underlying this statement is that the law of torts is to be applied in the light of justice, equity and good conscience. This type of justice usually means the idea of justice as found in the English common law, therefore, when a judgment is to go against this type of justice it is not to be rendered.114 The only justification for going against the common law are the local conditions, which may demand a different course of action.

This situation crossed over into the independent countries of Pakistan and India.

§ 18(3) of the Indian Independence Act, 1947 read as follows:

(3) Save as otherwise expressly provided in this Act, the law of British India

and of the several parts thereof existing immediately before the appointed day shall,

as far as applicable and with the necessary adaptations, continue as the law of each

of the new Dominions and the several parts thereof until other provision is made by

laws of the Legislature of the Dominion in question or by any other Legislature or

other authority having power in that behalf.

This section was adopted in the series of constitutions of Pakistan: 1956, 1962, 1972 (interim).

Article 268 if the 1973 Constitution now reads as follows:

268(1) Except as provided by this Article, all existing laws shall, subject to the

Constitution, continue in force, so far as applicable and with the necessary

adaptations, until altered, repealed or amended by the appropriate Legislature.

113 Surendra Kumar v. Distt. Board, Nadia, AIR 1942 Cal. 360, 365. 114 Nawal Kishore v. Rameshwar, AIR 1955, All 585; Kushal Rao v. B. R. G. Rao, AIR 1942 Nag. 52; Dharni Dhar v. Chandra Shekhar, AIR 1951 All 774; Khusro S. Gandhi v. N.A. Guzdar, AIR 1970 SC 1468.

Later, in India, the trend changed somewhat and it affected Pakistan too. A greater impact in India was due to the Bhopal tragedy. The Indian courts began saying that they will not follow an outdated English common law. Of particular significance is the case of M.C. Mehta v. Union of India.115 There are other cases too that relate to the same or similar issues.116 The English common law thus applies directly in the Islamic Republic of Pakistan through the law of torts, unless the principles or rules are outdated. The broad policy for applying this law is “justice, equity and good conscience,” which really means “judicial discretion” according to the Positivists like Austin. In short, the common law for torts had to be developed by the judges. Let us hope that a tragedy like that of Bhopal is not needed to bring the government and courts of Pakistan to come into action in this area.

In some areas, the law has been codified. These are either torts or related systems of compensation. The Defamation Ordinance, 2002 is a good example. Defamation is a crime too under the Pakistan Penal Code. When codification takes place in some area, as in the case of defamation, the common law may be said to shrink to the extent of the provisions of such codified law, but the common law continues to apply to fill the gaps left in the law. The law of defamation has been codified in the United Kingdom

(Defamation Act, 1996), Australia (Queensland Defamation Act, 2005 and New South

Wales Defamation Act, 2005) as well as in Canada. The Australian codified law, for example, does not attempt to define defamation. This means that the definition of defamation in the common law will apply. The same method applies to Pakistan, that is, if the codified provisions have not altered a common law rule, it will continue to

115 See Judgement Today, Vol. I, January 1, 1987. 116 Waghela Rajsanji v. Sheikh Masluddin, (1667) 14 IA 96; S.N. Roy v. Dinbhandu, 1914 ILR 42 Cal. 469; S. C. Chakravarti v. R.D. De, AIR 1921 Cal. 1; Tiruvengoda v. Tripurasundari, 1926 ILR 49 Mad 728; Ram Chandran v. S. Khan, AIR 1927 Nag. 75; Babu s/o Thakur Dhobi v. Subashi, AIR 1942 Nag. 650; Nawal Kishore v. Rameshwar Nath, 1955 All 594.

apply. An Indian author who tries to indicate the inadequate nature of the law of torts in India spells out certain reasons for underdevelopment, which apply to Pakistan as well. Ananyo Basu says:

The underdevelopment of torts in India may seem at first glance to be in conflict with the very essence of a common law system. In an important sense there can never be lacunae in any area of law in a common law jurisdiction because, to varying degrees, the common law of England and its former dominions and colonies is available for adoption. India’s constitution adopted all existing English law with the proviso of adaptation where necessary. If new rules or statutes from England are more consonant with the requirements of justice, the Indian courts are allowed to discard older common law rules in their favor. Moreover, a common law judge is entitled (within limits) to generate new law as dictated by equity. Lord Scarman in a British opinion made this very point: “The common law …covers everything which is not covered by statute. It knows no gaps: there can be no casus omissus. The function of the court is to decide the case before it, even though the

117 decision ….”

The above passage implies that the judges and lawyers have not being doing what needed to be done, as no statute is required to secure the rights of people. The system knows no “vacuum”; it is a “gapless” system.

117 Basu, “Torts in India,” He also says: “On a first consideration of tort law in India today, the American observer is likely to be struck by its familiarity. Closer inspection, however, reveals some differences in structure and still more in operation. The Indian legal system is a standard common law democratic system. Law is conducted in English with much the same categories and vocabulary as in England and the United States. There is a written (albeit rather voluminous) constitution and there is judge-made common law. The Indian constitution provides all the fundamental rights found in the U.S. Constitution but encourages greater social and economic justice—understandably, since India is more liberal and poorer. In particular, the language of Article 39 (in the section of articles on "directive principles" or what we would call aspirational rather than enforceable laws) is a tribute to the progressive leaders who fought for India’s independence. Thus, in 39(b) we see that the state is exhorted to direct its policy so "that the ownership and control of the material resources of the community are so distributed as best to subserve the common good" and in 39(c) so "that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment." Regrettably there is a gap between these guiding principles and the socioeconomic and legal realities of India. Nonetheless, concern for social justice motivates Indian judges in a way that many Western observers would find surprising if not troubling.” Ibid.

1.6.3 Developments in Pakistan Including Other

Compensation Systems

Though scattered, one can observe that tort law is incorporated in different statutes of

Pakistan including Code of Civil Procedure,118 Code of Criminal Procedure,119 Pakistan

Penal Code,120 Companies Ordinance,121 Workmen’s Compensation Act,122 Fatal

Accidents Act,123 Social Security Ordinance,124 Factories Act,125 Pakistan

Environmental Protection Act,126 Consumer Protection Act,127 and many other legislations.

A century or so ago, the law of tort was the main vehicle for compensation, but poverty, ignorance or economic pressure deprived many persons of access to the law and threw them back on charity or poor law or other cooperative measures.128 In more recent times, the development of social security and insurance has relegated tort law to a more secondary role. This trend is continuing, but in certain cases the law of torts will still continue, especially where the injury caused is based upon fault of the defendant and he must pay for his act. It is not possible to deal with this topic here in detail. Only a few points will be mentioned.

118 The Code of Civil Procedure, 1908 Act No.V of 1908 (21st March 1908) §19 Suits for compensation for wrongs to person or movables, §91 Public nuisance. 119 The Code of Criminal Procedure, 1898 as amended by Act 2 of 1997. §133 Public nuisance. 120 Pakistan Penal Code (Act XLV of 1860) §499 Defamation, §351 Assault, §339 Wrongful restraint, §340 Wrongful Confinement, §441 Criminal Trespass, §279-289 Negligence. 121 Companies Ordinance, 1984 (Act No. XLVII of 1984). 122 The Workmen’s Compensation Act, 1923 (Act No. VIII of 1923). 123 The Fatal Accidents Act, 1855 (Act No. XIII of 1855). 124 The Provincial Employees Social Security Ordinance, 1965 (W.P. Ord. X of 1965). 125 The Factories (Amendment ) Act 2012 (Act No. XIV of 2012). 126 Pakistan Environmental Protection Act, 1997 (Act No. XXXIV of 1997). 127 The Punjab Consumer Protection Act, 2005 (Pb. Act II of 2005). 128 W.V.H. Rogers, Winfield and Jolowicz: Tort, 23.

In the case of loss to property, the state does not do much. In this case, insurance is taking over. Further, three types of insurance deals with life assurance, personal accident insurance, and permanent health insurance. Professionals are also turning to insurance for malpractice protection. Social security is huge and complex. It deals with pensions, non-industrial injuries and industrial injuries like workers’ compensation systems. It is to be noted that the Law and Justice Commission has recommended that the Fatal Accidents Act be repealed, because the same issues are dealt with the qiṣāṣ and diyat provisions.

1.6.4 Selective Codification: Defamation Ordinance and

Consumer Law

The main issue that a common law jurisdiction faces is whether the law of torts should be codified, whether the civil wrongs for which the law will provide remedies should be turned into statutory law. This question arose in British India first. Sir Fredrick

Pollock prepared a draft bill on the request of the British government, but ultimately the Indian government decided not to undertake codification in this area at that time.

The reason perhaps was that the public was not sufficiently educated to understand this law. The real reason though appears to be that government of that time wished to discourage litigation in this area, as is visible from the excessive court-fee129 introduced to discourage such suits.130 It was an excellent effort and worth reading. Perhaps, it can still be used to codify the law of torts. In this chapter, we will have a brief look at

129 It is only recently that the government of Pakistan reduced the court-fee to some extent. 130 The Bill is found as an appendix to his book: “A Bill to define and amend certain parts of the Law of Civil Wrongs.” It consists of 9 chapters and 73 sections. Chapter VII deals with the tort of nuisance, that is, damage arising out of public nuisance and the tort of private nuisance. Pollock, A Treatise on the Law of Torts, 527–83.

whether a tort that has been codified is working to some extent. The description, therefore, follows.

In Pakistan, as in many other countries, defamation is both a crime and a tort (civil wrong), which means that a person accused of defamation may be prosecuted for the crime and he may be subjected to civil litigation for recovery of damages. The criminalised part of this law is codified within the Pakistan Penal Code, and is sometimes considered a masterpiece of legal drafting.131 These sections were adopted by other jurisdictions too, for example, the province of Tasmania, Australia.

Treating defamation as a criminal offence is rejected today by international standards, because it can be used by governments as a threat to curb the media or employed as an arm-twisting tactic. § 11 of the Defamation Ordinance, 2002 provides that “Nothing in this Ordinance shall prejudice any action for criminal libel or slander under any law for the time being in force.” This means that the provisions of the PPC continue to apply as law and defamation has not been decriminalised.132 Many countries continue to retain the crime of defamation, for example, the United Kingdom. It is only a few small countries that have decriminalised defamation. Nevertheless, the UK has not used this provision in the last one decade or more. We may, therefore, conclude that

131 See chapter XXI of the Pakistan Penal Code, 1860. 132Article 19 Global Campaign for Free Expression has laid down the principle that “criminal defamation laws are per se inconsistent with the guarantee of freedom of expression.” See Principle 4. The UNESCO sponsored Declaration of Sana’a declared that “disputes involving the media and/or the media professionals in the exercise of their profession …should be tried under civil and not criminal codes and procedures.” Declaration of Sana’a, 11 January 1996, endorsed by the General Conference by Resolution 34, adopted at the 29th session, 12 November 1997. The rationale underlying these statements is that when a state declares an act to be a crime, it shows that the state has a clear interest in “controlling the activity.” Controlling freedom of expression by the state is not to be approved whatever the reasons advanced. International courts today are also inclined toward the exercise of “restraint in applying criminal measures when restricting fundamental rights,” and international organisations “have made similar calls.” Article 19 Global Campaign for Free Expression, Memorandum on the Defamation Ordinance, 2002, 18.

the trend now is toward decriminalising defamation and Pakistan should think about it too.

The tort of defamation was up until recently governed by the principles of English common law. This law has now been codified in the form of the Defamation Ordinance,

2002.133 The English common law on the issue may, therefore, be said to have “shrunk”

considerably. Nevertheless, the concepts of the common law have not been ruled out

completely. In the United Kingdom (Defamation Act, 1996), Australia (Queensland

Defamation Act, 2005 and New South Wales Defamation Act, 2005) as well as in

Canada (British Columbia), the tort of defamation is governed jointly by statute and the common law. The position may be said to be the same in Pakistan. This means that the common law principles will apply unless the Ordinance has altered a common law rule.

A survey of the cases shows that only the rich can benefit from the law of defamation. There are no cases by the poor against the media or anyone else. In a country where the Press has newfound liberties, a vague and imposed code of ethics, and the public is interested in sensational news, the reputation of the ordinary people is under threat.134 The reasons for this are many and stretch back to the times of the British, who had imposed heavy court-fee for all tort cases in order to save revenue and haul it back to Britain. The poor people are not aware of their rights, and it is difficult to imagine that a destitute person will have the courage or the resources to file an expensive case against the powerful and rich newspapers or the broadcasting stations.

133 The Defamation Ordinance, 2002 appears to have relied on a document produced by the Article 19 Global Campaign for Free Expression Defining Defamation, especially in terms of defining defamation as well as in other provisions like absolute and qualified privilege. For example, the words like “tending to lower the esteem in which they are held within the community, by exposing them to public ridicule or hatred, or by causing them to be shunned or avoided,” within the definition of defamation. The Ordinance also appears to rely on the UK Act of 1996. 134 The behaviour of the electroninc media invading the privacy of the people in search for sensational news bears ample testimony of this.

Out of the forty or more reported cases of defamation that have been heard by the High

Courts and the Supreme Court, in the last decade or more, we have been able to identify

135 only three cases that involve the media.

Article 19 Global Campaign for Freedom of Expression made some recommendations pertain to the decriminalisation of the offence of defamation as well as the Defamation Ordinance, 2002. It is to be hoped that some of these recommendations will be adopted. On the whole, we may say that the Defamation

Ordinance, 2002 is working better than the criminal provisions of the PPC, and there have been more cases under the Ordinance. If notices served under the provisions of the Ordinance, even when the case does not ultimately end up in court, are taken into account we find that codification of an already well known civil wrong has had a healthy impact. Complete codification may, therefore, be a good idea.

Following India, certain laws have been provided to bring relief to consumers. The consumer law passed in the Punjab, like India, has now included medical services within the definition of services, which brings cases of medical negligence under that law.

1.6.5 Causes of Failure of the Law of Torts and Absence of a

Comprehensive Statutory Law on Torts

The causes of failure of tort law can be summarised as follows:

135 These cases are: Hakim Ali v. Messrs Pakistan Herald Publications (Pvt.) Ltd. through Chief Executive and 4 others, (PLD 2007 Karachi 415); Sheikh Muhammad Rashid v. Majid Nizami, Editor in Chief, The Nation and Nawa-e-Waqat, Lahore and another, PLD 2002 SC 514; and Mst. Kaniz Fatima v. Farooq Tariq and others, PLD 2002 Karachi 20.

Court-fee and the British

The British were interested in preserving their revenue that they collected from India.

This required minimum litigation. Accordingly, heavy court-fee was imposed. This discouraged tort claims, and made the protection of the law of torts unreachable for the poor masses. It is only in the last decade that this fee has been reduced to Rs. 25000 and less in Islamabad. The expensive process of litigation still prevents the poor from seeking relief under the law of torts.

Lack of Interest on the Part of Lawyers

Development of law does not only rest on the shoulders of the law makers and judges, but it is also the prime duty of the lawyers. Unfortunately, lawyers in Pakistan have not shown the same enthusiasm for the law of torts as they have done for other areas, especially the criminal law. Lawyers are not skilled enough to apply common law principles to fill in the gaps in existing law. Thus, the very principle of common law

Ubi jus ibi remedium has not been effectively argued by the advocates before the courts, and judges have failed to apply it in the cases pleaded before them. This has resulted in depriving the aggrieved from remedies, which could have been given applying common law principles based on justice, equity and good conscience. This has stunted the growth of the law of torts in our country.

There is also the lack of advice on the part of the advocates to their clients. Lawyers are mostly concerned with their fee and show selfish attitude towards clients’ problems.

They do not bear in mind the role of an educator, which they must perform considering it their obligation as sustainers of law. The result is unnecessary and unwanted litigation. With proper advice on the law of torts, this law can come up as more

preferable choice for the aggrieved, as the victim can get more handsome amount by way of damages under law of torts than under any other substantive law.

The Role of the Doctrines of Champerty and Maintenance

One of the major reasons of the neglect of law of torts in Pakistan are doctrines of champerty and maintenance, which needs to be abolished forthwith in order to revive interest in this field and to secure the rights of the poor. The rich may obtain relief through some mechanism, but it is the destitute who is the main loser and has nowhere to go. Doctrine of champerty means that a lawyer who maintains the litigation for a person will get his reward from the damages awarded to the litigant. Maintenance, on the other hand is “stirring up of litigation by giving aid to one party to bring a claim without just cause or excuse.”136 These doctrines were introduced to snub frivolous litigation or a mechanism to encourage the settlement of disputes without recourse to litigation. But in recent times, both of these doctrines have been resisted and given away. The United Kingdom has also abolished the doctrines of champerty and maintenance, both as torts and crimes.137 Champerty has its practical importance “to invade contingency fee arrangements.”138 Contingent fee is an arrangement between a lawyer and his client for the payment of fee only if the client wins the case. If a lawyer agrees to represent a client under a contingency fee agreement, which should not be confused with a “conditional fee agreement,” the lawyer will be able to claim a percentage out of any damages awarded to the litigant including litigation expenses.

But if the client loses the case, he does not have to pay anything to the advocate. In the

UK such an arrangement was considered against public policy, but since April 2013,

136 W.V.H. Rogers, Winfield and Jolowicz: Tort (London: Sweet & Maxwell, 2006), 876. 137 Sections 13(1)(a) and 14(1) of the Criminal Law Act, 1967 as cited in Ibid. 138 Conditional fee means that the client can pay later, on completion of the court proceedings. There was no problem with this, and §58 of the UK Courts and Legal Services Act 1990 recognizes such an arrangement.

under the Damages-Based Agreements Regulation of 2013,139 contingency fee agreements are now permitted in the United Kingdom. The United States has also abolished champerty and maintenance doctrines, but contingent fee is also permitted.140

141 Canada has also tried to follow the US in this field.

Thus in modern times, contingent fees are allowed in many states including

Australia, Brazil, the Dominican Republic, France, Greece, Ireland, Japan, New

Zealand, United States and United Kingdom.142 Such arrangements provide access to the law courts for those who cannot afford to pay lawyers’ fee and cost of litigation.

However, in Pakistan these doctrines still prohibit such arrangements. Considering the position of the modern states especially United Kingdom, it is suggested that doctrines of champerty and maintenance should also be abolished in Pakistan and contingency fee agreements should be allowed in tort cases. This will help in securing the rights of the poor who do not have means to go to the law courts and their tort claims are lost. This will open new avenues for the development and growth of law of torts in

Pakistan.

No Codification

Sir Fredrick Pollock prepared a draft and presented it as a proposal to the Indian government for codification. This proposal was not accepted. The Bill is found as an appendix to his book: “A Bill to define and amend certain parts of the Law of Civil

139 This regulation came into force on 1st April 2013. 140 Saladini v. Righellis 426 Mass. 231. In 1997, the Massachusetts Supreme Court in Saladini v. Righellis ruled that the doctrines of maintenance and champerty “no longer shall be recognized in Massachusetts.” The court reasoned that: “The champerty doctrine is [no longer] needed to protect against the evils once feared: speculation in lawsuits, the bringing of frivolous lawsuits, or financial overreaching by a party of superior bargaining position.” The Supreme Court of South Carolina adopted the Saladini analysis in Osprey v. Cabana Limited Partnership in 2000. 141 See, e.g., Walter C. Williston, “Contingent Fee in Canada,” Alta. L. Rev. (1968) 6:184. 142 Herbert M. Kritzer, Risks, Reputations, and Rewards: Contingency Fee Legal Practice in the United States (Stanford: Stanford University Press, 2004), 258-259.

Wrongs.” It consists of 9 chapters and 73 sections. Chapter VII deals with the tort of nuisance, that is, damage arising out of public nuisance and the tort of private nuisance.143 It was an excellent effort and worth reading. Perhaps, it can still be used to codify the law of tort.

The Need of Statutory Law on Torts

Codification is a means through which the masses become familiar with the law. As

stated above, people are less interested in the law of torts because it has not been reduced into writing in the form of a statute. The provisions which are found in different legislations are not known to a layman. The reason for the success of other laws is

mainly codification. Defamation Ordinance 2002 is a recent example. The litigation initiated under Defamation Ordinance 2002 reflects that people are more concerned about laws that are codified, even though its provisions were already included in PPC.

In modern times, there is trend of codifying law of torts. We have instances of

European tort law which is being codified extensively. Tort law of China is also an

144 important example in this area.

We also need to codify law of torts so that it can surface as a clear law, and its provisions can be meted out from a single code, which will be convenient and thereby informative as far as rights of the people are concerned. Statutory law is superior to case law, says Salmond.145 This law could not gain popularity amongst our people, unlike other laws such as criminal law, as it lies scattered in precedents and in some statutes, and unfortunately remains uncodified even in the modern times. There is no

143 Pollock, A Treatise on the Law of Torts, 527–83. 144 Tort Law of the People’s Republic of China, (Adopted at the 12th session of the Standing Committee of the Eleventh National People’s Congress on December 26, 2009). It came into force on July, 1st 2010. 145 John Salmond, Jurisprudence, 12th edition (Sweet & Maxwell, 1966), 129.

harm in codifying the law of torts in Pakistan. In fact, it is time for the legislators to think seriously about it and take positive steps for its codification.

1.6.6 Major Torts in the Common Law World That Need to be Implemented

Almost all of the intentional torts to person are recognised in Pakistan under criminal law like assault,146 battery,147 false imprisonment,148 but suit for civil remedy is very rare.149 The tort of intentional infliction of emotional distress is similarly not covered entirely. Damages for mental or emotional distress are generally claimed under torts of malicious prosecution or defamation. These damages are secondary to injury but there can be other ways to sue directly for damages of emotional distress. Intentional torts to property are well recognised comparatively and most civil litigation can be witnessed relating to dispossession of movable and immovable property,150 which covers trespass and conversion of property as well.

One of the most important torts is the tort of negligence, which is recognised in

Pakistan both under civil and criminal laws. But neither there are many cases nor people are interested in taking action due to lack of awareness and the provisions being dispersed under different laws. Same is the case with strict liability, which is part of criminal law but not sufficiently taken up under civil law. Likewise, remedies for public nuisance can be found under civil and criminal laws, but for tort of private nuisance injunctive measures are available under civil procedural law with hardly any civil

146 Section 351 PPC. 147 See, Section 350 Criminal Force, PPC. 148 See, Chapter XVIA, PPC, Section 339 Wrongful restraint and Section 340 Wrongful confinement. 149 §19 Suits for compensation for wrongs to person or movables, CPC. 150 Sections 16-20, CPC deal with territorial jurisdiction for filing suits concerning movable and immovable property.

actions. All of these torts are recognised, whether more or less but knowledge of most of these is confined to books and has not been translated into action due to lack of codification.

The invasion of the right to privacy is a tort of recent origin. However, the courts in

Pakistan have started taking notice of this tort. “Right of Privacy” is not mentioned in chapter one of the Constitution of Pakistan discussing fundamental rights. But the courts have discussed Article 14 in several cases in the context of privacy of home.

Article 14(1) says, “The dignity of man and, subject to law, the privacy of home, shall be inviolable.” In one significant case, M.D. Tahir, Advocate v. Director, State Bank of

Pakistan, Lahore and 3 others,151 the courts have discussed Article 14 in more general way.

In this case State Bank issued a circular to provide information of remunerative accounts to the CBR (now FBR) in order to help it “widen the tax net” and “to prevent tax evasion.” The learned Court questioned, in detail, the authority of the State Bank to issue such a circular, and then held, “Such eventual consequences tend to show that this measure of the nature of subordinate legislation suffers from visible legal defects and is held bad on grounds of unreasonableness as well as being discriminatory in nature and thus ultra vires Articles 4 and 25 of the Constitution of Islamic Republic of

Pakistan, 1973.” The Court then turned to an examination of the constitutional aspects of the measure within the context of Article 14. In a highly instructive discourse, the learned Court expanded the meaning of Article 14 to cover not only the privacy of the home, but other aspects of the right to privacy. The Court stated that “This Article of the Constitution corresponds to Article 21 of the Indian Constitution that has been held

151 2004 CLD 1680 (Lahore).

to be crucial to the functioning of a democratic and free society.” Discussing the right of privacy in the context of wire-tapping, privacy of an unchaste woman and other aspects, the Court held that “it is clear that the people in Pakistan have a right not to have their private financial matters given in good faith under fiduciary relationship to

Banks placed before the prying eyes of tax collection agencies without even an allegation of any wrong.”

The jurisprudence of the right to privacy in Pakistan is yet to emerge in a complete form. Attached to this right is also the tort of privacy. It includes news-gathering related legal issues and publication related violations. The journalists conduct news-gathering activities violating the privacy of the individuals.152 Such unreasonable intrusion in law allows the imposition of damages and penalties even when the claimant may not be able to prove any monetary loss or damage. Publication related violations are based upon the idea that “some facts about people are so intimate, embarrassing and private, or so misleading and offensive, that they should not be published, thus giving rise to publication based right of privacy claims.”153 These acts need to be restricted in

Pakistan and this will be possible through codification of law of torts.

Interference with business relations154 is another tort which needs to be recognised in Pakistan. It is a type of tort wherein a third party intentionally acts to cause one party in a business relation to violate business relations with the other. There can be an existing valid contract or valid business expectancy.

152 This occurs when the journalist unreasonably intrudes—physically, electronically, or otherwise—upon an area in which that person has a reasonable expectation of privacy. These news- gathering activities include trespass, intrusion, surveillance, and recording of conversations/eavesdropping. 153 Publication related violation includes two torts: public disclosure of private facts and false light. 154 It is sometimes also called “Tortious Interference of Business” or “Interference with Prospective Contract.”

Products liability is also one of the important categories of torts. Strict liability may be imposed if damage is caused by the products. This has been codified in Pakistan under consumer protection law but it needs to be recognised as tort too. The damages awarded under consumer law are of lesser value, considering it a wrong of strict liability.

The law of torts in Pakistan, then, needs to be resurrected from its grave and given a modern form if the rights of the less privileged citizens are to be protected and secured. To elaborate the nature and need of such a resurrection, we began with the description of the law of torts operating in Pakistan. The nature of remedies for torts in the days of the British was explained and then the way they operated in Pakistan was described at some length. It was pointed out throughout the above paragraphs that this law has failed to grow and provide relief to the poor and the injured. Indeed, the operation of the law of torts in Pakistan is highly inadequate, for which the judges and lawyers are equally to blame. To remedy the situation, the law of torts must be codified forthwith and a whole programme be started to educate the common man about his rights under this law.155 In addition to this, the law that grants protection against tort claims to utilities and state institutions will have to be altered. A tremendous struggle, thus, lies ahead.

1.6.7 Pakistan’s Tort Law and the MNCs

The brief description of the law of torts in Pakistan, and its inadequacy to deal with normal tort cases, shows that the legal system is ill equipped for dealing with the

155 The present writer has already initiated such a project and work on a “Draft Bill of the Law of Civil Wrongs” is already underway. Once the draft is ready it will be distributed among the leading legal personalities in the country and also sent to legislators, both federal and provincial. It is to be hoped that once such a law is codified and implemented, the poor and downtrodden of this country will be heard—through the law.

powerful MNCs that operate in this country. These large corporations have huge resources and armies of highly skilled lawyers at their disposal, and it is very easy for them to pick loopholes in powerful legal systems of the West. As compared to them, the system of torts in Pakistan must be appearing to them like a puny obstacle to be brushed aside. The analysis above, and the excessive power of these corporations, sends us a clear signal that this study must be taken up earnestly, and adequate remedies be found to deal with this colossal problem—before a tragedy strikes some poor segment of Pakistani society.

1.7 Signifcance of This Study and the Methodology Adopted

The Western world with such highly developed legal systems and sophisticated ways of handling legal problems, is grappling with the problem of MNCs and their torts. At the international level, the law has been compelled to grant many facilities to the multinational corporations, but when it comes to imposing duties on these powerful organizations international law appears to have failed. As compared to all this, the level of jurisprudence in corporate law in Pakistan is still in its infancy. When we write something in the statute book, it does not mean that it is being implemented or everything has become ordered. Take the case of insider trading. The law has been made but we cannot even dream of implementing it in the way it is done in the West.

In most improvements in the law, Pakistan follows the Indian lead. India, however, has suffered a terrible tragedy, and even after protracted litigation, which had to move abroad, the compensation given to the poor victims was inadequate. The Indian law and the Courts have begun to improve their own law. Where tort law is not moving swiftly, they have taken other action, as in the case of consumer law. As a result of this effort,

a recent judgment awarded more than $6 million as damages for medical negligence.156

This shows that India is on the move and will soon be in some position to deal with the

MNCs. India has to do it, because it has its own multinational corporations now against whom tort claims will soon be landing in India. What position can be taken by Pakistan and where does it stand in all this?

The law of torts in Pakistan is highly inadequate and underdeveloped. This law is not fit enough to deal with our domestic corporations, or even torts by individuals, so how can it handle torts by such powerful organizations as the MNCs are today. The measures and solutions that we look for must take the whole situation into account and then project it to the situation in Pakistan. If the final conclusion comes up with the total inadequacy of this tort law, then other avenues should be explored. It does not measure if these proposals take us into other jurisdictions or place us at the mercy of the international laws and institutions.

In studying the whole area and its problems, the point that must never be overlooked is that if Pakistan becomes very harsh with these MNCs, they will run away and take their investments elsewhere. Thus, if our courts treat them like private companies and pierce the corporate veil all the time then this will discourage them and they will leave this investment starved country. Will it be possible to enforce such a decision against the people at their headquarters? Here we cannot compare ourselves with India, for

India is a very big market, and we are not. The harshness they displayed, which was displayed after the sudden tragedy, has been forgotten soon due to the size of the Indian market and its attraction for the foreign investor. Corporations might be attracted to

156 Dr. Balram Prasad v. Dr. Kunal Saha & Others, Civil Appeals No. 2867, 692, and 2866 of 2012.

them in their greed for access to a very big market, but they may not care for a much smaller market. Pakistan is, therefore, in deep waters and must tread very carefully.

A major goal of this study, then, is to identify the whole problem of the MNCs and to attempt a presentation of the problem that the legal fraternity and the rulers will understand. The methodology must be designed accordingly. The first task must be to show that the MNCs are at our doorstep, but we are sitting in a state of oblivion with a worn out law of torts. This has been done in this chapter. It is equally important to make our legal minds wake up to the realization that the MNCs have acquired tremendous power in the world since the East India Company. These MNCs are now in Pakistan in considerable numbers and are working in every important area of the market exploiting and using our resources. If they are present in Pakistan, then what benefits do they bring in their wake and what dangers? This will be done in the next chapter.

The next two chapters will deal at length with the twin concepts of separate legal personality and limited liability. The main idea is to highlight for the judges in Pakistan what kind of views are being expressed by authorities in other jurisdictions and what decisions are being handed down by their courts. Are the courts in Pakistan ready to pierce the corporate veil of the MNCs in case of torts and are they ready to reject limited liability for the MNCs that have committed torts? These two chapters will consider the possibilities.

The next two chapters, preceding the final small chapter on conclusions, will deal with the possible solutions, that is, solutions that are possible for Pakistan. The first of the two chapters on solutions will deal with the domestic option, and the possibility of taking tort claims to the countries of domicile of the corporations. In addition to these two major objectives, other solutions like CSR, taxation provisions, codes of conduct

and other measures will also be considered. The second of the two chapters will be devoted to solutions that are being advocated under international law, including environmental concerns and human rights. The purpose will be to see how best Pakistan can follow what is proposed, while linking such proposals to the law of torts remedies discussed in the previous chapter. This will take into account the need of Pakistan for investment and its beneficial dealings with MNCs. The last chapter will gather the conclusions of the entire study.

CHAPTER 2 THE CHANGING SHAPE OF THE MNCs AND PRESENCE IN PAKISTAN

2.1 The Origins of Multinational Corporations

The first multinational corporation, that was destined to be the most powerful in the world for several centuries, arrived in what was later called the Indo-Pakistan Sub- continent in 1602 at the court of Jahangir the Mughal emperor, and then concluded the first trade agreement with the Mughal Empire in 1618.157 Examining the growth of such

157 Robins, The Corporation that Changed the World, xiv. The chronological events are recorded by Nick Robins as follows: 1498 Portuguese fleet led by Vasco da Gama arrives off the Malabar coast; 1595 Dutch Compagnie Van Verre established to take the ocean route to the East; 1600 31 December: English East India Company (EIC) established; 1602 Formation of the Dutch Verenigde Oostindische Compagnie (VOC); 1618 English Company negotiates first trade agreement with the Mughal Empire; 1623 EIC merchants executed at Amboina (Indonesia) by VOC forces; 1639 Fort St George at Madras established by the English Company; 1648 The EIC moves headquarters to East India House at Leadenhall Street; 1657 The EIC becomes a permanent joint stock corporation; 1668 Bombay transferred to the EIC by King Charles II; 1681 Josiah Child first elected as EIC governor (chairman); 1686-89 Child launches war with Mughal Empire; 1690 Company establishes new base in Bengal at Calcutta; 1695 First parliamentary investigation into Company corruption; 1698 Parliament awards monopoly of Asia trade to the New Company; 1709 Merger of New and Old Companies finalised; 1717 Company receives comprehensive trade privileges (firman) in Mughal India; 1721 Bubble in South Sea Company shareprices implodes; 1729 Qing Empire bans import of opium except for medicinal purposes; 1751-52 Robert Clive wins siege of Arcot; 1756 Calcutta captured by Nawab of Bengal and “black hole” incident; 1757 February: Recapture of Calcutta by EIC 23 June: EIC troops under Clive defeat the Nawab at Plassey; 1764 EIC defeats an alliance of Mughals, Bengal and Awadh at Buxar; 1765 Clive acquires the management of the Bengal treasury (diwani) for the EIC; 1769 Peak of “Bengal Bubble” in the Company’s shares; 1770 Bengal Famine: between 1 and 10 million die of starvation; 1772 Company appeals to government for financial assistance; 1773 Regulating Act passed to reform EIC governance, and Warren Hastings becomes first Governor-General of India. Tea Act passed to encourage sale of EIC tea in the Americas; in December, American patriots dump EIC tea in Boston harbour; 1776 Publication of Adam Smith’s Wealth of Nations; 1778 Spiridione Roma’s Offering installed at East India House 1780 Duel between Philip Francis and Warren Hastings in Calcutta; 1781 Hastings sends shipments of opium to China; 1783 Failure of Charles James Fox and Edmund Burke’s East India Bill; 1784 William Pitt’s India Act passed, increasing state powers over the EIC; 1788 Start of impeachment trial of Warren Hastings in the House of Lords; 1793 “Permanent Settlement” of Bengal’s finances and new Charter Act, breaching Company trade monopoly for first time; 1795 Warren Hastings acquitted at impeachment trial; 1799 Dissolution of Dutch VOC, and conquest of Mysore by EIC; 1806 Opening of new East India Dock; 1813 Company loses monopoly of trade with India; 1833 Parliament ends the Company’s commercial operations; remains as territorial administrator in India; 1839-42 First Opium War between Britain and China; 1856-60 Second Opium War, resulting in legalisation of opium in China; 1857 Outbreak of Indian Mutiny or First War of Independence in northern India; 1858 Parliament replaces Company with direct British rule in India; 1861 East India House demolished; 1874 1 June: Dissolution of English East India Company. Robins, The Corporation that Changed the World, xiv-xv.

companies Geoffrey Jones says that merchant enterprise, trading goods and services between communities, is the oldest form of international business, extending back thousands of years.158 He points out that between the sixteenth and eighteenth centuries large integrated firms known as “chartered trading companies” used to trade between

Europe and the rest of the world on the basis of monopoly government contracts.

Keeping this in view, “the English and Dutch East India Companies, and the Hudson’s

Bay Company have been regarded by some as the first ‘modern’ multinationals.”159

These European chartered trading companies had largely disappeared by the mid- nineteenth century, as government monopolies were dismantled, but much European and Japan trade continued to be intermediated by trading firms.160 Speaking from the perspective of Pakistan, then united India, we may state that one of the first multinational enterprises, the East India Company, landed in India and began a saga that led to the growth of the MNCs of the world into complex networks of parents, subsidiaries and holding companies that returned after the age of colonization to the newly independent states like Pakistan in many new forms practicing innovative guiles to drain away vital resources while apparently helping these countries with the people of these lands being mostly unaware of the magnitude of the presence of these powerful organizations. It is this sequence of events that we shall trace in this chapter starting with the origins of the MNCs, their phenomenal growth, departure and then return to countries like Pakistan in various forms.

The MNCs of those early times appear to have most of the features that MNCs have today. These features are similar in terms of the broad goals and strategies, and sometimes in the wrongs or torts committed, even if they differ in terms of certain

158 Jones, Merchants to Multinationals, 2. 159 Ibid. Jones relies on considerable literature to make this point. 160 Ibid. This can be seen from the chronological facts provided in the footnote above.

modern structures. Nick Robins makes this fascinating statement to indicate the similarity of features:

Like so many high profile corporate ventures since, the takeover of Bengal

proved to be an acquisition too far for the East India Company. Initial stock market

euphoria quickly gave way to excess, mismanagement and collapse. As the

Company transformed itself from a modest trading venture into a powerful

corporate machine, its systems of governance completely failed to cope with the

new responsibilities it faced. Oppression of local weavers and peasants became the

norm. Military spending spiralled out of control as adventurers took over from

traders. Corruption assumed epidemic proportions and speculation overtook its

shares, stoked up by Clive and others. Then, in 1769, conflict in south India rattled

nervy investors, sending its share price into free fall. Financial crisis stalked Europe

and the Company faced bankruptcy. Across the world in Bengal, drought turned to

famine as Company executives profiteered from rising grain prices. Plays,

pamphlets and poems poured from the presses back in Britain to pillory the

Company and its executives. Company executives became caricatured as grasping

Nabobs (or Nobs), the Yuppies of Georgian England. Like many of his

contemporaries, the Glasgow Professor of Moral Philosophy, Adam Smith, was

horrified at the way that the Company “oppresses and domineers” in the East

Indies.161 Parliament was forced to intervene, while over the Atlantic in Britain’s

American colonies, patriots focused on the Company’s tea as a symbol of

oppression. For one “Mechanic” appealing to the tradesmen of Pennsylvania,

America was faced with “the most powerful Trading Company in the Universe,” an

institution “well-versed in tyranny, plunder, oppression and bloodshed.”162 On the

night of 16 December 1773, patriots dressed as “Indians” dumped East India

161 Adam Smith, Inquiry into the Wealth of Nations, book I, chap. VIII (New York: The Modern Library, 1994 [1776]), 84. as quoted by Robins, The Corporation that Changed the World, 4. 162 “To the Tradesmen and Mechanics of Pennsylvania,” 4 December 1773 as quoted by Robins.

Company tea into Boston harbour, the symbolic start to the American War of

163 Independence.

The above statement shows that all the ingredients of a modern MNC. Thus, it shows the brutal acquisition of profit, the struggle for markets, the domination and monopolization of resources, the manipulation of stock markets, and above all a global reach. The company is also guilty of major torts like famine along with the callous killing of humans in incidents like the black-hole tragedy. After gross mismanagement, just like the failing banks today, the company asked the government to finance its foolishness. The most outstanding feature of the company is its global reach from India to China to the United States. Even Adam Smith recognizes in those early days that the company “oppresses and domineers.” and the Americans recognize that the company is “the most powerful Trading Company in the Universe,” an institution “well-versed in tyranny, plunder, oppression and bloodshed.” Are these the virtues of some or all of the MNCs today. It is difficult to say, but we might come across some such incidents when we take up the discussion of torts committed by MNCs. Nick Robins has given the following map of the range of the company’s operation.

163 Ibid., 4-5 (Robins).

Examining its global reach semi-sovereign power, Robinson says that “England’s East

India Company is the mother of the modern corporation.”164 For more than two and a half centuries of its existence, it served the mercantilist world of chartered monopolies and the industrial age of corporations accountable solely to shareholders.165 Robinson adds that the Company’s establishment by royal charter, its monopoly of all trade between Britain and Asia and its semi-sovereign privileges to rule territories and raise armies certainly mark it out as a corporate institution from another time.166 “Yet in its financing, structures of governance and business dynamics the Company are undeniably modern. It may have referred to its staff as servants rather than executives,

164 Ibid., 5. 165 Ibid. 166 Ibid.

and communicated by quill pen rather than email, but the key features of the

167 shareholder-owned corporation are there for all to see.”

It may have been the mother company for modern MNCs, but the East India

Company was not the only company as has been indicated above. In 1595 Dutch

Compagnie Van Verre was established to take the ocean route to the East. In 1602, the formation of the Dutch Verenigde Oostindische Compagnie (VOC) took place. The

English Company had on occasions lagged behind its Dutch rival, and even faced tough competition from new French Compagnie des Indes. As stated by Jones, and mentioned above, the English and Dutch East India Companies, and the Hudson’s Bay Company have been regarded by some as the first “modern” multinationals.168 The impact of the rivalry and competition between these companies was colonialism. “Colonial rule was certainly the final outcome of the Company’s adventurism in Asia. But it was the hunt for personal and corporate profit that had drawn the Company inexorably on. The results of this enduring dynamic were world-shattering. By the time of its demise, the

Company had changed the course of economic history, reversing the centuries’ old flow of wealth from west to east.”169 These European chartered trading companies had largely disappeared by the mid-nineteenth century, as governments stepped in with direct rule, but much “European and Japan trade continued to be intermediated by trading firms.”170 Thus, before disappearing, these companies had laid bare the design and established the foundations of what was to come. Pakistan, then part of undivided

India, has a joint history with the East India Company and still remembers how these companies operate.

167 Ibid. 168 Jones, Merchants to Multinationals, 2. 169 Robins, The Corporation that Changed the World, 5. 170 Jones, Merchants to Multinationals, 2.

2.2 Growth, Globalization and the Corporations

By the time the English East India Company was dissolved in 1874, company law had developed considerably and had acquired its full features.171 This was followed by rapid growth in the law as well as industries and companies. The age of globalization and

MNCs set in till such time that declaration of MNCs as subjects of international law came to be considered seriously. Today, Janet Dine, a well known writer on company law, has the following to say: “My colleagues have commentated frequently on my propensity to see a company law illustration for (nearly) any issue under discussion, accusing me of expecting company law to ‘take over the world’. This is the book where

I discover that not company law but companies have all but done so and confront us with the frightening reality of polarisation of incomes and the globalisation of poverty.

The ‘heart’ of the book lies in the discussion of groups of companies operating on a global basis and out of regulatory control.”172 The learned author is saying that

“corporate groups” of MNCs have all but taken over the world. We will return to the growth of MNCs and corporate groups, but before that we may briefly describe the growth in the law around the time the East India Company was about to be dissolved.

It is, however, not our purpose here to go into the detailed history of this law.

There are others who trace this growth of the multinationals from these earlier companies. Thus, an influential book says: “The multinational corporation does have a history, and the MNCs do change over time, as Mira Wilkins so convincingly shows in

Chapter 2. Thus, she identifies a line stretching from the British and Dutch East India

171 See Robins, The Corporation that Changed the World, xiv-xv. 172 Janet Dine, The Governance of Corporate Groups (Cambridge: Cambridge University Press, 2003), xix.

Companies of the 17th century to the leviathans of our own time.”173 The authors maintain that today a new kind of Leviathan has risen from the depths of humanity’s creative powers—the multinational corporation. In its embryonic state, they explain, it is found in multinational enterprises (MNEs), the first wave of the modern global economy, which began in the 1880s in the wake of the Industrial Revolution and modern empires.174 This development then took mature shape in a second wave in the multinational corporations (MNCs) of the 1970s.175 Both in number and power, they add, these multinational phenomena have made a qualitative change in our economic world by the time of the new millennium.176 Quoting a United Nations statement, they maintain that “a few years ago …[out of] the 100 entities with the largest gross national product (GNP), about half were multinational corporations (MNCs). This meant that by this measure these big MNCs were larger and wealthier than about 120 to 130 nation-

177 states.”

In Pakistan, following England, the term “company” has been used instead of the more common “corporation” that is used in the United States. In recent times, also following England, the term corporation has become quite common. Some universities have chairs of “corporate” law, and courses on company law in American universities

173 Chandler and Mazlish, “Introduction,” 3. Mira Wilkins, however, also has the following to say: “I believe that to a significant extent there was a wide divide between the modern MNEs and their many precursors. The modern MNEs of the 19th (particularly late 19th) and 20th centuries have had a formidable impact on globalization. The MNE integrates the world economy in a manner that differs from trade, finance, migration, or technology transfer; it puts under one organizational structure a package of ongoing relationships—transfers of goods, capital, people, ideas, and technology. Moving internationally from the more advanced parts of the world through the MNE are business culture, practices, perspectives, and information along with products, processes, and managers.” Mira Wilkins, “Multinational Enterprise to 1930: Discontinuities and Continuities,” in Leviathans: Multinational Corporations and the New Global History, ed. Alfred D. Chandler and Bruce Mazlish (Cambridge: Cambridge University Press, 2005), 51. 174 Chandler and Mazlish, “Introduction,” 2. 175 Ibid. 176 Ibid. 177Ibid., 1.

are usually called “Corporations Law” and their legislation, state “corporations” statutes.178 The early joint stock companies used “company” and the word was part of the title of the statute that was the foundation of modern company law, the Joint Stock

Companies Act 1844.179 “Since 1862 the statutes have been entitled ‘Companies Act’ and their provisions invariably refer to ’company’ and ’companies’. Nearly all the textbooks speak of ’company law’ and university courses are usually similarly titled.”180 The modern Companies Acts makes it clear that a company is a corporation.

Thus, for example, s. 13(3) of the Companies Act 1985 provides that the effect of registration under the Act is that from the date of “incorporation” the members of the company “shall be a body corporate,” and the word “corporations” is a wider concept than “companies.”

According to Muchlinski, historically, the first types of enterprises to carry the name “company” were the chartered trading companies of the 16th and 17th centuries.181 Incorporation by charter served not only to provide a trading monopoly for the founders, it also granted them governmental power over the foreign trading territory in question without which they could risk criminal prosecution under the law of conspiracy.182 “This type of organization can be seen as the forerunner of modern corporations to the extent that it involves the creation of a legal entity separate from its

178 Pettet, Company Law, 14. 179 Ibid. 180 Ibid. 181 Peter Muchlinski, “Corporations in International Law,” in Max Planck Encyclopedia of Public International Law, ed. Rudiger Wolfrum (Oxford, UK: Heidelberg / Oxford University Press, 2012), 1.See also C.T. Carr ed. Select Charters of Trading Corporations: AD 1530-1707 (Selden Society London 1913); M Schmitthoff, “The Origin of the Joint Stock Company” University of Toronto Law Journal 3 (1939-40): 74-96; L.C.B. Gower, Principles of Modern Company Law, 4th ed. (London: Stevens, 1979). 182 Muchlinski, “Corporations in International Law,” 1. See also R. E. Tindall, Multinational Enterprises: Legal and Management Structures and Interrelationship with Ownership, Control, Antitrust, Labor, Taxation and Disclosure (Oceana Dobbs Ferry New York 1975).

membership. However, it is an entity designed to regulate trade and to confer public law powers upon the enterprise, so that it could perform governmental functions in the foreign trading territory, and so is a hybrid organization displaying both commercial and constitutional characteristics.”183 This is distinct from a purely commercial enterprise in that its functions involve more than just the making of a commercial profit but also the proper provision of public services. Such entities may be seen as

“compound corporations” (compounding of private and public law) governed by both

184 private and public law.

English company law has mainly been concerned with the creation and operation of registered companies, that is, companies with separate legal personality created by the process of registering them with the Registrar of Companies under the Companies

Act 1985 first and now under the 2006 Act. This facility of creating companies simply by registration has been available in England since the Joint Stock Companies Act

1844.185 Companies were created by Royal Charter before this, or by a special Act of

Parliament. “These forms of company became common in the 16th century and were called ‘joint stock’ companies because the members of it contributed merchandise or money, and the company traded with the outside world as an entity distinct from the members. At first these companies were colonial companies, formed mainly to open up trade with new colonies, but by the late 17th century most of the new companies were created for domestic enterprises.”186 The early 18th century saw many speculative flotations and various types of company and a stock market collapse. In 1720 when the share price of the South Sea Company collapsed, the event came to be called the South

183 Ibid. 184 Ibid. 185 Pettet, Company Law, 9. 186 Ibid.

Sea “Bubble” because once it burst, there was nothing in the form of assets. This led to legislation designed to prevent the large partnerships from acting as though they were companies. “Known as the Bubble Act, it was not repealed until 1825, by which time it had been realised that it was economically desirable to permit the easy creation of companies. It also soon became necessary to clarify the status of the many partnerships which had now begun to flourish. In England, legislation in 1844 permitted incorporation by registration for the first time and limited liability was made available in 1855.”187 The said provisions were re-enacted in the Joint Stock Companies Act

1856, and in 1862 this and other subsequent legislation was consolidated in the

Companies Act 1862. Thereafter, the growth of company law followed a pattern which

188 continues to the present day.

A global map of multinational was planned and produced in 2003,189 however, work on the map was started in the 1990s. Referring to this map, the authors quoted earlier say: “When this project of mapping began in the 1990s, about 37,000 MNCs existed.

As of 2002, there were around 63,000. Their power and effects are almost incalculable—not only to the economy but also to politics, society, culture, and values.

Multinational corporations have an impact on almost every sphere of modern life from policymaking on the environment to international security, from issues of personal identity to issues of community, and from the future of work to the future of the nation- state and even of regional and international bodies and alliances.”190 They go to the extent of adding: “We might inquire into the assertion that the nation-state itself is in the process of being displaced by the MNCs, losing its authority to those ‘more

187 Ibid. 188 Ibid. 189 Medard Gabel and Henry Bruner, Global Inc.: An Atlas of the Multinational Corporation (New York: The New Press, 2003). 190 Chandler and Mazlish, “Introduction,” 2.

sovereign than the state.’ ”191 The MNCs bring many benefits to the people, although these benefits lie side by side with certain disadvantages. Thus, for example:

• MNCs have a profound impact on the environment. Some of these MNCs destroy

resources and harm the general ecology of the planet. The same MNCs, however,

alert us to “global environmental crisis through the satellites circling overhead

and reporting on the pollution and the depletion that transcend national

boundaries, and some of these satellites are operated by the very MNCs that are

192 part of the problem.”

• MNCs and their executives not only can cause but also can and sometimes do

193 take steps to reduce the severity of these environmental problems.

• Consumerism is spread via the same satellites that operate on behalf of global

multinationals. Tastes and trade are both promoted by the ubiquitous

advertisements transmitted in all countries.

194 • World music, for example, is circulated by multinational media corporations.

• Whatever the sins of Microsoft, it makes possible, via the computer network, the

mobilization of opinion worldwide, which then brings pressure on governments

195 everywhere.

• In pharmaceuticals, too, MNCs play a multifaceted role; the producers of wonder

drugs that heal are the same companies that often conspire to rig the market and

196 constrain their use worldwide.

191 Ibid., 6. 192 Ibid., 4. 193 Chandler and Mazlish, “Introduction,” 4. 194 Ibid. 195 Ibid. 196 Ibid.

• Human rights’ scope and power are dependent on the same communications

197 links.

From the above examples, the authors conclude that MNCs “embody contradictory impulses and play multiple roles, often producing results unintended by the actors themselves.”198 We may now examine, very briefly, the different structures that these giant multinationals acquire and adopt, as compared to the usual companies that operate within the boundaries of states.

2.3 Modern Structures: Parents and Subsidiaries

Blumberg says: “Legal theory of the corporation still concerned with the small, local corporation of the nineteenth century must catch up with the reality of the modern world of giant, multinational groups.”199 The learned author means that when the traditional entity law is applied to corporate groups, the older concept of the legal entity no longer matches the reality of the economic entity.200 Thus, under traditional entity law, according to Blumberg, each component corporation of the group—whether parent, subsidiary, or affiliate—for legal purposes was still separate and distinct from every other corporation in the group. The rights and responsibilities of each component were separate from those of the other constituent companies of the group and were unaffected by them. This was true, as long as entity law insulated the ultimate investors or shareholders in the parent corporation from liabilities of the parent. This may no longer be true. Tradition laws like the law in Pakistan have started noticing these issues, but the position is far from clear.

197 Ibid. 198 Ibid. 199 Blumberg, The Search for a New Corporate Personality, ix. 200 Ibid.

Company law in Pakistan is governed by the Companies Ordinance, 1984. A new

Bill is under consideration now and may replace the Ordinance in the year 2017. The

Bill is called “Draft Companies Bill 2015.” Both laws contemplate that a company has independent existence, but it may be related to other companies, or even to individuals, in a way of which the law needs to take notice for the enforcement of its provisions and the protection of the different persons dealing with the company.201 The existing law and the proposed new law define holding companies, their subsidiaries and associated undertakings as well as associated persons. According to the definitions, a “holding company” is a company that “controls” another company. The company controlled by a holding company is its “subsidiary.” A company or a body corporate may be a subsidiary company or a holding company.202 §3 of the 1984 Ordinance says that a company is a subsidiary of another company if

1a) that other company directly or indirectly controls or beneficially owns more

than 50 per cent of the voting securities of the subsidiary; or

1b) has the power to effect and appoint more than 50 per cent of the directors of the

subsidiary; or

2) is the subsidiary of the subsidiary of the holding company (which would mean

1a or 1b should be true for the relationship between the first two and then be true

203 for the second two).

In the same way, two companies, two undertakings, or a company and an undertaking are associated if

201 Imran Ahsan Khan Nyazee, Company Law: Including Companies Ordinance, 1984 (Islamabad: Federal Law House, 2014), 50. 202 Ibid. 203 Companies Ordinance, 1984, Section 3.

1. a single person is owner or partner or director in both or controls not less than 20

per cent of the voting power in both;

2. both are under a common management;

3. they are related as holding and subsidiary companies (§2(2))

Section 208 of the Ordinance states that investment in an associated undertaking is to take place only after a special resolution. The section also lays down rules for regulating such investment. Some other provisions of both laws, talk about the financial year, financial statements, and the purchase of shares of subsidiaries. These provisions have accounting and auditing objectives in view, and there is no provision that talks about liability in the case of torts or other destructive acts.

Sections 451–458 of the Ordinance deal with foreign companies. A foreign company is a company that has its offices and places of business outside Pakistan. If a foreign company establishes a place of business in Pakistan, it must within one month of the date of such establishment, file with the registrar of the province in which such place of business is situated certain documents like its charter or memorandum and articles of association, and also provide the address and names of directors and managers. For the ease of foreign companies, the Securities and Exchange Commission of Pakistan has issued guidelines for foreign companies. In addition to the above, every foreign company is required to file with the registrar three (3) copies of its balance- sheet on an annual basis. A foreign company must publish a prospectus when inviting the public to subscribe.

Phillip Blumberg, the well-known writer on corporate groups, describes these groups as “enterprises organized in the form of a dominant parent corporation with scores or hundreds of subservient sub-holding, subsidiary, and affiliated companies.

These typically conduct a single integrated enterprise under common control and often under a common public persona.”204 Each corporate entity, within a corporate group, has its own legal personality, and the management of a corporation owes specific duties to their company and its shareholders, and the shareholders themselves stand completely separate from the entity’s own liability and incur no risk beyond the amount of their investment.205 Although each entity is separate and technically independent in the eyes of the law, being operated as a single integrated enterprise under common control and often “under a common public persona,” through equity participation or contractual obligations, gives rise to various tensions between independence and interdependence.206 Such tensions become visible in the form of unique problems in the law of corporate groups.207 Thus, if directors are required to pursue the good of their own independent corporation, it is difficult to see how they sacrifice this required good for the well-being of the entire group.208 Directors are required to exercise independent judgment, therefore, it is difficult to see how they can be compelled to follow instructions from the management of their holding company.209 Likewise, a company’s debts are its own, therefore, a parent company cannot be held liable for the debts of an

210 undercapitalized subsidiary that it has used as a mere instrumentality.

In this relationship, the concept of control is the actual key. Thus, Herman Daems of the European Institute for Advanced Studies in Management says: “The large

204 Phillip I. Blumberg, “The Transformation of Modern Corporation Law: The Law of Corporate Groups,” Connecticut Law Review 37 (2005): 605. 205 Andreas Cahn and David C. Donald, Comparative Company Law: Text and Cases on the Laws Governing Corporations in Germany, the UK and the USA (Cambridge, UK: Cambridge University Press, 2010), 678. 206 Ibid. 207 Ibid. 208 Ibid. 209 Ibid. 210 Ibid. See also Stephen Griffin, Company Law: Fundamental Principles, 4th ed. (Essex, UK: Pearson Education Limited, 2006), 75.

Belgian holding companies are best defined as financial institutions which manage a portfolio of stocks in order to control the companies in which they hold a share of the equity capital. The crucial term in this definition is the concept of control. It is the struggle for corporate control which distinguishes the holding company from other financial institutions, such as the mutual funds. A precise definition of a holding company, then, requires a precise operational definition of the concept of corporate control.”211 The author then raises the question about the exact meaning of the term

“control,” its purpose and the benefits to be derived. In defining such control, he talks about crucial control instruments like representation on the board of directors or a

“substantial” share of equity capital needed to monitor capital management in a company.212 The same idea is found in the words of Stewart Johnston, “This will always be an important theme because the HQ-subsidiary connection is the primary conduit through which HQ is able to manage the corporation. The relationship enables the transfer of the MNC’s ownership advantage and the design and implementation of more efficacious and suitable corporate and subsidiary structures, control mechanisms, and knowledge and innovation coordination systems.”213 It can, therefore, be seen why the law of Pakistan defines a holding company in exactly these terms, as described above.

We will come back to this discussion in the next chapter. The purpose of the discussion here was to show that multinationals work as groups and it is these groups and the control within them with which we are concerned.

211 Herman Daems, The holding company and corporate control (Leiden: Martinus Nijhoff Social Sciences Division, 1978), 3. 212 Ibid. 213 Stewart Johnston, Headquarters and Subsidiaries in Multinational Corporations: Strategies, Tasks and Coordination (New York, N.Y.: Palgrave Macmillan, 2005), 3.

2.4 Torts Committed Around the World: Historical

Overview

In the previous chapter, we have explored the weaknesses and deficiencies in the tort law in Pakistan, in particular, and other deficiencies in general. In this chapter, we have seen, however briefly, that the law of companies in Pakistan, even the new proposed law, takes very little notice of corporate groups and multinational or foreign companies working in Pakistan. The legal system is simply not equipped to handle the problems that may arise as a result of the operation of MNCs in Pakistan. In this section, we will merely list some cases of disasters and torts that have arisen in the world with the objective that any of these incidents can happen in Pakistan. The legal system must be in a state of minimum readiness to handle such problems. This will be a very brief listing of cases with very the bare minimum of details.

Marc Galanter examining the tragedy that occurred in Bhopal, India, concludes with the following words: “Even if the preventive and regulatory fallout of Bhopal were to reduce the incidence and toll of future disasters, the coming years will surely bring many instances of explosions, wrecks, building collapses, mass poisonings, traumatic relocations, and other life-destroying and life-disrupting events. Most often, it will be the lives of the poorest and most vulnerable that will be destroyed and disrupted.”214

What he is saying here is that it is not necessary that all mass torts be generated through the rash and negligent acts of multinationals; the legal system of India is not in a position to handle these ordinary disasters. He lays the blame squarely on the shoulders of the Indian legal profession not only in their failure to develop tort law in India, but also in following an “atomistic” type of law practice that does not meet the standards

214 Galanter, “Legal Torpor,” 293.

that are expected of a modern legal community.215 For our study, this point is very important, because the legal system in Pakistan is an exact replica of the legal system of India albeit on a much smaller scale. The legal profession in Pakistan is also quite similar to the Indian legal profession, although it may not be as efficient, because it usually takes the lead from the Indian lawyers and judges. The question then is: if the legal system and the legal profession in India failed miserably in dealing with the

Bhopal tragedy, how can we expect the legal services in Pakistan to fair better in a similar disaster or even a much smaller one.

We may now turn to cases that have been taken up with an emphasis on human rights. For the summarised versions of some cases given below, we rely heavily on a short, but good article by Richard Meeran,216 as well as the description provided by

Liesbeth Enneking.217 The website of the Business & Human Rights Resource Centre also provides a list of some such cases, along with case histories and further references.218 The recent case of Kiobel v. Royal Dutch Petroleum Co.219 in which the

U.S. Supreme Court dealt a death blow to the Alien Tort Claims Statute (ATS) will not be discussed below. We shall take it up in detail in a later chapter.

2.4.1 The Bhopal Disaster: Union Carbide Corporation

The Bhopal disaster occurred in 1984 after the escape of a poisonous gas cloud from the Bhopal chemical plant operated by an Indian subsidiary of US-based multinational

215 See generally Marc Galanter, “Legal Torpor: Why So Little Has Happened in India After the Bhopal Tragedy,” Texas International Law Journal 20 (1985): 273–294. 216 Meeran, “Tort Litigation against Multinational Corporations,” 95 passim. 217 Liesbeth Francisca Hubertina Enneking, Foreign Direct Liability and Beyond: Exploring the role of tort law in promoting international corporate social responsibility and accountability (The Hague, The Netherlands: Eleven International Publishing, 2012). 218www.business-humanrights.org/Categories/Lawlawsuits/Lawsuitsregulatoryaction/ LawsuitsSelectedcases. 219 133 S.Ct. 1659 (2013).

Union Carbide Corporation (UCC), which is now called Dow Chemical. The poisonous leak left many people living in the vicinity of the plant dead, and according to some no one knows exactly how many died. There were others who were seriously injured. It is not our purpose to go into too many details here as these are very well known now, having been recalled by many writers. We may reproduce a summary of the facts from the business human rights website mentioned earlier.

• In December 1984, a Union Carbide pesticide plant in Bhopal, India, leaked over

forty tons of the poisonous gas methyl isocyanate into the community

surrounding the plant. Indian officials estimate that the gas leak left nearly 3000

people dead and 50,000 people permanently disabled and that 15,000 people died

subsequently from exposure to the poisonous gas. (Unofficial estimates range up

220 to 7000-8000 initial deaths, and 15,000-20,000 subsequent deaths).

• Some of the injured people of Bhopal attempted to litigate claims against Union

Carbide (part of Dow Chemical since 2001) in the US. Claims were also filed

both in India and before US courts. The claims in the Indian courts were based

on a common law doctrine of multinational enterprise liability (a form of strict

liability within multinational enterprises) and partly on the parent company’s

allegedly negligent role in the design and construction of the Indian plant and in

221 subsequent safety monitoring.

• The US lawsuits were dismissed in 1986 in favour of litigating the claims through

222 the Indian legal system.

220 http://business-humanrights.org/en/union-carbidedow-lawsuit-re-bhopal\#c9302 (accessed March 26, 2016). 221 Enneking, Foreign Direct Liability and Beyond, 95. 222 http://business-humanrights.org/en/union-carbidedow-lawsuit-re-bhopal\#c9302 (accessed March 26, 2016). In 1985, the various US claims were joined and assigned to the New York federal district court, while the Indian government enacted legislation which provided that it had the exclusive

• In 1989 the Indian Supreme Court approved a settlement of the civil claims

against Union Carbide for $470 million. Until recently approximately $330

million of the settlement amount had yet to be disbursed to the Bhopal victims

and their survivors. In July of 2004, the Indian Supreme Court directed that the

223 balance of the settlement fund be disbursed among all of the Bhopal claimants.

• In 1999, a group of victims of the Bhopal disaster filed suit against Union Carbide

in US federal court seeking compensation for the 1984 incident as well as for the

alleged ongoing environmental contamination at and around the Bhopal plant

site. After a number of appeals, the plaintiffs’ US claims for compensation for

injuries directly related to the 1984 incident were dismissed because the court

found that these claims were barred by the 1989 Union Carbide settlement in

224 India.

• The court, however, allowed claims to go forward regarding property damage

due to the environmental contamination at the Bhopal plant site and surrounding

areas. In June 2012 the district court dismissed the case against Union Caribide.

The plaintiffs appealed, and the appeals court upheld the lower court’s ruling in

June 2013. On 30 July 2014, the US District Court of the Southern District of

New York ruled that Union carbide could not be sued for the on-going

contamination from the plant, despite the plaintiffs’ lawyers providing evidence

that an Union Carbide employee managed its construction. The plaintiffs

right to represent Indian plaintiffs in India and elsewhere in connection with the tragedy (the “Bhopal Gas Leakage Disaster Act 1985”). In May 1986, the joint case was dismissed on grounds of forum non conveniens, as the court considered that the case should be tried in the Indian legal system, rather than in the US. 223 Ibid. 224 Ibid.

appealed in November 2014, and claim that they have provided new evidence

225 that show Union Carbide’s involvement.

• In addition to the US litigation, a criminal lawsuit against Union Carbide and

Warren Anderson, its former CEO, has been ongoing in the Indian legal system

since 1989. In June 2010 a court in India handed down a verdict in the case. It

found Union Carbide India Ltd. and seven executives of the company guilty of

criminal negligence. The company was required to pay a fine of 500,000 rupees

($10,870) and the individuals were each sentenced to two years in prison and

fined 100,000 rupees ($2175) a piece.

• On 2 August 2010, the Indian Central Bureau of Investigation filed a petition

with the Supreme Court seeking a harsher punishment for the accused in this

case. This petition sought to reinstate charges of culpable homicide against the

accused; a September 1996 order had reduced the charges from culpable

homicide to criminal negligence. In May 2011, the Supreme Court rejected this

226 petition and declined to re-open the case to reinstate the harsher charges.

225 Ibid. 226 Ibid. Bhopal: Bhopal court on Friday scheduled hearing related to 7 Indians accused in Bhopal gas tragedy case to March 30, 31 and April, 1 & 2. Handed out sentence by a lower court in Bhopal for causing death by negligence in 2010, the accused including former Union Carbide India Ltd (UCIL) chairman Keshub Mahendra, former managing director Vijay Gokhale, former vice-president Kishore Kamdar, former works manager J Mukund, former production manager S P Choudhary, ex plant superintendent K V Shetty, ex production assistant S I Quershi—challenged the verdict in district and sessions court. They pleaded the disaster was fallout of a design defect in the Union Carbide Bhopal plant, which was built by the American company. The court has scheduled back-to-back hearing of the case on March 30, 31, and April 1 and 2 and we are arguing in the case, one of the counsels for the accused Ajay Gupta told TOI. On June 7, 2010, court of chief judicial magistrate sentenced these accused under Section 304-A (causing death by negligence) of the IPC. There was one more Indian among accused R B Roychoudhary, then assistant works manager of UCIL, who died during the process of trial. All of them got bail and challenged the verdict of lower court in the district and sessions court Bhopal. The methyl isocyanate gas that leaked from Union Carbide plant on the night of December 2 and 3, 1984, killed and maimed thousands. http://timesofindia.indiatimes.com/city/bhopal/Back-to-back-hearing- against-Indian-accused-from-Mar-30/articleshow/51066791.cms (visited March 26, 2016).

The Bhopal case has some significance for our study. In particular, the actions taken in India as we will need some ideas for designing remedies for possible injuries and disasters caused in Pakistan.

2.4.2 The Unocal Corporation Case

• A group of Myanmar residents filed a lawsuit against Unocal in US federal court

in 1996. The plaintiffs alleged they had suffered human rights abuses such as

forced labour, murder, rape and torture at the hands of the Myanmar military

during construction of a gas pipeline, and that Unocal was complicit in these

abuses. Unocal and Myanmar’s military government were in a consortium for the

227 pipeline’s construction.

• The claims were based on the ATS, as well as on a number of other legal grounds

228 derived from US federal law and California state law.

• Parallel to the federal court proceedings, an action was brought in California state

court in 2000; this action, which sought to hold Unocal tortiously liable on the

basis of California state law with respect to its participation in the Yadana

pipeline, encompassed a number of claims that had been dismissed in the federal

procedure without a ruling on them. After having survived various motions to

dismiss made by Unocal, a number of these claims were allowed to proceed to

trial, as the court decided that on the basis of the available evidence a jury might

find that the joint venture in which Unocal participated hired the Burmese

227 http://business-humanrights.org/en/unocal-lawsuit-re-myanmar#c9309 (accessed March, 2016). Actually, a class action was brought before the California district court in 1996 against US-based Unocal Corporation, its president and its CEO, as well as against French oil company Total, the Burmese military regime (the State Law and Order Restoration Council, SLORC) and the state-owned and controlled Myanmar Oil and Gas Enterprise (MOGE). Enneking, Foreign Direct Liability and Beyond, 96. 228 See Doe v. Unocal Corp., 963 F.Supp. 880 (C.D.Cal., 1997), 880-885.

military and that it might on that basis hold Unocal vicariously liable for the

human rights abuses committed by that same military. The trial date for a jury

trial in the state case on the plaintiffs’ claims of murder, rape, and forced labour

229 was set for June 2005.

• The parties reached an out-of-court settlement in which Unocal agreed to

compensate the plaintiffs and provide funds for programmes in Myanmar to

improve living conditions and protect the rights of people from the pipeline

region (the exact terms of the settlement are confidential). This settlement was

230 accepted by the court, and the case was closed on 13 April 2005.

The parallel proceedings in the California state court in 2000 are particularly important as they represent a course of action that goes for direct liability in a state court. This may be an independent route for claimants, that is, independent of the Alien

Tort Claims Act.

2.4.3 Cape/Gencor Lawsuits: South Africa

• In 1997, a group of five South Africans suffering from asbestos-related disease

(ARD) brought suit against Cape PLC in the English High Court seeking

compensation for their injuries from Cape’s asbestos mining and milling activity

in South Africa. The plaintiffs, former Cape workers and individuals living in the

229 Enneking, Foreign Direct Liability and Beyond, 95 relying on www.earthrights.org/legal/ doe-v-unocal-case-history and www.earthrights.org/legal/doe-v-unocal. 230 http://business-humanrights.org/en/unocal-lawsuit-re-myanmar#c9309 (accessed March, 2016). After a complicated chain of litigation, in March 2005, the parties agreed to a confidential out-of- court settlement, which was hailed by some as a historic victory not only for the plaintiffs but also for human rights and the corporate accountability movement. Soon after the announcement of the settlement, Unocal was taken over by Chevron-Texaco. See “Historic advance for universal human rights: Unocal to compensate Burmese villagers” (2 April 2005), www.earthrights.org/legal/ historic-advance- universalhuman-rights-unocal-compensate-burmese-villagers (accessed March 2016).

vicinity of Cape’s operations, alleged that Cape exposed its workers to 30 times

the British legal limit of asbestos dust without adequate protective gear and that

asbestos related injuries were suffered by those living near Cape’s asbestos

231 operations.

• After the claim was filed, Cape applied to stay these claims on forum non

conveniens grounds, arguing that the case should be tried in South Africa. At the

beginning of 1998, Cape’s application was granted by the trial court, but the

232 Court of Appeals later reversed the lower court’s decision.

• In 1999, another 2000 claims were commenced against Cape in England for ARD

based on Cape’s activity in South Africa. Cape reapplied to stay these new

claims, in addition to those filed in 1997, and Cape’s application was granted. On

appeal, the Court of Appeals affirmed the lower court’s ruling. The plaintiffs then

appealed to the UK House of Lords, and in 2000 the Law Lords held that the case

should be allowed to continue in the English High Court. The Law Lords found

that South African courts would not be a viable alternative forum because legal

aid in South Africa had been withdrawn for personal injury claims and no

reasonable likelihood existed for the plaintiffs to acquire effective legal

233 representation on a contingency fee basis for a case of such complexity.

• After the House of Lords decision, more claimants joined the case, and by 2001

there were approximately 7500 claimants. In 2001, Cape agreed to a £21 million

out-of-court settlement with the plaintiffs, but the company encountered financial

problems in August 2002 and did not meet the agreed settlement terms.

231 http://business-humanrights.org/en/capegencor-lawsuits-re-so-africa-0\#c9329. 232 Ibid. 233 Ibid.

Therefore, the litigation recommenced in September 2002, and Gencor Ltd. was

joined as a defendant in the case. Gencor is a South African company which took

over some of Cape’s South African asbestos operations when Cape left the

234 country in 1979.

• In 2003, the plaintiffs, Cape and Gencor reached a settlement agreement. There

were three parts to the settlement. First, Gencor established and now administers

a £35 million trust in South Africa (the trust is to compensate ARD victims in

South Africa who were not represented by Leigh Day & Co.). Second, Cape

settled with its 7500 claimants for £7.5 million. Third, Gencor settled with the

235 7500 claimants for approximately £3 million.

This case is not only significant in its own right, but also on the grounds that it is a UK case, as distinguished from cases in the US and EU countries. The Cape case is also a group action brought in the UK by South African plaintiffs. A major ground for determining liability was the “control” argument, that is, the de facto control that Cape exercised over its foreign subsidiaries, along with the breach of duty of care.

2.4.4 Apartheid Reparations Lawsuit: South Africa

• In 2002 a group of South Africans, represented by the Khulumani Support Group,

sued 20 banks and corporations in US federal court that did business in South

Africa during apartheid. The plaintiffs alleged that the participation of the

defendant companies in key industries during the apartheid era was influential in

encouraging and furthering abuses against black Africans during that time. The

plaintiffs claimed that they were victims of human rights abuses such as extra-

234 Ibid. 235 Ibid.

judicial killings, torture and rape, and they alleged that the defendants’ activities

in South Africa during the apartheid era made them complicit in the commission

236 of those abuses.

• The South African Government was opposed to this lawsuit, and it filed

documentation with both the district court and appeals court publicly stating its

position regarding the case. A federal district court judge granted the defendants’

motion to dismiss in November 2004. The plaintiffs appealed this dismissal in

August of 2005. In October of 2007, the appeals court reversed the lower court’s

dismissal of this case and remanded the case back to the lower court for further

proceedings. On 10 January 2008, the defendant companies petitioned the US

Supreme Court for certiorari, asking the court to hear their appeal of the October

237 2007 decision of the US Court of Appeals for the Second Circuit.

• In May 2008, the US Supreme Court declared that it could not intervene in this

case because four of the nine justices had to recuse themselves for apparent

conflicts. Lacking the required quorum, the Supreme Court had no option but to

uphold the decision of the Second Circuit Court of Appeals allowing the lawsuit

to proceed.

• On 8 April 2009, the federal district court issued a ruling in this case. The judge’s

ruling narrowed the claims in the case but allowed the case to continue against

238 Daimler, Ford, General Motors, IBM and Rheinmetall Group.

• In September 2009, the South African Government announced its support of the

lawsuit, withdrawing its previous opposition to the case. The South African

236 http://business-humanrights.org/en/apartheid-reparations-lawsuits-re-so-africa (March 2016). 237 Ibid. 238 Ibid.

Justice Minister sent a letter to the District Court judge informing her that the

239 government believes the court to be the appropriate forum to decide this case.

• In August 2013 the US Court of Appeals for the Second Circuit returned the case

to the lower court and recommended dismissing the case, citing the US Supreme

Court’s limitation on extraterritorial application of the Alien Tort Claims Act in

Kiobel v. Shell. On 26 December 2013 the lower court issued an order dismissing

Daimler and Rheinmetall from the case, but the court declined to dismiss the

240 claims against IBM and Ford.

• In April 2014, the lower court ruled the plaintiffs could amend their complaints

against Ford and IBM to provide evidence that the companies’ activities “touch

and concern” the territory of the United States. The judge said that in order to

overcome the presumption against extraterritoriality set forth in Kiobel, the

241 plaintiffs must show corporate presence plus additional factors.

• On 29 August 2014, the lower court judge dismissed the case finding that the

plaintiffs had not shown a sufficient connection with the United States to warrant

the case being heard in US court. On 27 July 2015, the court of appeals upheld

242 the lower court’s dismissal of the case.

243 • On 27 February 2012, the plaintiffs reached a settlement with General Motors.

The case is important as it relies on the decision about the Alien Tort Claims Act jurisdiction in the Kiobel v. Shell case.244 The plaintiffs claimed that the defendants had violated international law and were thus subject to suit in US federal courts

239 Ibid. 240 Ibid. 241 Ibid. 242 Ibid. 243 Ibid. 244 Ibid.

under, inter alia, the ATS.245 The core allegations underlying th claims were that

defendants had been involved in the wide range of human rights violations

committed by the apartheid regime, as they had knowingly supported it, and

continued to do so “even after its practices had been universally condemned and

246 international sanctions had been imposed.”

2.4.5 Trafigura Lawsuit: Ivory Coast (Côte d’Ivoire)

• On 19 August 2006 the ship Probo Koala unloaded a waste shipment at Abidjan,

Côte d’Ivoire (Ivory Coast). This waste was disposed of at open air sites around

Abidjan. The ship was chartered by the London office of Trafigura, a Dutch

international petroleum trader. After the waste from the ship was discharged in

Abidjan, people living near the discharge sites began to suffer from a range of

illnesses (nausea, diarrhea, vomiting, breathlessness, headaches, skin damage,

and swollen stomachs). Sixteen people died, allegedly from exposure to this

247 waste, and more than 100,000 sought medical attention.

• Trafigura sent two of its executives to Abidjan in August 2006 to investigate what

happened. These executives and a representative from a Trafigura subsidiary,

248 Puma Energy, were arrested by Ivorian authorities and imprisoned.

• On 12 February 2007 the Government of Côte d’Ivoire signed a settlement

agreement with Trafigura in which the company agreed to pay $198 million to

the Ivorian government for a compensation fund, the construction of a waste

treatment plant and to assist in the recovery operations. However, the company

245 Enneking, Foreign Direct Liability and Beyond, 100. 246 Ibid. 247http://business-humanrights.org/en/trafigura-lawsuits-re-c\%C3\%B4te d\%E2\%80\%99ivoire (accessed April, 2016). 248 Ibid.

stressed this payment was not “damages” and that it did not admit liability. Côte

d’Ivoire agreed to drop any prosecutions or claims, now or in the future, against

Trafigura. After this settlement agreement was made, the Trafigura executives

249 and the Puma Energy representative were released from prison.

• Claims in the United Kingdom: In November 2006, the High Court of Justice in

London agreed to hear a group action by about 30,000 claimants from Côte

d’Ivoire against Trafigura over the alleged dumping of toxic waste from the

Probo Koala. Applicants alleged that the waste had high levels of caustic soda,

as well as a sulphur compound and hydrogen sulphide making it hazardous waste

as defined by the Basel Convention on the Control of Transboundary Movements

250 of Hazardous Wastes.

• After protracted proceedings, in September 2009, the parties to the UK lawsuit

reached a settlement agreement in which Trafigura agreed to pay each of the

30,000 claimants a certain amount, approximately $1500. The parties released a

joint statement that said, among other things, “independent experts are unable to

identify a link between exposure to the chemicals released from the slops and

deaths, miscarriages, still births, birth defects, loss of visual acuity or other

serious and chronic injuries. Leigh Day and Co, in the light of the expert

evidence, now acknowledge that the slops could at worst have caused a range of

251 short term low level flu like symptoms and anxiety.”

• Claims in the Netherlands: In February 2008, Dutch prosecutors served notice

that they intend to file criminal charges against Trafigura, among others, for its

249 Ibid. 250 Ibid. 251 Ibid.

alleged part in the disposal of waste in Côte d’Ivoire. In June 2008 an Amsterdam

court began hearing evidence in this case. The Dutch trial started in June 2010.

In July 2010 the Dutch court ruled that the company, in violation of Dutch law,

had concealed the dangerous nature of the waste aboard the Probo Koala and

fined the company €1 million. The Dutch court also convicted a Trafigura

employee and the Ukrainian captain of the Probo Koala for their roles in the

matter. There were other lawsuits too by Greenpeace at The Hague and at

252 Amsterdam.

• Claims in France: In July 2008, three French victims of the Probo Koala

incident filed a complaint against Trafigura before an examining magistrate in

Paris alleging corruption, involuntary homicide and physical harm leading to

253 death.

2.4.6 Shell Lawsuit: (Oil Pollution in Nigeria)

• The plaintiffs filed three separate lawsuits, each one addressing the impact of oil

spillages in the three villages—Oruma, Goi and Ikot Ada Udo.

• The Oruma lawsuit claims that oil spillages occurred on 26 June 2005 and that

Shell Petroleum Development Company of Nigeria (“Shell Nigeria”) (Shell’s

Nigerian operating company) only closed the hole in the pipeline on 29 June

2005. Allegedly, the oil flowed into plaintiffs’ farmland and fishponds, polluting

it and making it unfit for use. The plaintiffs further claim that the clean-up started

in November 2005 and that neither the environment near Oruma nor their oil-

polluted property has been adequately cleaned by Shell Nigeria.

252 Ibid. 253 Ibid.

• With regard to the allegations of negligence, the suit argues that Shell Nigeria

acted negligently by allowing the oil spill to occur, or at least it did not prevent

or limit it, and did not adequately clear the oil. Plaintiffs also allege that Shell plc

(the parent company) was negligent because it did not ensure that its subsidiary

carried out oil production in Nigeria in a careful manner, although it was able and

obligated to do so. The other two lawsuits make similar claims regarding oil

spillages in Goi and Ikot Ada Udo.

• On 13 May 2009 Shell submitted a motion to the court arguing that the Dutch

courts lacked jurisdiction over the actions of the Nigerian subsidiary. On 8 July

2009 the plaintiffs filed their Statement of Defence to the Motion Contesting

Jurisdiction at the Hague district court. On 30 December 2009, the Hague district

court ruled that it did have jurisdiction over the plaintiffs’ case.

• On 24 March 2010, former Shell Transport and Trading Company and Dutch

Shell Petroleum N.V. (Shell’s Dutch subsidiary) were added as defendants after

Shell argued that it cannot be held responsible for actions of its predecessors.

Lawyers for the plaintiffs requested the defendants to disclose relevant internal

documents. On 16 June 2010, Shell denied plaintiffs’ request for disclosure of

internal documents, stating it cannot be forced to and is not able to provide them.

Shell appeared in court to respond to the plaintiffs’ allegations in October 2012.

• On 30 January 2013 the Dutch court issued a decision ordering Shell to pay

compensation to one of the farmers, but it dismissed the balance of the claims. In

December 2015, a Dutch appeals court reversed its dismissal and permitted the

balance of the claims to go forward. The appeals court also ruled that Shell must

grant the claimants access to certain internal company documents essential to the

case.

The Kiobel case against Shell before the US Supreme Court, which had a huge impact

on the Alien Tort Claims Act, will be discussed later.

The cases described above could easily have happened in a country like Pakistan

where a large number of multinational corporations are operating in a variety of areas.

We may now try to have a fair idea of the type of corporations working in Pakistan

either directly or through one of their subsidiaries.

2.5 Pakistan and the Multinational Corporations: Securing

the Environment

Corporation Parent/ Subsidiary Head offices/ Website Plant At/ Products Environmental CSR: Corporate Social Work

of Threat Name

Nestle Pakistan Nestle S.A. Vevey, Switzerland Shiekhupura, Soil, Water Focusing on the core areas related to

Khanewal, Islamabad Pollution and Waste nutrition, water and rural development (Swiss Company) 308-Upper Mall Lahore and supporting the underprivileged & Port Qasim dumping problems. Pakistan communities for improving their

Food and Bevereges livelihood http://www.nestle.pk/

Unilever Pakistan Unilever NV (The Rotterdam, Netherlands, Rahim Yar Khan & Soil, Water Creating a sustainable future with its fiv partners; Unicef, United Nations World Netherlands) London, UK Khanewal Pollution and Waste Programme, Save the Children, Populati and Unilever dumping problems. Avari Plaza, Fatima Eatables, Soaps, Services International and Oxfam. Unile PLC (UK) Pakistan partners with both local and gl Jinnah Road, Saddar Beauty Products, partners in order to execute its sustainab (Anglo-Dutch Shampoos, https://www.unilever.pk agenda. Company) Detergents etc. /

Protor & Gamble Proctor & Gamble Cincinnati, Ohio, Providing Pakistani communities affecte natural disasters with clean drinking Pakistan Co. United States Hub Baluchistan & Watrer Pollution water. Through this initiative 24million (American 11th & 12th floor, The Port Qasim and Waste dumping of clean drinking water has been made Company) Harbour Front Building, problems. Sanitary napkins, available via P&G Purifier of Water Dolmen City, Block-4, Beauty Products, Clifton, Karachi sachets to Pakistani communities affecte Shampoos, drought in Tharparker and floods in http://www.pg.com/en_ Detergents. Punjab. PK/index.shtml

Shell Pakistan Royal Dutch Shell Headquarters in Imports crude oil. It Oil spills in coastal Shell Pakistan Limited has developed a

Netherlands and has shares in Pakistan areas. programme of social investment, which (Anglo-Dutch incorporated in UK refinery limited as organizations and initiatives in the areas Company) well. health, education, welfare, community Shell House, 6 Ch. development, heritage, sustainable Khaliquzzaman Road, Feuls, Oils and

Karachi lubricants development and environment.

http://www.shell.com.p

ICI Pakistan AkzoNobel Group Amsterdam, Karachi,Khewra,

Netherlands Shiekhupura, Lahore (Dutch Company) Toxic wastes, toxic Major Focus on sustainability.

5 West Wharf Karachi, Light Ash, Dense effects Ash, Refined Sodium Lahore, Islamabad Bicarbonate, Paints, Polyester, Chemicals

http://www.ici.com.pk/

Leverkusen, North

Rhine-Westphalia, Bayer Pakistan Bayer AG SITE and Korangi, Toxic wastes, toxic Main Areas are Education, Germany Karachi effects Emergency Response (German 4th Floor, Bahria and Environment. Company) Pharmaceuticals Complex II, MT Khan (Health care Road, Karachi, and Pakistan. Agriculture)

GlaxoSmithKlin GlaxoSmithKline Brentford, London S.I.T.E., West Wharf, Toxic wastes, toxic Managing the environmental impacts of e Pakistan plc (GSK) Deh Landhi, Karachi effects operations and products to reduce West Wharf, Karachi

(British Company) Pharmaceuticals carbon emissions, water use and waste. http://pk.gsk.com/

Toyota Pakistan Toyota Motor Toyota, Aichi, Japan Port Qasim, Air pollution Main Areas are Education, health,

Industrial zone, indirect (Indus Motor Corporation Port Qasim, Karachi Environment. Assistance in natural Karachi Company (Japanese http://www.toyota- Limited) assembling, calamities, road safety, and welfare of Company) indus.com/ progressive neighbouring communities. manufacturing and

marketing of Toyota

vehicles.

Philip Morris Philip Morris New York, USA. Kotri, Sahiwal, Threat to flora and These include Access to Education,

Ltd. Pakistan International Inc. Mardan fauna 19th Floor Women Empowerment, Economic

(American The Harbour Front, Manufacturing and deforestation. Opportunity and Community Grant. Company) Dolmen City, HC – 3, cigarette and tobacco

Block 4 – Clifton products

Karachi

http://www.philipmorris

pakistan.com.pk/

http://www.pmi.com/m

arketpages/pages/marke

t_en_pk.aspx

Pakistan British American London, UK Jhelum, Punjab and Threat to flora and Youth smoking Prevention,

Tobacco Tobacco Serena Business Akora Khattak, fauna and Complex Afforestation. Khayaban-e- NWFP. deforestation. Company (British Company) Suhrwardy, Islamabad

Manufacturing and

http://www.ptc.com.pk/ Processing tobacco

products

CHAPTER 3 THEORIES OF LEGAL PERSONALITY AND THE LAW FOR CORPORATE GROUPS

As early as 1947, Adolf Berle wrote a now famous article suggesting that legal fictions about separate personhood be disregarded in favor of a more realistic view of the corporate enterprise.254 Berle argues that the original primary purpose and business advantage of granting personality and limited liability was the insulation of the small investor.255 This, he argued is not problematic, but when shareholders are individual investors or corporations holding minor amounts of stock, but when a corporate enterprise, a large group of related corporations with a parent and subsidiaries starts using this advantage, the original rationale becomes completely distorted.256 This advice was not heeded and the debate continues till today, and the present chapter may be considered part of this discussion, which is being undertaken in the context of torts.

The focus on tort liability of groups appears to be due to the colossal tragedies like those of Bhopal and Amoco Cadiz, which we have described briefly towards the end of the previous chapter. In reality, however, it was tort liability in the 20th century that compelled corporations to organize and structure themselves in ways that paved the way of limiting liability for torts or of avoiding such liability altogether. This was

257 attained mainly by passing on hazardous activities to subsidiary corporations.

254 Adolf A. Berle, Jr., “The Theory of Enterprise Entity,” Columbia Law Review” 47 (1947): 343 as quoted in Meredith Dearborn, “Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups,” California Law Review 97 (2009): 199. 255 Ibid. 256 Ibid. 257 Henry Hansmann and Reinier Kraakman, “Toward Unlimited Shareholder Liability for Corporate Torts,” Yale Law Journal 100 (1991): 1881. “Strong empirical evidence indicates that increasing exposure to tort liability has led to the widespread reorganization of business firms to exploit limited liability to evade damage claims. The method of evasion differs by industry. For example, placing hazardous activities in separate subsidiaries seems to be the dominant mode of insulating assets in the tobacco and hazardous waste industries.3 In contrast, disaggregating or downsizing firms seems to be the primary strategy for avoiding liability in the chemical industry and, more recently, in the oil transport

According to Dearborn, subsidiarization occurred en masse in the aftermath of asbestos litigation, while cigarette manufacturers restructured in reaction to lawsuits over tobacco-induced diseases.258 Hansmann and Kraakman predicted that “[c]hanges in technology, knowledge, liability rules, and procedures for mass tort litigation have for the first time raised the prospect of tort claims that exceed the net worth of even very large corporations. Environmental harms, such as oil spills or the release of toxic materials, are one potential source of massive liability; hazardous products and carcinogens in the workplace are others.”259 Their prediction was true and this has led to the creation of more and more complex groups around the device of “legal personality.” What then is attribute or device of legal personality? How was it originally conceived and applied? Was it the result of a private act or public, that is, was it a result of a contract or a concession by the state? How are corporate groups explained? What are the theories for such groups. In this chapter, we will discuss all or most of these issues. Our conclusions on these points will help us decide whether states, if they are the ones who grant legal personality, are qualified to place restrictions on these groups if they are the home states?

3.1 The Origins of Corporate Personality

The origin of the concept of the legal person has been discussed by many Western authors from different perspectives.260 The discussion about the origins of this concept

industry.4 Indeed, one study finds that, over the past twenty-five years, a very large proportion of small firms entering all hazardous industries in the United States are motivated primarily by a desire to avoid liability for consumer, employee, and environmental harms.” Ibid. (footnotes omitted). 258 Dearborn, “Enterprise Liability,” 199. 259 Hansmann and Kraakman, “Unlimited Shareholder Liability,” 1881. 260 Among the earliest discussions, we may include Dewey, “Corporate Legal Personality,” Smith, “Legal Personality,” Wesley A. Sturges, “Unincorporated Associations as Parties to Action,” Yale Law Journal 33 (1924): 383–405; George F. Canfield, “The Scope and Limits of the Corporate Entity Theory,” Columbia Law Review 17 (1917): 128–143 and Machen, “Corporate Personality,” The latest discussions are based on personality for groups. See, e.g., Blumberg, The Search for a New Corporate

is renewed as the form and scope of business changes,261 because the concept has the greatest significance for business followed by its significance for the idea of the state.

The main purpose of the study of its origins appears to be the discovery of who created the legal person: the creator of this concept has the right to alter its features and to place restrictions on this person. The concept is equally important for religious legal systems.

Thus, in Islamic law it is debated whether the creation of the legal person is lawful, while acknowledging that human progress leading to the current state of development

262 can be attributed in part to this vital concept.

John Dewey, after surveying what non-legal ideas may be about this concept, declares that “legal person” is “what law makes it signify.”263 Arthur Machen states that

Roman law did not give sufficient consideration to the concept of the corporation, while

Canon law did not develop any theory about it. After this, he tries to identify a reality about the legal person saying that a Church will appear as a person to an onlooker even if its members keep on changing, so will a school or a university.264 Machen discusses the views of well known jurists from Germany, France, Switzerland and of course from the United Kingdom and USA. Notable among these are: Savigny, Brinz, Gierke,

Personality, Kimberly Blanchard, “The Tax Significance of Legal Personality: A U.S. View,” NYU School of Law Tax Policy Colloquium 3 (2015): 2–54; and Goddard, “Corporate Personality—Limited Recourse and its Limits.” For legal personality in international law, see Klabbers, “The Concept of Legal Personality” and Portmann, Legal Personality in International Law. 261 See, in particular Blumberg, The Search for a New Corporate Personality. 262 “There is no exaggeration in the assertion that modern life is not possible without the concept of the corporation. This is the stark reality. It is, perhaps, for this reason that most Muslim scholars are ready, indeed anxious, to accept the concept as it is and to declare it Islamic. Muslims, however, have to face other realities too.” Imran Ahsan Khan Nyazee, Corporations in Islam (Islamabad: Federal Law House, 2007), 3. 263 Dewey, “Corporate Legal Personality,” 655. “The survey which is undertaken in this paper points to the conclusion that for the purposes of law the conception of ‘person’ is a legal conception; put roughly, ‘person’ signifies what law makes it signify. If this conclusion had not been disputed, if it were even now generally accepted, if even when it is accepted in substance it were not complicated by the use of non-legal concepts employed to justify certain reasonings and conclusions, this paper would have no particular excuse for being written.” ibid. 264 Machen, “Corporate Personality,” 1.

Zitelmann, Thering, M. de Vareilles-Sommiere, and Schwabe. We need not go into all that detail. The main point to be noticed is that some of them focused on legal personality as something real, while others considered it fictitious or real in the sense that it was granted by the law.265 He does realise that even when the realities are the same, the law may choose to recognize one as a legal person and not the other. The example he gives is that of a partnership and of a corporation. Although both meet the basic requirement of being a real person, yet the law does not grant recognition to partnership as a legal person.266 This is so despite the fact that accountants and traders in the market treat it as a single person for all practical purposes.267 Machen distinguishes between the physical reality that appears to be a person and the recognition by the law of this physical body as a legal person.268 He says:

Hence, it follows that in recognizing the existence of a corporation as an entity,

the law is merely recognizing an objective fact, while in refusing to recognize fully

the existence of a partnership or voluntary association as an entity the law is shutting

its eyes to facts. Therefore, what needs explanation in the common law is not the

doctrine that a corporation is an entity, but the doctrine that a partnership or other

269 voluntary association is not an entity.

Salmond elaborates the same thing in a slightly different way. He begins by saying that the first example of a fictitious personality in the world were deities and idols. This type

265 Ibid., 2-3. 266 Ibid., 4. 267 Nathaniel Lindley, A Treatise on the Law of Partnership, 4th ed. (London: Callaghan & Company, 1881), 206-208. “Merchants and lawyers have different notions respecting the nature of a firm. Commercial men and accountants are apt to look upon a firm in the light in which lawyers look upon a corporation, i. e. as a body distinct from the members composing it, and having rights and obligations distinct from those of its members. Hence, in keeping partnership accounts, the firm is made debtor to each partner for what he brings into the common stock, and each partner is made debtor to the firm for all that he takes out of that stock. In the mercantile view, partners are never indebted to each other in respect of partnership transactions; but are always either debtors to or creditors of the firm.” Ibid. 268 Machen, “Corporate Personality,” 4. 269 Ibid.

of “institution” was found in many cultures, especially the Hindu culture.270 Was this a legal person as a reality or was its personality recognized by the law? The Privy Council in Pramathu Nath Mallick v. Pradymna Mullick271 acknowledged the personality of the

Hindu idol. Salmond also mentions a book that was written on the issue.272 He then states that a “person is any being to whom the law attributes a capability of interests and therefore of rights, of acts and therefore of duties.”273 In other words, a person is any being to whom the law grants the ability to acquire obligations and duties, and it gives legal recognition to these acts when they pertain to such rights and duties.

Like Machen, he says that the “legal person” has two essential attributes: (1) A corpus or body. This corpus may be a human being or a group of human beings or even something else, like a fund. (2) An attribute with which the corpus is clothed by the law and by virtue of which its rights, duties and obligations are granted legal recognition.

In other words, when this additional attribute is conferred upon a corpus or a body, this corpus comes to possess legal capacity. This additional attribute granted by the law is called “personality.” A slave was a human being, a natural person but without this attribute of personality conferred by the law, he could not be called a legal person.274

Personality is real when it is assigned to a human being, and it is fictitious when it is assigned to a non-human corpus. The corpus, however, is real in either case, as Machen says, whether or not it is a natural person. When it is non-human, the grant of personality makes it an artificial person. The will of the legal person is always represented by human intervention. Thus, for example, Salmond calls the board of a

270 John W. Salmond, Jurisprudence: Or The Theory of the Law, 2nd ed. (London: Stevens & Haynes, 1907), 350. 271 (1925) L.R. Ind. 272 Duff, The Personality of the Idol, as quoted in Salmond, Jurisprudence, 351. 273 Salmond, Jurisprudence, 351. 274 Ibid.

corporation as its “alter-ego.” Salmond concludes that the “choice of the corpus into which the law shall breathe the breath of a fictitious personality is a matter of form rather than of substance, of lucid and compendious expression rather than of legal principle.”275 In simple words, as Dewey indicated at the start of this section, it means the law will assign legal personality to whom it will; and the law is the state. He then summarises the rules for corporations:

It is essential to recognise clearly the element of legal fiction involved in both

those forms of incorporation, for this has been made by some writers a matter of

dispute. A company is in law something different from its shareholders or members.

The property of the company is not in law the property of the shareholders. The

debts and liabilities of the company are not attributed in law to its members. The

company may become insolvent, while its members remain rich. Contracts may be

made between the company and a shareholder, as if between two persons entirely

distinct from each other. The shareholders may become so reduced in number that

there is only one of them left; but he and the company will be distinct persons for

276 all that.

After the theory surrounding the nature of “legal personality,” we may state that according to certain writers, like Thomas Donaldson, the evolution of the corporation may be said to have four stages. The first stage belongs to the medieval period in which the Church, the guild, and the borough had corporate status. The organizing force during this period was religion. In the second stage, the organizing force was the profit motive alone. This occurred in the early sixteenth century when European traders organized trading voyages. In the third stage, the prototypes of the modern corporations

275 Salmond, Jurisprudence, 338. 276 Ibid., 339-40.

were born. In the final stage, with the creation of the East India Company, the

277 government made the chartering procedures easier and gave up excessive control.

What Salmond has said may be said to be visible in the actual grant of legal personality to corporations. Thus, when Queen Victoria ascended the throne in 1837, there were two principal legal vehicles for the conduct of large scale business ventures—the corporation and the joint stock company.278 There were, also two ways for the creation of a corporation: under a Royal Charter or by virtue of an Act of

Parliament. The one created by Act of Parliament had separate legal existence.279 The joint stock company, on the other hand, was in law nothing more than a large partnership.280 It had shares that were freely transferable and other elements of a corporation, but the joint stock company did not enjoy any legal identity separate from its members.281 The members, as partners, owned the assets and were jointly and severally liable for the debts incurred by the business. Thus, the joint stock company was in reality nothing but a partnership.282 The Companies Act of 1844 was enacted to deal with these problems. A separate legal existence was granted to any venture that complied with the statutory machinery. It was now no longer necessary for a promoter

283 to procure a Charter or an Act of Parliament.

277 Thomas Donaldson, Corporations and Morality (New Jersey: Prentice Hall, 1982) 4. It may be pointed out here that the developments in the first two stages should not be confused with actual legal personality. See also J.L.Reynolds, “Origins of Modern Business Enterprise: Medieval Italy,” Journal of Economic History 12 (Fall, 1952): 350-65. 278 Ross Grantham and Charles Rickett, “The Bootmaker’s Legacy to Company Law Doctrine,” in Corporate Personality in the 20th Century, ed. Charles E. F. Rickett and Ross B. Grantham (Oxford: Hart Publishing, 2010), 2. 279 Ibid., 1. 280 L Sealy, “Perception and Policy in Company Law Reform,” in D Feldman and F Meisel (eds.), Corporate and Commercial Law: Modern Developments (London, Lloyd’s of London Press, 1996), 11-13. 281 Grantham and Rickett, “The Bootmaker’s Legacy to Company Law Doctrine,” 2. 282 Ibid. 283 Ibid., 3.

3.2 Theories Governing the Personality of the Single

Corporations

According to Janet Dine, it is crucial to understand the different models of corporations and such an understanding depends on an understanding of the theories that underlay these models, shape them, and govern them.284 The author maintains that a thorough understanding of these theories is vital if progress is to be made by steering companies in the desired direction, and for the identification of the contentious issues that are likely to arise.285 She also says that formulating a regulatory structure without an enquiry into

286 the model and its governing theories invites incoherence.

The broad and basic purpose of examining corporate theory is to develop a

framework within which we can assess the values and assumptions that either unite

or divide the plethora of cases, reform proposals, legislative amendments, and

practices that constitute modern corporation law. This law has not sprung up

overnight. We need some way of disentangling the different philosophical and

287 political perspectives from which it has been constructed.

This is interpreted by Dine to mean that the proper classication depends on whether the company is seen as a creature of the state or as a contractual arrangement between a group of people.288 In other words, one has to see whether the contractual theory governs or whether it is the entity concept looking towards the state as the created is to be deemed decisive. This important point has been so clearly elaborated by Butler in the following words:

284 Dine, The Governance of Corporate Groups, 2. 285 Ibid. 286 Ibid., 1. 287 S. Bottomley, “Taking Corporations Seriously: Some Considerations for Corporate Regulation,” Federal Law Review 19 (1990): 203, 204. 288 Dine, The Governance of Corporate Groups, 2.

The contractual theory of the corporation is in stark contrast to the legal concept

of the corporation as an entity created by the state. The entity theory of the

corporation supports state intervention—in the form of either direct regulation or

the facilitation of shareholder litigation—in the corporation on the ground that the

state created the corporation by granting it a charter. The contractual theory views

the corporation as founded in private contract, where the role of the state is limited

to enforcing contracts. In this regard, a state charter merely recognizes the existence

of a “nexus of contracts” called a corporation. Each contract in the “nexus of

contracts” warrants the same legal and constitutional protections as other legally

enforceable contracts. Moreover, freedom of contract requires that parties to the

289 “nexus of contracts” must be allowed to structure their relations as they desire.

This tells us in vivid terms that the proposals experts make for reform and regulation must be understood and analyzed in terms of these two major approaches. The statement also tells us that our own proposals that we make later, in the context of

Pakistan, must also be based on one of these theories or scrutinized in the light of one such theory that we tend to favour. Now that we have examined the reason why we should look at these theories before venturing on to larger issues, let us look at the variations in these two approaches if any. Nevertheless, our explanation of these theories has to be very brief and we cannot give it too much space.

3.2.1 Three Theories of the Corporation

Janet Dine classifies these theories into three: contractual theories, communitaire theories and concessionary theories.290 Contractual theories are divided into “legal

289 Henry N. Butler, “The Contractual Theory of The Corporation,” George Mason University Law Review 11 (1989): 100. 290 Dine, The Governance of Corporate Groups, 2. “Although theories overlap and interweave, it is suggested that a convenient structure can be imposed by taking as a starting point three theories that have been infuential in shaping models of companies. These are the contractual, the communitaire, and

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contractualism” and “economic contractualism.” Michael Jensen and William

Meckling, in 1976, first formulated the conception that the corporation is a “nexus of contracts” in their famous article The Theory of the Firm: Managerial Behavior, Agency

Costs, and Ownership Structure.291 The main idea of the legal contractual theory is that two or more parties come together to make an agreement or a contract for carrying on commercial activity. It is from this contract to do business that the company is born.

Dine does not elaborate how this idea differs from that of partnership and why

“personality” arises from this contract and not from the contract of partnership. The logical thing to do would be to grant personality to both as legal realities, something discussed in the previous paragraphs, or to deny it for both. There is no answer in

Bottomley’s explanation when he labels this theory as the “aggregate” theory:

“Contract supplies the explanatory framework for both the judicial and the political status of the corporation. Internally the corporation is regarded as an association or aggregation of individuals; it comprises contractual relations between members inter se, and between members and management.”292 The net impact of this contractual base is that it limits the social responsibility of the company. It creates an entity that falls completely within the domain of private law and is, therefore, remote from regulatory interference of the state.293 Imposing social responsibility on the corporations would

294 amount to imposing a tax on shareholders to which they had not consented.

Economic contractualism focuses on the fact that the company has traditionally been thought of more as a voluntary association between shareholders than as a creation

the concessionary theories. The contractual and communitaire theories represent two extremes since they reject notions of the company as a product of laissez-faire individualism and as an instrument of the state, respectively. The concession theory may provide a less extreme ‘middle way’.” Ibid. 291 Michael C. Jensen & William H. Meckling, “The Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics 3 (1976): 305. 292 Bottomley, “Taking Corporations Seriously,” 208. He does attribute the label to others. 293 Dine, The Governance of Corporate Groups, 2. 294 Ibid., 7.

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of the state. Analytically an incorporated company is, like all other business forms, that is, a nexus of contracts. In economic analysis individuals rather than the state are the source of validity of the operation of the commercial venture. Companies are seen by this approach as a method of reducing the costs of a complex market consisting of a series of bargains among parties. Transaction costs are reduced by the organisational design of the company. To facilitate all this corporate law “establishes a set of off-the- rack legal rules that mimic what investors and their agents would typically contract to do.”295 Realists ideas are relied upon for legal personality, but for limited liability it is maintained that if the state had not granted limited liability, the parties would have

296 implemented it through contracts among themselves.

Communitaire theories, it is said, use the corporate tool to further its ends, that is, the emphasis is entirely on the aims of the company with those of society. Dine states that companies modelled on these theories were known in the former communist countries and in fascist Italy.297 The company in this sense is a concession, but the theories are at the other extreme as compared to the contractual theories. Regulation of companies becomes very easy under such theories, but in today’s free market ideologies they are difficult to justify. Even if they can be justified in some way, acceptance by scholars will not be possible.

The third, and the most widely accepted theory, is the type called the concession theory. This theory “views the existence and operation of the company as a concession by the state, which grants the ability to trade using the corporate tool, particularly where

295 Ibid., 8. 296 Ibid., 10. “One interesting facet of many of the neo-classical economic models is the lowly place occupied by the doctrine of limited liability. It is seen as an incentive to investment but the role of the state in providing this potentially ‘market rigging’ mechanism is generally played down,54 and the argument is made that, if limited liability were not provided by the state as an available attribute of a company, participants would incorporate it into individual bargaining arrangements.” Ibid., 10-11. 297 Ibid., 17.

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it operates with limited liability.”298 Early writers like Hobbes classfied corporations as

“bodies politic.” These were those organisations that had been granted corporate personality by “writ or letters from the sovereign.”299 As compared to this “private bodies” are “those which are constituted by subjects among themselves.” These would be partnerships.300 If the corporations are created by the state in both communitarian theories and concessionary theories, then what is the difference between the two theories? The main difference between the two is focused on the goals of the corporation and the goals required from the corporation by the state. The state may focus more on social goals, while the goals of the shareholders will be directed towards profit maximization. Communitarian theory applies when the goals of the corporation or the shareholders and the goals of the state are “aligned.” Concession theory grants more leeway to the shareholders and permits them to pursue their private goals as long as the broad confines of the original concession are not violated. Social aspirations are, however, not completely ruled out.

3.2.2 Support and Criticism of the Theories

Since the time that Michael Jensen and William Meckling gave the idea of the corporation as a “nexus of contracts” the conception has dominated the law-and- economics literature in corporate law. Eisenberg records that this is true, but the

298 Dine, The Governance of Corporate Groups, 21. 299 Thomas Hobbes, Leviathan (Oxford: Blackwell, 1960), 146. Companies like the East India Company, discussed in the previous chapter, fall squarely into this category. Janet Dine reproduces excerpts from the Charter of the Newfoundland Company, which read: “thinking it a matter and action well becoming a Christian King to make true use of that which God from the beginning created for mankind … therefore do of our special grace certain knowledge and mere motion …give grant and conform by these presents unto [various persons] their heirs and assigns, and to such and so many as they do or shall hereafter admit to be joined with them in form hereafter …. That they shall be one body or communalty perpetual, and shall have perpetual succession, and one common seal to serve for the said body …. And that they and their successors shall be likewise enabled …to plead and be impleaded before any of our Judges or Justices in any of our Courts and in any actions or suits whatsoever.” Ibid., 21-22. 300 Ibid.

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conception has had its critics too right from the start.301 There are many supporters of the nexus of contract theory. We will mention only the latest supporters here, who are

Reinier H. Kraakman, Paul L. Davies, Klaus J. Hopt, Luca Enriques, Henry B.

Hansmann, Gérard Hertig, John Armour, the joint authors of a now popular book The

302 Anatomy of Corporate Law: A Comparative and Functional Approach.

The authors maintain that this theory emphasizes the most important point that the relationships within a firm—including, in particular, those among the firm’s owners, managers, and employees—are essentially contractual in character. This means that the relationship is based on consent, rather than on some “extracontractual command-and- control authority.”303 They acknowledge that while this is an important insight, it does not distinguish firms from other networks of contractual relationships. Accordingly, they deem it more accurate to describe a firm as a “nexus for contracts.” After amending the label, the authors say: “The first and most important contribution of corporate law, as of other forms of organizational law, is to permit a firm to serve this role by permitting the firm to serve as a single contracting party that is distinct from the various individuals who own or manage the firm. In so doing, it enhances the ability of these individuals to engage together in joint projects.”304 The identify several core elements

301 Among these critics, he mentions the important text as that of Robert C. Clark, “Agency Costs Versus Fiduciary Duties,” in Principals and Agents: The Structure of Business, John W. Pratt & Richard Zeckhauser eds. (1985). Another writing he mentions as a “more recent important legal critique” is that of David Campbell, “The Role of Monitoring and Morality in Corporate Law: A Criticism of the Direction of Present Regulation,” Australian Journal of Corporate Law 7 (1997): 343. Melvin Aron Eisenberg, “The Conception That the Corporation Is a Nexus of Contracts, and the Dual Nature of the Firm,” Journal of Corporation Law 24 (1998): 819. 302 Reinier H. Kraakman, Paul L. Davies, Klaus J. Hopt, Luca Enriques, Henry B. Hansmann, Gérard Hertig, John Armour, The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford: Oxford University Press, 2009). The book has been written by seven leading corporate law scholars from top academic and research institutions in seven countries. They worked in collaboration for nine years to produce the first global and comprehensive comparative and functional analysis of corporate law. 303 Ibid., §1.2.1. 304 Ibid.

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of the corporation for which their text has to be read and understood. We will provide a brief description.

The first core element, in their view, is what the civil law refers to as “separate patrimony.” This means the demarcation of a pool of assets that are distinct from other assets owned, singly or jointly, by the firm’s owners.305 The firm has rights of ownership over these designated assets include the right to use the assets, to sell them, and to make them available for attachment by its creditors. From the other perspective, these assets are unavailable for attachment by the personal creditors of these owners, because they are in the ownership of the firm. This separate patrimony has been termed

“entity shielding” insofar as it involves shielding the assets of the entity from the personal creditors of the entity’s owners. From this entity shielding concept, the authors derive several rules.306 We may list them as follows:

• The first rule gives priority to the creditors of the firm in their claim over the

firms assets in preference to the claim on the firm’s assets by the personal

creditors of the firm’s owners.

• The second rule of entity shielding concerns “liquidation protection.” The

individual owners of the corporation (the shareholders) cannot withdraw their

share of firm assets at will, nor can the personal creditors of an individual owner

foreclose on the owner’s share of firm assets.

• The third rule permits certain persons to buy and sell the firms assets and to act

on its behalf. This is the rule of “delegated management” that grants the board of

305 Ibid. 306 Ibid.

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directors, rather than the individual owners, the power to bind the company in

contract.

• Another type of rule specifies the procedures by which both the firm and its

counterparties can bring lawsuits on the contracts entered into in the name of the

307 firm, that is, what is called the right to sue and be sued.

Considering the first two rules as a single rule, the authors maintain that each of these three types of rules—entity shielding, authority, and procedure—create common expectations, among a firm and its various present and potential creditors, concerning the effect that a contract between a firm and one of its creditors will have on the security available to the firm’s other creditors.308 The learned leading authors go into many other details, which cannot be reproduced here. Nevertheless, the feeling that one gets is that all these nice and detailed arguments are theoretical explanations. They cannot match the reality and power of the concessionary theory, which has many supporters.

Butler, a well known writer on the subject, favours the contractual theory. He concludes an excellent article in these words: “Finally, the contractual theory of the corporation offers a new perspective on the corporation and the role of corporation law.

The corporation is in no sense a ward of the state; it is, rather, the product of contracts among the owners and others. Once this point is fully recognized by the state legislators and legal commentators, the corporate form may finally be free of unnecessary and intrusive legal chains.”309 Janet Dine, whom we have quoted at length in this section, also appears to favour the concession theory, however, she gives her own theory called the “dual concession theory,” which she also refers to as the “bottom up” concessionary

307 Ibid. 308 Ibid. 309 Butler, “The Contractual Theory of The Corporation,” 123.

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theory.310 Melvin Eisenberg has the following to say: “[T]he nexus-of-contracts conception is unsatisfactory as a positive—that is, descriptive—matter, in part because the corporation has a dual nature: In one aspect, it consists of reciprocal arrangements; in another, it is a bureaucratic hierarchy. The nexus-of-contracts conception captures only one of these two aspects of the corporation …the conception lacks intellectual coherence and often gets in the way of clear thinking by substituting conclusory assertions for careful analysis.”311 There are so many arguments on both sides that it is difficult to decide which way the balance tilts; it ultimately comes down to a question of personal preference or conviction of a writer. This is what Bratton realises, and concludes the discussion for us in the following words:

Whatever the future interplay of theory and power, the concepts that make up

theories of the firm—entity and aggregate, contract and concession, public and

private, discrete and relational—will stay in internal opposition. This tendency

toward contradiction should be accepted, not feared. The contradictions are

intrinsic. No foreseeable scholarship or legislative reform will resolve them. The

contradictions also are wholesome. Studying and reflecting on their interplay in the

law enhances our positive and normative understanding. Legal theories that heavily

privilege one or another opposing concept risk positive error. Theory, instead of

denying the existence of the contradictions, should synchronize their coexistence in

312 law.

For the purposes of our study, this important statement may be interpreted to mean that when states wish to impose some form of corporate responsibility on corporations they

310 Dine, The Governance of Corporate Groups, 21. 311 Eisenberg, “The Conception That the Corporation Is a Nexus of Contracts,” 820. 312 William W. Bratton, “The ‘Nexus of Contracts’ Corporation: A Critical Appraisal,” Cornell Law Review 74 (1989): 464–65.

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may. This may be done on grounds that serve a larger global cause. We may now turn to the meaning and personality of “corporate groups,” that is, to consider the phenomenon of related or associated companies and their relationships with each other, particularly with reference to group personality and liability.

3.3 Corporate Theories From a Slightly Different

Perspective

We have discussed three theories above; namely, the contractual theories, communitaire theories and concessionary theories. In addition to this, we also mentioned “reality theory” of the corporation. There are other theories, or the same theories under different names, that may be mentioned. One such classification is into the concession theory, the aggregate theory and the reality theory. As discussed in the previous section, the concession theory and the communitarian theory are based on the same idea and one represents an extreme version of the other. Thus, the focus was on two main theories.

Likewise, the reality theory lost favour with experts. The “aggregate theory” may be said to be an older version of the contractual thoery. In 1932, Adolf Berle and

Gardiner Means published their seminal work, The Modern Corporation and Private

Property, which strengthened the aggregate theory of the corporation.313 They described the transformation of the corporate form in terms of the agency problems created by the separation of ownership and control. In doing so, they shifted emphasis from the corporate entity to the corporate enterprise highlighting the relationship

313 Adolf A. Berle & Gardiner C. Means, The Modern Corporation and Private Property: With a New introduction by Murray L. Weidenbaum and Mark Jensen (New Brunswick, New Jersey: Transaction Publishers, 1991), 247.

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between the shareholders and the managers. The aggregate theory, therefore, is the contractual theory that was promoted by Jensen and Meckling.314 The purpose of mentioning these terms was to point out that if they are used interchangeably, there should be no confusion.

3.4 The Meaning of a Corporate Group

In 1993, Phillip Blumberg explained that multinational corporations had challenged traditional concepts of both corporation law and international law in a new world in which “business is conducted worldwide by giant corporate groups, composed of affiliated companies organized in dozens of countries.”315 A new “enterprise” law is emerging, he stated, that is changing the traditional theory of the corporation of the nineteenth century to one of corporate groups. He then claims that it is for the first time that he is talking about the “legal personality of the corporate group.”316 This leads to natural questions like what are corporate groups? why is the earlier corporation changing or has grown into the corporate group? what are the theories that explain the existence and functioning of these groups? is there a law somewhere that governs and regulates these corporate groups? In the rest of this chapter, we will be occupied mostly with these questions. The liability of these groups will be considered in the next chapter.

314 Michael C. Jensen & William H. Meckling, “The Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics 3 (1976): 305. 315 Blumberg, The Search for a New Corporate Personality, vii. 316 Ibid. Janet Dine expresses surprise on why the corporate group and its consequential governance is missing entirely from books on company law: “Perhaps the most astonishing thing about this topic is the lack of an intense debate concerning the corporate governance of groups of companies. The topic is absent from or briey treated in many of the company law textbooks and treatises on corporate governance and discussion of the problems posed by groups of companies often focuses narrowly on insolvency issues rather than a concern with the governance of groups of companies.” Dine, The Governance of Corporate Groups, 37.

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3.4.1 Why do Corporate Groups Exist?

The answer to this question must be mainly economic, but there are legal implications too. We may give both answers, but if we ask the same question in a somewhat negative manner the response may turn out to be more beneficial: why was it that the corporations did not grow into groups right from the early times? In the previous section, we have examined the concession theory of the corporation, which restricts the purposes of a corporation to those listed in the charter or the memorandum of association. If corporations acted outside of this specified list of authorized objectives, there acts would be annulled by the courts on the basis of the famous doctrine of ultra vires. It was for this reason that the early corporations were not allowed to “purchase the stock of other corporations,” especially when the corporation whose stock was purchased had entirely different objectives.

Blumberg says: “In the nineteenth century, American law was settled that in the absence of an express grant in the statute or its charter a corporation had no power to purchase the stock of another corporation.”317 This position was elaborated by the

Supreme Court in De La Vergne Refrigerating Machine Co. v. German Savings

Institution in 1899 in the following words:

But as the powers of corporations, created by legislative act, are limited to such

as the act expressly confers, and the enumeration of these implies the exclusion of

all others, it follows that, unless express permission is given to do so, it is not within

the general powers of a corporation to purchase the stock of other corporations for

318 the purpose of controlling their management.

317 Blumberg, The Search for a New Corporate Personality, 52. 318 175 U.S. 40, 54-55 (1899), as quoted in ibid., 53.

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It was not only the doctrine of ultra vires that was frequently advanced as the rationale for the decision, the courts discussed the idea of “control” as well.319 Thus, a

Georgia court, holding invalid a corporation’s acquisition of stock of another corporation, stated:

[A] corporation is a mere creature of the law, and only exists at all, for the

purposes declared in its charter, and has absolutely no powers but those which the

law confers upon it. … It has ever been considered the very highest public policy

to keep a strict watch upon corporations, to confine them within their appointed

bounds and especially to guard against the accumulation of large interests under

320 their control.

The situation prevailed for a long time, but then inroads were made by banks and insurance companies, water and gaslight companies, and railroads. Blumberg mentions the statutes of the Baltimore & Ohio, 1832-1846; the Pennsylvania Railroad in 1855; and railroads generally in New Jersey in 1849. He then states: “Railroads thus comprised the first corporate groups in the country.”321 The learned author traces the movement for the emergence of groups through resistance to the antitrust movement, and later the resistance of the courts to restructuring and reorganization of corporations, and then concludes that by 1917 “[t]he general corporate authority to acquire stock of other corporations became an accepted aspect of American corporation law.

319 Blumberg points to several cases where the courts declared the purchase of stock unlwful even when the corporate charter has expressly include the power in the attempt to make it impossible to contend that exercise of the power was ultra vires. The courts then said that the stutute (company articles) should also include such power. The underlying real reasons, Blumberg indicates, were the deep suspicion and hostility of corporations generally, particularly among Jacksonians, deep antagonism to monopolies, and attempts to control. Ibid. 320 Central R.R. v. Collins, 40 Ga. 582, 625, 630 (1869), as quoted in Blumberg. “The nineteenth century judges had a firm understanding of the significance of stock ownership and its relationship to direction of the corporation’s business and affairs. Thus, the use of the term ‘control’ in this context was early known to the law. Corporate cases of the period contain numerous references to ‘control,’ leaving no doubt that the concept assumed a prominent role in lawyers’ understanding and usage from the early days of the American republic.” Ibid. 321 Ibid., 55.

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…Corporate groups soon grew to occupy a commanding role in American industry and eventually in the world economy as well.”322 Thus, what came to be true for the United

States also affected the rest of the world.

This description explains the origin of corporate groups. We may now look at the economic need for these groups. A report on corporate groups submitted to the

Australian Investment Commission by Companies and Securities Advisory Committee, which included scholars like Blumberg, summarized the reasons for the formation of

323 groups. We may list some of the important reasons out of these:

• Major economic and commercial benefits are the reducing of commercial risk, or

maximising potential financial return, by diversifying an enterprise’s activities

324 into various types of businesses, each operated by a separate group company.

• Preserving intangible commercial property of existing companies by acquiring

325 the companies themselves to expand an enterprise or increase market power.

326 • Attracting capital without forfeiting overall control.

• Lowering the risk of legal liability by confining high liability risks, including

environmental and consumer liability, to particular group companies, with a view

327 to isolating the remaining group assets from this potential liability.

322 Ibid., 58. 323 Companies and Securities Advisory Committee, Corporate Groups Final Report 2000 (Sydney, NSW: ASIC, 2001), 3–4. 324 Ibid., 3. 325 A corporate group may wish to continue operating an acquired company as a separate group entity to utilise its corporate name, goodwill and public image. Also, it is frequently preferable, for taxation reasons, to acquire companies as a going concern, rather than merely their assets. Ibid. 326 A group controller may want outside investment in only part of its overall business. This can be achieved by incorporating that part of the business as a separate subsidiary and allowing outside investors to acquire a minority shareholding in it. Ibid. 327 Ibid.

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328 • Providing better security for debt or project financing.

329 • Simplifying the process of partial sale of an enterprise.

330 • Complying with various regulatory requirements.

The Report also states that a corporate group may also develop incidentally, for example, where the group acquires an outside company which itself is a holding company of various other companies.331 The Report, thus, provides an excellent summary of all the reasons for which a corporate group may be formed. The most important out of these for our purposes is the reason dealing with liability: “Lowering the risk of legal liability by confining high liability risks, including environmental and consumer liability, to particular group companies, with a view to isolating the remaining group assets from this potential liability.”332 The picture about this aspect of liability has been so aptly and precisely painted by Blumberg in the following words:

Under traditional entity law, each component corporation of the group—

whether parent, subsidiary, or affiliate—for legal purposes was still separate and

distinct from every other corporation in the group, and its rights and responsibilities

were separate from those of the other constituent companies of the group and were

unaffected by them. Insofar as entity law insulated the ultimate investors or

shareholders in the parent corporation from liabilities of the parent, the traditional

328 For instance, a lender may require that the borrower shift specific assets into a separate company incorporated for that purpose, thereby ensuring that the lender has a first charge over the whole or most of the new company’s property. Likewise, a separate group company may be formed to undertake a particular project and obtain additional finance by means of substantial charges over its own assets and undertaking. Ibid., 4. 329 It is often easier, and more tax effective, to transfer the shares of a group company to the purchaser, rather than sell discrete assets as would be necessary if the enterprise were conducted through divisions of one company. Ibid. 330 Some enterprises may need to maintain separate subsidiaries to satisfy prudential or other statutory requirements. In the case of multinational groups, the domestic law of particular countries in which those groups wish to conduct business may require that the local businesses be conducted through separate subsidiaries (sometimes subject to minimum local equity requirements). Ibid. 331 Ibid. 332 Ibid.

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concept continued to achieve its objective. Entity theory and limited liability,

however, did not apply only to the shareholder-investors of the parent. The parent

itself was a shareholder in its subsidiaries. Accordingly, although the parent, unlike

its public shareholder-investors, was part of the enterprise and engaged in the

business, entity law and limited liability also insulated it from liability for the

activities of its subsidiary companies. Corporate obligations imposed in accordance

with entity law no longer pertained to the entire enterprise but only to the assets of

the constituent corporation involved in the controversy. The remainder of the

333 enterprise escaped liability.

The author says that the fragmentation of an integrated business among a number of affiliated companies through legal form achieves legal consequences of great importance.334 As a result of this legal arrangement, “multinational companies operating around the world are predominant in the world economy. The national enterprise law of one nation imposing obligations on foreign components of the group in dealing with the legal problems of in-country affiliates inevitably presents a serious risk of confrontation with other nation-states. The interrelationship between enterprise concepts and extraterritoriality adds a major dimension to an already serious jurisprudential problem. National law applied to world business inevitably leads to international controversy.”335 Some ground has been covered by national, regional and international bodies, as we will see in this chapter and the whole study, but the general position is still quite similar to this learned writer has stated. We may now see how experts define the term “corporate groups.”

333 Blumberg, The Search for a New Corporate Personality, ix. 334 Ibid. 335 Ibid.

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3.4.2 Corporate Groups Defined

According to most writers, the attempt to define the term “corporate group,” a distinction must be made between the economic entity, which is promoted by the nexus of contracts approach and the entity approach that focuses on the concession theory.

Another distinction that has to be maintained is between the European approach and the American law on the issue. According to Virginia Harper Ho, “[d]efining the corporate group is a more complicated exercise. In Germany and France, the corporate group is a distinct entity form governed by its own body of law. In the United States, however, there is no entity form corresponding to the corporate group, nor is there a uniform definition.”336 She maintains that the effort to define the corporate group must begin by acknowledging that both the “corporation” and the “corporate group” are both firms in the Coasian sense. Thus, both are economic organizations, and the economic boundaries of the firm as an enterprise does not correspond to its legal boundaries.337

After saying this, she tries to identify the key defining characteristic of a corporate group. A corporate group, in her view, includes “a parent company and its direct and indirect subsidiaries, each with a separate legal identity and its own legal rights and obligations. Assets of the corporate group may be held in trusts, special purpose vehicles, and other separate legal entities owned by one or more members of the corporate group.”338 The OECD Guidelines, while denying the importance of a precise definition, state the meaning of “multinational enterprises” as follows:

A precise definition of multinational enterprises is not required for the purposes

of the Guidelines. These enterprises operate in all sectors of the economy. They

336 Virginia Harper Ho, “Theories of Corporate Groups: Corporate Identity Reconceived,” Seton Hall Law Review 42 (2012): 886. 337 Ho, “Theories of Corporate Groups,” 886. 338 Ibid.

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usually comprise companies or other entities established in more than one country

and so linked that they may coordinate their operations in various ways. While one

or more of these entities may be able to exercise a significant influence over the

activities of others, their degree of autonomy within the enterprise may vary widely

from one multinational enterprise to another. Ownership may be private, State or

339 mixed.

From an economic perspective, explains the Australian Report,340 corporate groups may be organised horizontally (for instance, several group companies operating at the same level in a production or distribution process)341 or vertically (group companies operating at different points in that process). Further, groups may be formed as, or develop into, “conglomerates,” whereby group companies conduct a diverse range of businesses in unrelated fields.342 Besides the hierarchical structure of parent and subsidiaries or the horizontal structure of “cross-shareholdings,” the important factor is that of “control.” An Australian court, for example, tries to define a group in these terms: “The word ‘group’ is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control.”343 The Report quotes another court as follows: “close and common management links, as well as an interlocking web of complex mutual shareholdings are features sufficient in de facto terms to constitute the various companies in question within the group as being properly described as such, being responsive to the needs and

339OECD (2011), OECD Guidelines for Multinational Enterprises, OECD Publishing, 17. http://dx.doi.org/10.1787/9789264115415-en. This citation form is required by the Guidelines. 340 Companies and Securities Advisory Committee, Corporate Groups Final Report 2000, 2. 341 See also Dine, Goverance of Corporate Groups, 39 quoting T. Eisenberg, “Corporate Groups” in M. Gillooly (ed.), The Law Relating to Corporate Groups (Sydney: Federation Press, 1993), 1. 342 Companies and Securities Advisory Committee, Corporate Groups Final Report 2000, 2. 343 Walker v Wimborne (1976) 3 ACLR 529 at 532, per Mason J, as quoted in Companies and Securities Advisory Committee, Corporate Groups Final Report 2000, 2.

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interests of each other as corporate entities through their management.”344 We may conclude the description of a “corporate group” with the following important passage from Virginia Ho:

Common ownership more clearly defines where the corporate group begins, but

the question of where the corporate group ends is another matter. The answer has

to do with the second and related criterion for membership in the corporate group—

control. At its most basic, “control” is defined as the ownership of a majority voting

interest of the corporation’s shares, which confers the power to select the board of

directors, although control may also be conferred contractually. Where the

shareholder is another corporation, the degree of control exercised by the parent

depends primarily on the voting interest of the parent corporation in the subsidiary,

which need not be identical to its financial stake. Subsidiaries may be wholly or

partially owned by their parent company, and the parent corporation may hold a

percentage interest that is also sufficient to exercise indirect control over

345 subsidiaries further down in the corporate structure.

Now that we have described the meaning of corporate group from different perspectives, we may end this section with a definition given by Blumberg. He says that corporate groups are “enterprises organized in the form of a dominant parent corporation with scores or hundreds of subservient sub-holding, subsidiary, and affiliated companies. These typically conduct a single integrated enterprise under common control and often under a common public persona.”346 Here the word

“dominant” means that control is directly or indirectly exercised by the parent.

“Common public persona” means that an impression of strength is created among the

344 Re Enterprise Gold Mines NL (1991) 3 ACSR 531 at 540, per Murray J, as quoted in Companies and Securities Advisory Committee, Corporate Groups Final Report 2000, 2. 345 Ho, “Theories of Corporate Groups,” 886 (footnotes omitted). 346 Phillip I. Blumberg, “The Transformation of Modern Corporation Law: The Law of Corporate Groups,” Connecticut Law Review 37 (2005): 605.

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public and the market, but it does not mean corporate personality in the legal sense for the entire group.

3.5 Enterprise Concepts and Theories of Corporate Groups

The search for a new personality for the group often called “enterprise law” began as a clash between the entity concept and the maintenance of its outward form versus the

“economic realities” and “system analysis” for the corporate group.347 In an extraordinary presentation on the search for a new personality for the corporate group,

Phillip I. Blumberg has presented an overview of the development of such ideas in the

American legal system.348 The main activity on this issue was in the courts, but statutory law also took notice of the problem.

Most of the early cases pertained to railroads, but were not confined to them. Cases ranged from the construction industry to taxi cabs being run as individual corporations.

The cases began in 1854 when the Supreme Court for the first time faced the issue of intragroup liability in York & Maryland Line Railroad v. Winans involving patent infringement liability of a Pennsylvania subsidiary for patented railway cars.349 This was followed, in 1895, when the Supreme Court was called upon to consider intragroup relationships in Lehigh Mining and Manufacturing Co. v. Kelly.350 This was followed by a long line of cases where a railway company had been sued either in contract or in

347 “This dimension is best captured by two competing approaches: the enterprise view and the entity view. An enterprise approach views all of the legal entities that comprise the corporate group as part of a single economic organization, while the entity view emphasizes the separate legal identity of the affiliates that together form the corporate group.” Ho, “Theories of Corporate Groups,” 898. 348 Blumberg, The Search for a New Corporate Personality, 70–88. 349 The cars operated on the subsidiary’s line from York, Pennsylvania, to the Maryland boundary, where they continued on to Baltimore on the line of its parent, the Baltimore & Susquehanna Railroad, a Maryland corporation. 350 A Pennsylvania corporation instituted an action in the federal district court in Virginia against a Virginia corporation to settle title to Virginia land. Both cases are cited and elaborated in Blumberg, The Search for a New Corporate Personality, 67–69.

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tort. The main issue always was whether the “economic reality” of the group had to be given importance or the separate entity of the corporations within the group was to be maintained. The reason why these cases pertained to railways was that the railroads of the country were increasingly being organized into a series of great systems that operated through trains over the interconnected tracks of the various component subsidiary and lessee corporations played an important role in the development of the law for decades. It is not possible for us to record the details of these cases nor will it serve a major purpose of this thesis. Blumberg’s excellent description is unmatched and may be accessed for the details.351 We will, however, briefly record the standards that

352 the courts tried to use for asserting the personality of the group.

Blumberg states that in dealing with the problem of corporate groups in order to determine the liability of one member of the group for the obligations raised by another member, the courts faced some difficulty and usually came up with a vague and unsatisfactory conceptual framework.353 The first such concept that was used by the courts was that of “partnership,” that is considering the group as a large partnership.

This analogy did not survive for long due to “the inherent difficulties of squeezing the distinctive economic organization represented by the corporate group into the

351 Some of the important cases were: Union Pacific Ry. v. Chicago, Rock Island & Pacific Ry; Phinizy v. Augusta & K.R. Co.; Pennsylvania Railroad v. Jones; Chesapeake & Ohio Railway v. Howard; Lehigh Valley Railroad Co. v. DuPont; Lehigh Valley Railroad Co. v. Delachesa; Davis v. Alexander; Cannon Manufacturing Corp. v. Cudahy Packing Co.; Berkey v. Third Avenue Railway; United States v. Reading Co.; United States v. Delaware, Lackawanna & Western Railroad; United States v. Elgin J. & E. Railway; United States v. South Buffalo Railway; Peterson v. Chicago, Rock Island & Pacific Railway. All these cases have been discussed by Blumberg. 352 Blumberg summarizes the background about the legal position taken by the courts on the personality of the corporate group. “All courts accepted the traditional corporation law doctrine that the corporation and its shareholders were separate legal units. Shareholders could not sue on corporate claims, did not own corporate assets, and were not liable for corporate debts. Some courts simply stopped there, preventing the imposition of group liability for acts of a particular subsidiary. The significant thing is that for a while some courts, including the Supreme Court, in some but not all decisions, and certain other courts, including the Court of Appeals for the Second Circuit, were not ready to close the discussion at this point. They sought to go further and to develop new theories of what is now called enterprise law, under which the legal interrelationships of parent and subsidiary corporations could be determined on a group or system basis.” Blumberg, The Search for a New Corporate Personality, 71. 353 Ibid., 82.

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requirements of the partnership law,”354 and as a result partnership concept as a rationale disappeared quite early.

The related concept of “agency” was also applied and this effort lasted for a longer time. The main idea was to “treat the parent’s control over the subsidiary as the equivalent of the principal’s power to direct the activities of the agent.”355 Scholars argued that the agency concept as it was found in the common law sense could not be applied to the parent-subsidiary relationship. The arguments are detailed, but the crux of the main argument was that the subsidiary had not been authorized to bind the parent corporation nor was this implied by its acts.356 The subsidiary always acts in its own name and its own behalf, even if the economic results are similar to those that accrue from a principal-agency relationship. Judge Learned Hand and others argued that if the concept of agency was expanded on the basis of “control” that existed in both situations, it would “make every parent liable for every act of a subsidiary.”357 It is to be noted that the concept of agency is employed in the entity concept for piercing the corporate veil in combination with other metaphors like “instrumentality,” “alter ego,” “department,”

“conduit,” “puppet,” and the like.

The “alter ego” concept was altered in the late 19th century to govern relations between parent and subsidiary. In those days of American law, this term had become prominent in corporate law in corporate torts. A negligent employee was held to be acting on behalf of the corporate employer, that is, as a case of vicarious liability. This concept was closer to the common law idea of agency. It was then used in the twentieth century as “a convenient route to disregarding the corporate entity.” This would imply

354 Ibid., 80. 355 Ibid. 356 Ibid. 357 Ibid.

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that the subsidiary lost its corporate entity for all purposes. Nevertheless, after considerable maturation of the doctrine that courts were ready to recognize that the subsidiary ceased to be a single entity only for purposes of the case being decided and retained its separate identity for other purposes. There are some cases even today in which courts maintain that the subsidiary’s separate corporate existence is being disregarded and that liability is being imposed because the parent and subsidiary

358 represent only a single legal entity.

A doctrine ultimately gained ground in the attempt to disregard the corporate entity producing its own jurisprudence called the jurisprudence of “piercing the corporate veil.” It became a prominent doctrine producing substantial legal literature that analyzed the numerous reported cases and attempted to formulate the legal principles on which they were based. Courts in “rare” or “exceptional” cases impose liability upon a shareholder for obligations of a corporation under one or another of the three variants of the doctrine: “instrumentality,” “alter ego,” and “identity.” We need not go into the details of this doctrine as it is very well known. The major purpose in the context of the group is that the veil is pierced to make the shareholders liable where one of the major shareholders will be the parent. What is important to note is that in two major areas— jurisdiction and torts—a number of courts in America have pierced the veil on a showing of what the court regarded as excessive control by the parent corporation, without regard to other factors.

Blumberg concludes that “entity law,” and “piercing the corporate veil” as its safety valve in rare or exceptional cases, is still the firmly established, governing and dominant law in the United States. Nevertheless, this law and its doctrines have begun to erode.

358 Ibid., 83.

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Such erosion, he says, is clearly seen in the area of “torts and in certain procedural questions, including jurisdiction, venue, and service, it is even more evident in judicial decisions construing statutes of general application in which Congress has not

359 addressed the question of entity or enterprise.”

Blumberg was writing almost two decades ago. There have been many attempts to go beyond what he said, and to trace the development of the law. Most of these attempts venture into the area of tort liability of groups, which we will address in the next chapter. One good attempt to the study the personality of corporate groups and the theories surrounding them is by Virgina Harper Ho, in an article on Theories of

Corporate Groups: Corporate Identity Reconceived.360 The author has tried to measure corporate group personality against various theories like the concession theory, the aggregate theory (nexus of contracts) and a few others. The net result, besides a few recent cases that will be discussed in the next chapter anyway, is that it is the aggregate theory or the contractual view that more easily sees the corporate group as a single unit or as a single enterprise. The recognition of a personality for such an enterprise, according to this view, is a theoretical construct and does not conform to reality found in courts, which still follow the concession theory and do not recognize a “personality” for the group to include the parent and the subsidiaries.

Till such time that a personality is recognized for the group, we will rely on the analysis undertaken by Blumberg. The above discussion, however, has focused on the

American law. We have not attempted to understand the implications of the “conzern” that is the title for groups in German law. We will look at it in the next section.

359 Blumberg, The Search for a New Corporate Personality, 88-89. 360 Virginia Harper Ho, “Theories of Corporate Groups: Corporate Identity Reconceived,” Seton Hall Law Review 42 (2012): 898.

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3.6 The Law for Corporate Groups

In the previous sections, we have studied the meaning of corporate groups, identified the reasons for their existence, analysed the theories of personality for the single unit, and assessed their possible application to the groups in which they exist. The conclusion drawn was that corporate groups do not have a group personality in the American law or in the UK law along with all the jurisdictions that follow the common law. We did not pay much attention to the law in Europe. The law of Germany will be referred to in brief and its designation of the group as Konzern or “concern.” Before we do so, we may first identify some of the problems that arise within a group, and of which the law may take notice. After recording these points, we may briefly look at the laws that regulate corporate groups.

3.6.1 Issues or Problems to be Noticed by the Law

Recalling the definition given by Blumberg in a previous section, we may say that corporate groups are “enterprises organized in the form of a dominant parent corporation with scores or hundreds of subservient sub-holding, subsidiary, and affiliated companies. These typically conduct a single integrated enterprise under common control and often under a common public persona.”361 This definition highlights the relationship between the parent and its subsidiaries. This relationship may give rise to a number of tensions. Some of these tensions have been recognized by different writers,362 and we will summarize them below.

361 Phillip I. Blumberg, “The Transformation of Modern Corporation Law: The Law of Corporate Groups,” Connecticut Law Review 37 (2005): 605. 362 See, e.g., Cahn and Donald, Comparative Company Law, 677–81.

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Studies undertaken—for US, Britain and Germany—by writers like Chandler363 indicate that many early corporate groups producing everything from common consumer items to sophisticated products like pharmaceuticals, telecommunications equipment and aircraft have often used four methods to grow from single entities to large groups. These methods can be seen across many groups like Nestlé, Bayer,

Boeing, General Electric, E. I. du Pont de Nemours, Siemens AG, Telefunken, and AFA famous for batteries. While a group is created through equity participation or contractual obligations, there are four ways stated and these are: (1) Acquiring or merging with enterprises using much the same processes to make much the same products for much the same markets. This is called horizontal combination.364 (2)

Taking on units involved in the earlier or later stages of making a product, from the mining or processing of raw materials to the final assembling or packaging. This is called vertical integration.365 (3) Expanding geographically to distant areas. (4) Making new products that are related to the firm’s existing technologies or markets.366 These groups, therefore, often produce and sell products under a common name.

Growing into a large group brings with it certain advantages and disadvantages. The first obvious advantage is rapid growth. In addition to this, the first advantage is the enhanced significance of limited liability. This is the most important advantage. When the corporation is single and not a group, liabilities incurred on behalf of an unprofitable division may wipe out the profits of the entire business, which can drive the corporation into insolvency. By segregating parts of the enterprise into separate legal entities, the risk of failure of a particular activity is shifted to the entity’s creditors while the rest of

363 Takashi Hikino Alfred D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, MA: Belknap Press, 1990). 364 Ibid., 37. 365 Ibid. 366 Ibid.

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the enterprise remains unaffected.367 Limited liability, originally a means to encourage capital investments by individuals became, and still is, a force driving the organization

368 of large multicompany enterprises.

The second advantage is “control with less capital.” Berle and Means had indicated that in such giant corporations, control is possible with as little as 10%.369 Probably they had a single very large corporation in mind and not a group. Cahn and Donald, on the other hand, say that group-building allows for control of large enterprises with comparatively little capital. As the parent moves down the chain, the amount of capital needed for exercising control goes down.370 Another advantage is the acquired capacity of facilitate faster decision making due to shallow hierarchies that enable the management of the holding company to focus on long-term strategy and monitoring operations rather than on day-to-day business. In addition, there is great incentive for mid-level managers in the holding company, who can be employed as senior officers of a subsidiary. Further, acquiring companies as new subsidiaries leads to access to foreign markets where it might be more difficult to establish and to operate through a

371 mere branch office.

Turning into a group affects the interests of different types of stakeholders.

Activities of subsidiaries are conducted in the interest of the whole group, but liability arising from these activities is limited to the assets of the individual subsidiary. This is particularly dangerous for the creditors of the company, especially when the subsidiary is engaged in hazardous activities or is thinly capitalized and sustained by intra-group

367 Cahn and Donald, Comparative Company Law, 679. 368 Ibid. 369 see generally Adolf A. Berle & Gardiner C. Means, The Modern Corporation and Private Property: With a New introduction by Murray L. Weidenbaum and Mark Jensen (New Brunswick, New Jersey: Transaction Publishers, 1991). 370 Cahn and Donald, Comparative Company Law, 679. 371 Ibid., 680.

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loans.372 There are other matters that are difficult to detect, but do exist. These are like transfers of value from the subsidiary to the parent or other related corporations by way of pricing arrangements for goods or services, or like the taking of the subsidiary’s corporate opportunities. Such matters are dangerous for the minority shareholders of a subsidiary. There are other lesser dangers, some related to voting rights, retained

373 earnings and dividends, but what we have said will suffice.

We may now raise the problem issues from the perspective of law. The background for these problem issues is that the corporate entity has its own legal personality, and the management of a corporation owes specific duties to their company and its shareholders, who themselves stand completely separate from the entity’s own liability and incur no risk beyond the amount of their investment.

• The first problem is that directors must pursue the good of their corporation, that

is, they owe a duty of loyalty to their corporation, so how may they sacrifice this

374 good for the well-being of the entire group?

• Directors must exercise independent judgment, governed by the business

judgement rule, so how may they be forced to follow instructions from the

375 management of their holding company?

• A company’s debts are its own, so how may a parent company be held liable for

the debts of an undercapitalized subsidiary that it has used as a mere

376 instrumentality?

372 Cahn and Donald, Comparative Company Law, 680. 373 Ibid. 374 Ibid., 667. 375 Ibid., 667. 376 Ibid.

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3.6.2 The Law in the USA and UK

Phillip Blumberg, after surveying a large number of decisions handed down by the US courts, concludes by saying that although “entity law and its corollaries—limited liability and ‘piercing the veil jurisprudence’—are unquestionably still the foundation of American corporate law, the challenge presented by corporate groups to the legal system has resulted in the widespread adoption of principles of enterprise law in many disparate areas.”377 He maintains that where implementation of the legal policies and objectives, determined for a particular area, so require, the legislatures, administrative agencies, and courts are increasingly ready to depart from entity law and apply enterprise principles in cases involving component companies of corporate groups.378

The implementation of these policies and objectives and related developments have been going on for the past sixty years have, in his view, and have reached a stage where they must be recognized as having created a new jurisprudence of their own: the

American law of corporate groups.379 In short, he is saying that although legal personality has not been granted to corporate groups, the law and legal realities have been compelled to ignore the entity concept for individual units and to recognize the corporate group in practice as a group. It is this recognition in practice that now appears as the “American law of corporate groups.”

This new enterprise law is seen by Blumberg as consisting of four quite different classes of situations:

1. Common law jurisprudence based on two factors: There are two factors that

influence common law jurisprudence involving private controversies about

377 Blumberg, The Search for a New Corporate Personality, 120. 378 Ibid. 379 Ibid.

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enterprise law. “First is the nature of the group interrelationship, consisting of the

intertwined structure and operations—including the significant exercise of

control—together with economic integration, administrative and financial

interdependence, intertwined personnel policies, and group persona.”380 The

second is an evaluation of the significance of the adoption of enterprise principles

for implementation of the objectives of the law in the legal area involved.

Blumberg has called the consequence of this approach as “liberalized piercing

381 the veil jurisprudence.”

2. Judicial construction of statutes of general application to lend strength to

enterprise law: The second situation is reflected in the judicial construction of

statutes of general application, where enterprise law rests on a somewhat lesser

showing of such group interrelationship. On evaluation, the courts acknowledge

the significance of the adoption of enterprise principles for implementation, and

382 prevention of frustration, of the objectives of the statute.

3. Control given prominence in statutes of specific application: The third

situation is exhibited in statutes of specific application to corporate groups, where

“control,” and “control” alone, is almost invariably the crucial statutory

383 standard.

380 Blumberg, The Search for a New Corporate Personality, 119. 381 “American courts have made considerable progress in the difficult case-by-case evolution of a doctrinal standard for application of enterprise principles. In the more forward-looking decisions, both in common law controversies and in construction of statutes of general application, the courts have moved well beyond emphasis on the formalistic factors that had constituted previously the core of traditional “piercing the veil jurisprudence.” This may be termed “liberalized piercing the veil jurisprudence.” The courts are concerned instead with the economic realities. Do the separate corporations actually function as integral parts of the group or do they operate as independent businesses? If the former is true, will application of enterprise principles better implement the underlying policies of the law in the area?” Ibid. 382 Ibid. 383 Ibid.

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4. Court decisions in the case of procedure and bankruptcy: The fourth situation

can be witnessed in judicial decisions in the fields of judicial procedure and

bankruptcy. These areas are amalgams of judicial doctrines and statutory

codifications. In procedure, the standards employed reflect the particular

procedural doctrine at issue, ranging from primary emphasis on “control” in “res

judicata, collateral estoppel, discovery, and scope of injunctions to much more

complex standards in such areas as jurisdiction.”384 In certain areas of

bankruptcy, the courts are reaching enterprise results through application of the

historic standards of equity jurisprudence in the light of the economic realities of

385 the group debtors before the court.

In consequence, says Blumberg, “enterprise principles take on different content in the various areas, and it is foolish to expect that any consistent or transcendental body of jurisprudence will emerge. The choice between enterprise principles and entity law will reflect the values and interests at stake and the fundamental nature of the choice to be made by the court in the case at hand. Decisions applying enterprise principles will vary as the nature of the problem and local perceptions of the jurisprudential problem changes. Enterprise law will necessarily be untidy and inconsistent.” Blumberg’s analysis traces the move towards the acknowledgement of the reality of enterprise law, but states that precise prediction of court decisions will not be possible, and inconsistencies will naturally prevail till such time that a personality is recognized for the corporate group.

As regards the United Kingdom, Blumberg traces a number of decisions and maintains that “[n]otwithstanding isolated decisions and selective instances in statutory

384 Ibid. 385 Ibid.

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law, England, followed by its Commonwealth spin-offs, remains among the nations most firmly committed to traditional entity principles.”386 He goes on to add that

“Salomon and entity law have rendered English courts impotent to deal with the problems presented by corporate groups under statutes of general application where

Parliament has not specifically addressed the issue.”387 Statutory law too has applied enterprise law principles only where remedial statutes seek to protect employees and

388 unions in such areas as sex discrimination and secondary boycott.

3.6.3 EU Law and the German Law of the “Konzern”

Like Blumberg, Cahn and Donald also conclude that groups of companies are regulated by a number of special laws focused on particular areas such as: (1) accounting

(preparation of consolidated group accounts); (2) taxation (concept of worldwide unitary taxation), antitrust (concept of conglomerate mergers); (3) insolvency law

(worldwide assets in liquidations); and (4) specialised legislation for particular types of companies, such as financial institutions (bank holding companies) and public utilities.

“Each of these laws addresses the fact that, although the units are legally separate entities, they operate in a unified group that is guided by central management.”389

Comparing the laws of the USA, the UK and Germany, these authors conclude that of

“our three jurisdictions, Germany is the only one with a statutory body of ‘group law.’

This is in part a function of the mandatory nature of German law. …Rather than delegation to private ordering, German Konzernrecht overrides other mandatory provisions of the Aktiengesetz and allows fundamental characteristics of the corporation to be altered, so as to achieve in practice what Williamson describes as the benefits of

386 Ibid., 154. 387 Ibid. 388 Ibid. 389 Cahn and Donald, Comparative Company Law, 681.

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the M-form, such as creating an ‘internal capital market’ to allocate resources among the group members.”390 German Konzernrecht,391 according to the authors, is found in

§§15-19 and 291-328 of the Aktiengesetz. These rules are designed for the protection of the subsidiary’s minority shareholders and creditors. Protection of creditors will obviously mean conceding tort claims. The definition sections, the authors maintain, apply to “enterprises” (Unternehmen) irrespective of their legal form. An “enterprise” as referred to in these provisions is any entity engaged in commercial activities of a dimension making it reasonable to suspect that the entity might promote these other activities at the expense of the controlled corporation. This definition of “enterprise”

392 can apply both to individuals and to public entities.

The practical effect of these provisions, the authors explain, is to allow an independent corporate entity and its management to be turned into a unit of a larger whole to protect the most vulnerable constituencies in this arrangement. There are two ways, they say, in which a concern may be formed: expressly, by contracts referred to as “enterprise agreements” (Unternehmensverträge), or in fact (de facto) by actual influence (faktischer Konzern).393 This description is sufficient for our purposes, and it shows how the world is gradually coming to grips with the reality of the corporate groups and the emerging enterprise law.

3.6.4 Corporate Groups and the Law of Pakistan

We have already discussed the provisions of the law in Pakistan within the discussion of “Modern Structures: Parents and Subsidiaries” in chapter 2. We do not feel the need

390 Ibid., 682. 391 The term Konzern means “Concern,” which derives from the Latin concernere, meaning to mingle separate things together. 392 Cahn and Donald, Comparative Company Law, 682. 393 Ibid.

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to add to that description, except that the law will change when the law in the UK and the Commonwealth changes first. The proposed Bill of 2015 does not appear to add much to the existing law.

CONCLUSION

We have now discussed legal personality of corporations at length. We traced the origin of legal personality and then dealt with the various theories that best explain the nature of this personality. The major purpose of doing so was to see if “corporate groups” have also been assigned legal personality because they are in reality a single enterprise.

Accordingly, the meaning of corporate groups was first examined and understood. It was seen that though personality is not recognised completely for these large groups, they were treated as single persons for certain special purposes like accountancy and taxation. To study this aspect thoroughly, the law for corporate groups was taken up as it is conceived and applied in different jurisdictions all over the world. Of particular interest was the law of the “konzern” of Germany. The law of Pakistan for such groups was also referred to. We are now ready to look at the concept of limited liability and how it works within what is called “piercing the veil jurisprudence.” Of special interest for us will be the reasons and occasions due to which limited liability is set aside, especially for torts. We now examine this in the next chapter.

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CHAPTER 4 LIMITED LIABILITY, TORTS AND MULTINATIONAL CORPORATIONS

4.1 Introduction to Tort Claims and Multinationals

The second vital feature of the modern corporation, besides an independent personality, is that of limited liability. In the previous chapter, we have seen how legal personality has enabled the parent corporation to shield its assets and business from the liability of its subsidiaries and affiliated concerns. We have also seen that the law that exists for corporate groups in different jurisdictions is a law that favours the home states, who have to gather taxes to run governments, for which purpose they may brush aside the different entities and see the whole group as a single enterprise. The creditors of the subsidiaries, and even the minority small shareholders, are at a big disadvantage for they cannot have access to the assets of the larger enterprise to satisfy their claims or to enhance them in the shape of larger dividends. The most disadvantaged position is that of the citizens of the poor and developing countries where these larger groups send their subsidiaries or affiliates to operate. While bringing investment to these developing countries, the subsidiaries may wreak havoc in the environment and brutally exploit the local natural resources, violate the basic rights of the citizens in their greed to attain many unfair advantages through bribery and corruption, especially where the developing countries are pursuing privatization schemes in a big way under the directions of the IMF and World Bank. The corrupt rulers often succumb to bribes and become tools in the hands of these giant enterprises.

In this chapter, we will first examine the origin and development of the idea of limited liability. This is essential as the idea is directly linked to what Blumberg, in the

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previous chapter, has called “the jurisprudence of piercing the corporate veil.” Piercing of the corporate veil basically means denying the advantages that exist due to limited liability, and to expose the assets of the entire enterprise to the tort or other claims of the victims of the subsidiary operating in the host country.

The possibility of piercing the corporate veil of the subsidiary, to reach the assets of the whole enterprise, to satisfy the claims of victims in a developing host country can take place mainly in two jurisdictions, besides the limited remedies available in the host countries themselves. These are the United States of America and the European

Union, including the United Kingdom. In the United States, the major claims that have been brought to the U.S. courts from outside the U.S. have been under the Alien Tort

Claims Act (ATCA) also called the Alien Tort Claims Statute (ATS). While the strength of this statute may be weakening or be on the wane as a result of recent decisions by the U.S. Supreme Court, a study of these cases provides an excellent opportunity of understanding the entire process of suing multinationals and corporate groups. As such it is very beneficial to look at the approaches and strategies of suing and the defences raised by the MNCs, along with the difficulties faced by the claimants in the host countries. We will, therefore, give some space to the Alien Tort Claims Act (ATCA) in this chapter.

If the ATCA or ATS is on its death-bed, what are the other possibilities of pursuing claims, in one form or the other, against the MNCs? One possibility is the bringing of suits directly in the home state of the parent or the subsidiary within the U.S. This is sometimes called foreign direct tort liability of the MNCs.394 Although there are no major precedents in this area, the avenue may grow into a more fruitful channel now

394 See, e.g., Enneking, Foreign Direct Liability and Beyond, 73 passim.

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that the ATS is fading into the background. Another possibility is that of complaints under the Foreign Corrupt Practices Act (FCPA), as some are even proposing the creation of a human right of freedom from corruption to lend strength to action under this law. Most jurisdictions have their own versions of this law. We will, however, not consider this possibility in this chapter, but will postpone it for a later chapter. In that later chapter, we may also take up briefly the possibility of action under environmental laws, both national and international.

In addition to the USA, many large corporate groups belong to the European countries, especially the United Kingdom. We will consider a few cases that have been brought against multinationals in Europe. This description is expected to tell us how the laws of Europe accommodate such claims, and with what success and effectiveness.

Finally, to close this chapter, we will examine the possible options that may be available to Pakistan. We begin below with an overview of the development of the idea of limited liability.

4.2 The Concept of Limited Liability and Tort Claims

We will first take up a historical overview of the concept of limited liability and then look at some of the issues and approaches to the brushing aside of limited liability, especially in the case of torts.

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4.2.1 Historical Overview of the Concept of Limited

Liability

Henry Manne argued that the modern publicly held corporation with many small shareholders could not exist without limited liability.395 The reason being that investors would not make small capital contributions to diverse firms without exposing themselves to such liability. Even a single share of stock would place all of their personal assets at risk.396 To guard against this risk, they would have to select just a few companies for investment where they could actively monitor management.397 This can be seen if we briefly look at early forms of business. Thus, in ancient Rome many corporate entities existed, but liability remained unlimited.398 According to Gillman and

Eade, the reason for this, in part, is due to the fact that most firms were not highly specialized, and pressure towards limited liability is created when there is a separation of ownership and control.399 In the case of the pater familias, however, the head of the principal economic unit in Rome, was liable for the debts of a slave or son only to the extent of the extent of the peculium, or sum entrusted to him.400 This shows that though

Rome had well-developed notions of both corporate personality and limited liability, they were not related to each other.401 In medieval Italian times, joint and several

395 Henry Manne, “Our Two Corporation Systems: Law and Economics,” Virgina Law Review 53 (1967): 259. 396 Ibid., 262. 397 Daniel J Morrissey, “Piercing all the veils: Applying an established doctrine to a new business order,” Journal of Corporation Law 32, no. 3 (2007): 538. See also William J. Carney, “Limited Liability Companies: Origins and Antecedents,” U. Colo. l. Rev. 66 (1994): 664. 398 Carney, “Limited Liability Companies,” 664. 399 Max Gillman and Tim Eade, “The Development of the Corporation in England, with Emphasis on Limited Liability,” International Journal of Social Economics 22 (1995): 22. 400 William J. Carney, “Limited Liability,” in Encyclopedia of Law and Economics (Chicago: University of Chicago, 1999), 660, citing David Johnston, “The Development of Law in Classical and Early Medieval Europe: Limiting Liability: Roman Law and the Civil Law Tradition,” Chicago-Kent Law Review, 70 (1995): 1515-1538. 401 Ibid., citing David L. Perrott, “Changes in Attitude to Limited Liability—the European Experience,” in Limited Liability and the Corporation, ed. Tony Orhnial (London and Canberra: Croom Helm, 1982), 82.

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unlimited liability was the rule in Italian city-states during the twelfth and thirteenth centuries402 When commerce expanded outside the city-states, larger amounts of capital was required and outside investors who participated, either for interest or a share of profits, were liable only to the extent of their investment.403 This gave rise to the commenda, which was widely adopted throughout the Mediterranean.404 The en commandite partnership was legalized in France in 1671, in Ireland in 1782, elsewhere on the Continent and in a few states in the USA in the early nineteenth century, and in

England in 1907.405 Limited liability did not appear for chartered companies until the

1780s when clauses were inserted in charters limiting the liability of shareholders to the amount represented by their shares. Before this, shareholders’ liability had been unlimited, but the directors of the French East India Company appear to have had limited liability.406 In 1807 France provided limited liability for joint stock companies,

407 while Napoleonic conquests spread this form to a number of German provinces.

In England, in the early days, those forms of the corporation that required no royal grant from the English Crown were treated as having limited liability for their members without an express grant.408 Nevertheless, if members of these corporations were to be held personally liable, it required an act of Parliament.409 Some of the initial companies grew from guilds where members began to do business as joint stock companies, with charters in the sixteenth century that recognized this, sometimes with limited

402 Maria Teresa Guerra Medici, “Limited Liability in Mediterranean Trade from the 12th to the 15th Century,” in Limited Liability and the Corporation, ed. Tony Orhnial (London and Canberra: Croom Helm, 1982), 124. 403 Ibid.; Carney, “Limited Liability,” 660. 404 Perrott, “Changes in Attitude to Limited Liability—the European Experience,” 84. 405 Carney, “Limited Liability,” 661. 406 Ibid. 407 Ibid. 408 Gary M. Anderson and Robert D. Tollison, “The Myth of the Corporation as a Creation of the State,” International Review of Law and Economics 3 (1983): 109. 409 Ibid.

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liability.410 Limited liability was probably treated as a privilege granted by government to encourage certain forms of economic activity.411 “Thus, the charter of the East India

Company granted in 1600 provided for limited liability. On the other hand, for a number of corporations formed later, the charters either were silent or provided for unlimited shareholder liability.”412 The general rule, however, in early English legal history was that of unlimited shareholder liability, and this stemmed from the Bubble Act’s 1720 prohibition of trading in shares of unincorporated joint stock companies. But it did not end the use of unincorporated joint-stock associations; half of the companies formed in the eighteenth century after 1720 were unincorporated, and achieved de facto limited liability through the use of trusts and contract terms limiting creditors to corporate assets.413 The repeal of the Bubble Act in 1825 and adoption of a general incorporation law in 1844 were not meant to deal with limited liability, but to regulate growth in the number of unincorporated joint stock companies. This shows that general incorporation laws in England were introduced not primarily because there was a need to limit liability, but to respond to the development of large companies that operated under the disabilities of not being recognized as entities in the courts.414 Thus, the 1844 Act emphasized unlimited liability by requiring registered companies to publicize their members.415 In the early 1850s pressure for limited liability came in part from philanthropists seeking a safe investment for the savings of working people, giving the argument that the 1844 Act had not succeeded in attracting investors to new businesses.416 It was in the years 1855 and 1856 that Parliament granted limited liability

410 Perrott, “Changes in Attitude to Limited Liability—the European Experience,” 83. 411 Stephen M. Bainbridge, “In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green,” Washington and Lee Law Review 50 (1993): 1430. 412 Blumberg, The Search for a New Corporate Personality, 8. 413 Anderson and Tollison, “The Myth of the Corporation as a Creation of the State,” 110. 414 Carney, “Limited Liability,” 662. 415 Ibid. 416 Ibid.

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to members of registered joint stock companies. This led to an increase in the number of companies seeking registration. The 1855 legislation, in an attempt to protect creditors, required the inclusion of “Ltd.” in the company name. This pattern was then

417 followed throughout Europe.

America adopted English corporation law without much problems, and the state legislatures did not share English reluctance to create new corporations. Special acts of incorporation became widespread, and by 1801 there were more than 300 American corporations. These were overwhelmingly companies undertaking to provide public services: bridges, canals, turnpikes, water supply, banks, and insurance. There were no more than eight manufacturing companies.418 Assignability of shares and perpetual existence were the attributes that made the corporate form attractive to entrepreneurs forming manufacturing companies. Limited liability was of little importance. The New

England manufacturing charters of the time typically expressly provided for unlimited liability of shareholders or were silent on the issue. However, this was not as clear in such states as New York and Maryland. Charters for public and financial service companies was different, thus, public service corporation charters typically provided expressly for limited liability.419 The New England states provided for unlimited liability until increased demand for corporate charters for manufacturing, coupled with competitive pressure from other states, caused them to adopt limited liability between

1816 (New Hampshire) and 1847 (Rhode Island).420 Limited liability became the general rule in the United States after 1830, and in most cases before that date.

417 Ibid. 418 Blumberg, The Search for a New Corporate Personality, 8. The American colonies inherited the Bubble Act early in their history, but the Colonial legislatures were more willing to issue charters than Parliament, so the corporation, rather than the joint stock company, became the dominant American form of business entity. Ibid. See also Carney, “Limited Liability,” 662. 419 Blumberg, The Search for a New Corporate Personality, 9. 420 Carney, “Limited Liability,” 663.

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England was more highly industrialized than the United States in the early nineteenth century, it lagged behind the United States in the development of limited liability. In 1885, 30 years after introducing limited liability, only 10 percent of the number of the major firms were incorporated in England. But by 1855 English firms were registering under both French and American laws, giving credence to the competition among jurisdictions explanation.421 This must have exerted pressure on

Britain for granting limited liability. According to Blumberg:

In the years following the introduction of limited liability, there was almost a

threefold increase in the number of companies registering under the company acts.

Some of this may be attributed to the more prosperous times and the unhappy

practices of promoters who, solely for speculative purposes, organized companies

that never came into operation. Some may also be attributed to changes in legal

form for existing businesses. However, in view of the magnitude of the increase, it

is apparent that the English adoption of limited liability had provided a significant

422 economic incentive.

Final adoption of limited liability soon led to a period of speculation and security frauds that contributed to a particularly severe financial panic, as some opponents had earlier warned, but limited liability survived. Once entrenched, limited liability continued as a

423 settled principle of English company law.

On the Continent, limited liability surprisingly made its first appearance in Russia as early as 1805. It was included in the Napoleonic Code, which was imposed by the military might of French revolutionary armies on most of Europe, and limited liability

421 Ibid., 662. 422 Blumberg, The Search for a New Corporate Personality, 18-19. 423 Ibid.

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along with it, which was later continued by the European states.424 The concept was extended to Asian nations that had adopted western legal forms.425 Virtually all nations seem to have developed the notion of limited liability for shareholders in stock corporations.426 The general acceptance of limited liability without question lasted almost a century.

4.2.2 Questioning Limited Liability

The general rule of limited liability, once it had been accepted as a general rule, continued to govern corporations without question for almost a century.427 The controversy over its adoption arose once again in the middle of the twentieth century.428

“The resurrection of the debate was somewhat unexpected, and it appears that the revival occurred shortly after the decision in Walkovszky v. Carlton was handed down by the Court of Appeals of New York.”429 Basic facts of the case are reproduced below as mentioned by Daniel Kahan.

John Walkovszky had the misfortune of being struck by a taxicab owned by the

Seon Cab Corporation. William Carlton was the sole shareholder of ten taxicab

corporations, including Seon. Seon carried only the state-mandated minimum

amount of automobile liability insurance, and Carlton regularly paid himself

dividends out of Seon’s profits. Because Seon was thinly capitalized, Walkovszky

sought to recover from Carlton and the nine other corporations whose stock he

424 Ibid., 19. 425 Carney, “Limited Liability,” 664. 426 Ibid. 427 “Limited liability in tort has been the prevailing rule for corporations in the United States, as elsewhere, for more than a century. This rule is generally acknowledged to create incentives for excessive risk-taking by permitting corporations to avoid the full costs of their activities. Nevertheless, these incentives are conventionally assumed to be the price of securing efficient capital financing for corporations.” Hansmann and Kraakman, “Unlimited Shareholder Liability,” 1. 428 Daniel R. Kahan, “Shareholder Liability for Corporate Torts: A Historical Perspective,” The Georgetown Law Journal 97 (2009): 1101. 429 Ibid.

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owned on a theory of “enterprise liability.” In an opinion by Judge Fuld, the

majority rejected the theory, and held that Walkovszky had not stated a cause of

430 action against Carlton in his individual capacity.

The main point here is that had Carlton formed only one corporation, and had not regularly taken out the corporation’s profits in the form of dividends, then Walkovszky could have recovered a great deal more than the state-mandated insurance minimum.

The decision appeared unfair to many as the corporate form appeared to have been misused.431 The unfairness of the decision gave rise to many debates, but it was twenty years later that the case became a common point of discussion in scholarly treatments of limited liability. The “commentators began to ask whether limited liability was the problem, not whether enterprise liability was the answer.”432 An argument arising from this debate was that contract creditors can demand premiums for limited liability, but tort creditors cannot.

The second pressure on limited liability, therefore, came from the huge tort claims that could not be met. The debate, however, began in earnest with what is called “The

Hansmann-Kraakman Proposal.” In 1991, Professors Henry Hansmann and Reinier

Kraakman published an article in the Yale Law Journal calling for pro rata unlimited liability for corporate torts. The authors argue that “given advances in both industrial and legal technology and the inefficiency of the current liability rule for corporate torts, efficiency and fairness would be better served under a new, unlimited liability regime.

Seeing no similar problems in the contract context, the authors supported the retention

430 Ibid. (footnotes omitted). 431 Kahan, “Shareholder Liability for Corporate Torts,” 1101. 432 Ibid.

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of limited liability for contract claims.”433 The proposal made by these professors, as stated in the abstract of their paper, was as follows:

This article presents a comprehensive case for imposing pro rata liability on

shareholders for tort damages that exceed a corporation’s net assets. Unlimited

liability, we argue, would mitigate the current regime’s incentives to overinvest in

hazardous industries and to underinvest in precautions. Contrary to the conventional

wisdom, a well-crafted rule of unlimited liability could be imposed on both closely-

held and publicly-traded corporations without inefficiently impairing capital

formation. Rather, the most serious objections to unlimited liability are the

difficulty of administering the rule across international jurisdictions, the incentive

it could create to disaggregate industrial ownership, and the opportunity it might

afford for irresponsible deployment of liability rules. None of these objections,

however, seem sufficiently strong to outweigh the advantages of unlimited liability.

We conclude that unlimited liability is also superior to alternative reforms such as

liberalized veil-piercing, expanded officer and director liability, and requirements

434 for minimal capitalization or insurance.

The Hansmann-Kraakman proposal attracted a good deal of attention, but this was not the only proposal. The authors have themselves given a detailed account of such proposals, and we have summarized these below, but the authors point out the distinction between their proposal and the earlier proposals as follows: “Although several authors have recently proposed curtailing limited liability for certain classes of tort claims or for certain types of corporations in order to control its worst abuses, even the most radical of these proposals retains limited shareholder liability as the general

433 Ibid., 1102. 434 See abstract in Hansmann and Kraakman, “Unlimited Shareholder Liability,”

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rule.”435 The also stated that at a minimum they would conclude that the burden is now

436 on the proponents of limited liability to justify the prevailing rule.

Blumberg suggested in a 1986 publication that limited liability be abolished for firms within “corporate groups.” The publication was outstanding and contains a wealth of information.437 Dent proposed a “reasonable prudence” test for imposing limited liability on controlling shareholders.438 Halpern et. al. advocated unlimited liability for small, closely-held corporations, in both tort and contract, and suggested that directors of large, publicly-traded corporations be made personally liable to involuntary creditors.439 Schwartz advocated abolition of limited liability for “knowable tort risks,” though without specifying whether shareholders or only directors should be personally liable in an alternative regime.440 Stone advocated abrogation of limited liability for criminal penalties, punitive damage awards, and “perhaps even civil liabilities arising under federal statutes whose policies do not appear fully discharged by compensation.”441 D. Leebron advocated abrogation of limited liability for corporate subsidiaries.442 The authors mention a number of other minor proposals.

Most of the literature addressing the rationale for limited liability focuses principally on corporate liability to contract creditors. Thus, limited liability is justified in the case of contract creditors. The above objections to limited liability are all in the

435 Ibid., 1. 436 Ibid., 2-3. 437 Blumberg, The Search for a New Corporate Personality, 18-19. 438 George W. Dent Jr, “Limited Liability in Environmental Law,” Wake Forest L. Rev. 26 (1991): 151, 178. 439 Paul Halpern, Michael Trebilcock, and Stuart Turnbull, “An economic analysis of limited liability in corporation law,” University of Toronto Law Journal, 1980, 148-49. 440 Alan Schwartz, “Products liability, corporate structure, and bankruptcy: toxic substances and the remote risk relationship,” The Journal of Legal Studies, 1985, 716-17, accessed April 20, 2015. 441 Christopher D. Stone, “The place of enterprise liability in the control of corporate conduct,” Yale Law Journal, 1980, 74. 442 David W. Leebron, “Limited liability, tort victims, and creditors,” Columbia Law Review, 1991, 1565– 1650, accessed April 20, 2015.

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case of torts. The reason for the above questioning of limited liability in the case of torts is that changes in technology, knowledge, liability rules, and procedures for mass tort litigation have for the first time raised the prospect of tort claims that exceed the net worth of even very large corporations.443 According to Hansmann-Kraakman, “strong empirical evidence already indicates that increasing exposure to tort liability has led to

the widespread reorganization of business firms to exploit limited liability to evade damage claims. The method of evasion differs by industry.”444 The debate goes on and

445 claims for doing away with limited liability is turning to multinational corporations.

In the previous chapter, we had said that according to Blumberg a doctrine ultimately gained ground in the attempt to disregard the corporate entity producing its own jurisprudence called the jurisprudence of “piercing the corporate veil.” It became a prominent doctrine producing substantial legal literature that analyzed the numerous reported cases and attempted to formulate the legal principles on which they were based. Courts, he said, in “rare” or “exceptional” cases impose liability upon a shareholder for obligations of a corporation under different rationales. His major argument was that in the context of the group the veil is pierced to make the shareholders liable where one of the major shareholders will be the parent. Blumberg also concluded that “entity law,” and “piercing the corporate veil” as its safety valve in rare or exceptional cases, is still the firmly established, governing and dominant law in the United States. Nevertheless, this law and its doctrines have begun to erode. Such erosion, he says, is clearly seen in the area of “torts and in certain procedural questions, including jurisdiction, venue, and service, it is even more evident in judicial decisions

443 Hansmann and Kraakman, “Unlimited Shareholder Liability,” 3. 444 Ibid. 445 See, e.g., Muchlinski, “Limited liability and multinational enterprises,” and the earlier work by Phillip I. Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality (Oxford: Oxford University Press, 1993).

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construing statutes of general application in which Congress has not addressed the question of entity or enterprise.”446 We may now turn to tort claims under the Alien

Tort Claims Statute (ATS) by victims of torts by multinational corporations to see the operation of this doctrine, and also to see the future of ATS in the light of the latest decisions. Before doing so, however, we may very briefly recall the significance and relevance of limited liability for the multinational enterprise.

4.3 Recalling the Relevance of Limited Liability for

Multinationals and Groups

In the previous chapter, we have seen scholars and experts arguing for a legal personality for the corporate group or the larger multinational enterprise as distinguished from the single entity corporation. The main purpose of this effort and complex discussion is to fix liability of the parent for and its other affiliated organizations for an act that is committed by the subsidiary of this parent in the, usually underdeveloped, host country when the assets of the subsidiary are not enough to cover the likely damages to be awarded. As no personality is acknowledged by the law for the group, the only option available is to “pierce the veil” of the subsidiary behind which the parent is hiding to evade liability while enjoying the benefits of the subsidiary that is within the parent’s control and whose alter ego the parent truly is beyond any doubt. The well-known writer on the subject, Peter Muchlinski, has the following to say:

In the context of corporate groups, the legal principles of limited liability and

corporate separation can lead to injustice in cases of harm to involuntary creditors

by externalising risks that ought to be internalised by the enterprise as the better

446 Ibid., 88-89.

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risk taker. The avoidance of responsibility can be achieved by interposing a separate

legal entity between the victims and the ultimate controller of the group, be it a

parent company or its controlling shareholders. The resulting lack of legal

responsibility could be remedied in a number of ways ranging from adaptations of

existing exceptions to the doctrine of limited liability to outright abolition of limited

447 liability.

In the section above, we have seen the different arguments and suggestions given for doing away with limited liability so that the liability of the group, especially the parent can be determined. The implications of the various doctrines prevailing on this issue and the suggestions of some of the leading writers on it were examined. In the rest of the chapter we will examine the various options the victims of serious torts committed in the host country have with respect to the pursuit of the parent. These options mainly hover around the choice of jurisdiction in which to bring a legal action, and the defenses that the parent-defendant may raise. The remedy, however, will almost always be the “piercing of the veil” to shatter limited liability.

4.4 Tort Claims Under the Alien Tort Claims Statute (ATS) in the USA, and the Future of the ATS

4.4.1 The Origin of ATS, its Purpose and Initial Cases

The Alien Tort Statute (ATS) was originally enacted as part of the Judiciary Act of

1789 (Act of Sept. 24, 1789, §9, 1 Stat. 77) The ATS was invoked twice in the late 18th century, but then only once more over the next 167 years.448 The recent Kiobel judgement by the U.S. Supreme Court, mentions these cases to be the following: Moxon

447 Muchlinski, “Limited liability and multinational enterprises,” abstract. 448 Kiobel, et al. v. Royal Dutch Petroleum Co. et al., 133 S. Ct. 1659, 569 US 12 (2013).

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v. The Fanny, 17 F. Cas. 942 (No. 9,895) (DC Pa. 1793); Bolchos v. Darrel, 3 F. Cas.

810 (No. 1,607) (DC SC 1795); O’Reilly de Camara v. Brooke, 209 U. S. 45 (1908);

Khedivial Line, S.A.E. v. Seafarers’ Int’l Union, 278 F. 2d 49, 51-52 (CA2 1960) (per curiam). It was then applied in earnest in 1980, when Dolly and Joel Filartiga successfully sued a former Paraguayan police inspector-general, Americo Norberto

Peña-Irala, for torturing and killing a member of their family.449 The case confirmed that ATS provides aliens with a right to sue in tort over certain excessive breaches of human rights, including torture and extra judicial killings, even when those acts take

450 451 place abroad. No other country has a statute comparable to ATS.

In Kiobel, the Supreme Court said that the statute provides district courts with jurisdiction to hear certain claims, but does not expressly provide any causes of action.452 The Court, however held in Sosa v. Alvarez-Machain,453 that the First

Congress did not intend the provision to be “stillborn.” The grant of jurisdiction is instead “best read as having been enacted on the understanding that the common law would provide a cause of action for [a] modest number of international law violations.”454 The Court thus held that federal courts may “recognize private claims

455 [for such violations] under federal common law.”

449 Filartiga v. Peña-Irala, 630 F2d 876 (2d Cir. 1980). 450 See generally, M. Gibney and R.D. Emerick, “The Extraterritorial Application of United States Law and the Protection of Human Rights: Holding Multinational Corporations to Domestic and International Standards,” Temple International and Comparative Law Journal 10 (1996): 123, as quoted in Sarah Joseph, Corporations and Transnational Human Rights Litigation (Oxford: Hart Publishing, 2004), 21 (arguing that the ordinary presumption against extraterritorial application for US statutes was rebutted). 451 B. Stephens, “Translating Filartiga: A Comparative and International Law Analysis of Domestic Remedies for International Human Rights Violations,” Yale Journal of International Law 27 (2002): 32. 452 Kiobel, et al. v. Royal Dutch Petroleum Co. et al., 133 S. Ct. 1659, 569 US 12 (2013). 453 542 U. S. 692, 714 (2004). 454 Ibid., 724. 455 Ibid., 732.

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In Filartiga v. Peña-Irala, the Court had stated that “[F]or purposes of civil liability, the torturer has become-like the pirate and slave trader before him—hostis humani generis, an enemy of all mankind.”456 The reason for this statement was that the specific cause of action in Filartiga v. Peña-Irala was reaffirmed and extended in the Torture

Victim Protection Act 1991 (TVPA).457 It was, however, the Court’s decision in Sosa that framed the true question.458 In Sosa the Court specified that the Alien Tort Statute

(ATS), when enacted in 1789, “was intended as jurisdictional.”459 The Court added that the statute gives today’s courts the power to apply certain “judge-made” damages law to victims of certain foreign affairs-related misconduct, including “three specific offenses” to which “Blackstone referred,” namely “violation of safe conducts, infringement of the rights of ambassadors, and piracy.”460 The Court held that the statute provides today’s federal judges with the power to fashion “a cause of action” for a “modest number” of claims, “based on the present-day law of nations,” and which

“rest on a norm of international character accepted by the civilized world and defined with a specificity comparable to the features” of those three “18th-century paradigms.”461 Recognizing that Congress enacted the ATS to permit recovery of damages from pirates and others who violated basic international law norms as understood in 1789, Sosa then framed the crucial question for today’s judges: Who are

456 Filartiga v. Peña-Irala, 630 F. 2d 876, 890 (CA2 1980); see also Restatement (Third) of Foreign Relations Law of the United States, §§402, 403, 404 (1986). 457 28 USC §1350 App. 458 The Filartiga interpretation of the meaning of ATCA has been confirmed on numerous occasions in District and Circuit Courts, and has also expanded. For example, accountability was extended beyond actual perpetrators to those in a position of command responsibility in Xuncax v. Gramajo. In Kadic v. Karadzic, ATS liability was extended to officials of de facto, yet unrecognised, governments. The Second Circuit in Kadic confirmed that ATS could ground certain actions against individuals acting in a private rather than official capacity. And in 1997, in Doe v. Unocal (1997), it was held for the first time that ATS actions could lie against private corporations. Joseph, Corporations and Transnational Human Rights Litigation, 22. 459 542 U. S., at 714. 460 Ibid., at 715. 461 Ibid., at 724-725.

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today’s pirates?462 This provided a framework for answering that question by setting down principles drawn from international norms and designed to limit ATS claims to

those that are similar in character and specificity to piracy.463 The above outstanding

464 explanation has been provided by Breyer, J., in his concurring in judgment in Kiobel.

The above reasoning has developed out of the following words of the ATS: “The district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.”465

The ATS may, therefore, be said to have two limbs.466 According to Sarah Joseph, the first limb of ATCA grants aliens rights to sue in tort for breaches of “the law of nations,” which is a term that logically refers to sources of international law beyond treaty law.467

Treaty law is different and is the subject matter of the second limb of ATS. Non-treaty sources of binding international norms are customary international law and jus cogens norms.468 Generally, it seems that US courts are satisfied that ATCA is activated if the human rights violation at issue breaches customary international law; the alleged violation need not amount to a breach of a jus cogens norm.

The explanations from the perspective of breaches of customary international law may be sound, but all along there has been a presumption against extraterritoriality that has gradually worked its way into the statute and has finally come to raise its head in

462 See 542 U. S., at 724-725 (majority opinion). 463 Ibid., at 725. 464 133 S. Ct. 1659, 569 US 12 (2013). 465 28 USC §1350. 466 Joseph, Corporations and Transnational Human Rights Litigation, 22. 467 Ibid. 468 Ibid., 23 “Customary international laws are binding international norms arising from the “general and consistent practice of states [state practice] followed by them from a sense of legal obligation [‘opinio juris’]. Ordinary customary law binds all States except for those who have persistently objected to its application. Jus cogens is that inner core of customary laws that is not subject to the ‘persistent objector’ exception: jus cogens norms are non-derogable in all circumstances. Therefore, ‘the corpus of [customary international law] is much larger than that of jus cogens’.” Joseph, Corporations and Transnational Human Rights Litigation, 22 (footnotes omitted).

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Kiobel,469 as we shall be examining a few sections below. The logic of this presumption has been elaborated by Justice Breyer. He says that the presumption “rests on the perception that Congress ordinarily legislates with respect to domestic, not foreign matters.”470 The ATS, however, was enacted with “foreign matters” in mind. The statute’s text refers explicitly to “alien[s],” “treat[ies],” and “the law of nations.”471 The statute’s purpose, the learned judge added, was to address “violations of the law of nations, admitting of a judicial remedy and at the same time threatening serious consequences in international affairs.”472 At least one of the three kinds of activities, he added, that was found to fall within the statute’s scope, namely piracy, normally takes

473 place abroad.

The very brief overview of the Alien Torts Statute (ATS), actually Alien Torts

Claims Act (ACTA), should be sufficient to show the recent problem that has come to surround this statute after many interesting cases in the last few decades. We may now examine, briefly how the system of these torts claims worked. We will do so in their relationship to human rights violations. The explanation is likely to turn up interesting facts about such claims and may prove to be instructive for all kinds of such claims irrespective of their being under the ATS. In describing the system and the defences involved, we will be very brief. The details of this mechanism are freely available, and we would like to allocate the space available to the Kiobel judgement and the various rationales for the judgement handed down by the Supreme Court of the United States.

469 133 S. Ct. 1659, 569 US 12 (2013). 470 Morrison v. National Australia Bank Ltd. 561 U.S. 247 (2010). 471 569 US 12, 34 (2013) referring to 28 U. S. C. §1350. 472 Sosa, 542 U. S., at 715. 473 133 S. Ct. 1659, 569 US 12 (2013).

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4.4.2 Substantive and Procedural Issues Involved in ATS

Cases

4.4.2.1 An Overview of the Implementation of the ATS

In the previous section, we mentioned the two arms of the ATS; the first is that of international customary law, while the second is that of international treaty law. The

ATS imposes civil liability on MNEs for breaches of customary international law.474

This is the first limb of the ATS, pointed to above. Almost all ATS cases coming before the courts have fallen under the first limb, that is, torts committed in violation of the law of nations. In the second limb, that is, torts committed in violation of a treaty of the

United States, there have been very few cases. The reason offered for this is that courts have generally assumed that the second limb refers exclusively to self-executing treaties. These self-executing treaties become part of US law without the need for statutory incorporation, whereas non self-executing treaties must be statutorily

475 incorporated before they grant private rights of action.

Multinational enterprises can be held directly liable for an increasing number of private actor abuses, as well as acts committed in furtherance of such abuses.476 Other

ATS claims are only actionable if accompanied by “State action.” In cases where state action is necessary, courts have used §1983 tests to determine whether there is adequate collusion between an MNE, and whether this collusion has pleaded so as to ground a claim against that MNEs.477 Alternative tests derived from international law and tort

474 Joseph, Corporations and Transnational Human Rights Litigation, 63. 475 See Sei Fujii v. California, 38 Cal 2d 718 (SCt Cal 1952); see also K.D.A. Carpenter, “The International Covenant on Civil and Political Rights: A Toothless Tiger?” North Carolina Journal of International Law and Commercial Regulation 26 (2000): 11-16.. 476 Joseph, Corporations and Transnational Human Rights Litigation, 63. 477 Ibid.

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law have also been used. As ATS claims against MNEs will often concern the actions of foreign governments, a number of principles of abstention may be relevant, namely the doctrines of act of state, political question, and comity.478 We will be discussing these doctrines in this section.

In general, it seems that US courts are satisfied that ATS is activated if the human rights violation at issue breaches customary international law; the alleged violation need not amount to a breach of a jus cogens norm.479 It is well known that proof of “the law of nations” is established from a variety of sources, such as international treaties and other primary international documents, international case law, and the works of jurists and respected international law academics.480 The list that is the most authoritative for the findings of US courts regarding customary human rights, is to be found in the

Restatement (Third) of the Foreign Relations Law of the United States at § 702. The list includes: genocide, slavery or slave trade, murder, disappearance, torture or other cruel, inhuman and degrading treatment or punishment, prolonged arbitrary detention, systematic racial discrimination, and consistent patterns of gross violations of

481 internationally recognised rights.

In any case, the decisions of the courts have concerned the following heads under which ATS liability has been attracted:482 prohibitions on torture,483 summary

478 Ibid. 479 Ibid., 23. 480 B. Stephens and M. Ratner, International Human Rights Litigation in US Courts (New York: Transnational Publishers Inc, 1996) 52; see also Sarei v. Rio Tinto, 221 F. Supp. 2d 1116 (CD Cal 2002). 481 “Consistent patterns of gross violations of internationally recognised rights” is an avenue for holding perpetrators of multiple or at least mass abuses liable even when the individual abuses fall short of customary human rights violations. Joseph, Corporations and Transnational Human Rights Litigation, 25-26. 482 For this list and helpful citations, see ibid. 483 The most glaring example is Filartiga v. Peña-Irala, 630 F. 2d 876 (2d Cir. 1980) 884.

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execution,484 genocide,485 war crimes,486 sexual assault,487 forced labour,488 slavery,489 forced relocation,490 disappearance,491 cruel, inhuman and degrading treatment492 including medical experimentation without informed consent,493 forced exile,494 forced displacement,495 arbitrary detention,496 arbitrary arrest,497 crimes against humanity,498 racial discrimination,499 aircraft hijacking,500 and pollution contrary to UNCLOS,501 as well as rights to associate and organise,502 life, liberty and personal security,503 peaceful assembly and association,504 and freedoms of political belief, opinion, and expression.505 All these have been reproduced here from Kiobel judgment. As compared to these, some rights have been found by US courts not to activate ATS. The reason advanced is that they are not breaches of the law of nations. These rights are:

484 Ibid. 485 Kadic v. Karadzic, 70 F.3d 232 (2d Cir. 1995) 241-3; Presbyterian Church of Sudan v. Talisman Energy, 244 F. Supp. 2d 289 (SDNY 2003) 327 (acknowledging that “non-Muslims” can constitute an ethnic group, the intentional elimination of which constitutes genocide). 486 Sarei v. Rio Tinto, 221 F. Supp. 2d 1116 (CD Cal 2002) 1139-42; Bodner v Banque Paribas, 114 F. Supp. 2d 117 (EDNY 2000) 128. 487 Kadic v Karadzic, 70 F. 3d 232 (2d Cir 1995) 242-43. 488 John Doe I v Unocal Corp, 2002 US App LEXIS 19263 (9th Cir. 2002) 14208 (Unocal 2002). 489 Ibid. 490 Doe I v. Unocal Corp, 963 F. Supp. 880 (CD Cal 1997). 491 Xuncax v. Gramajo, 886 F Supp 162 (D Mass 1995) 184-85. 492 Ibid. 493 Abdullahi v. Pfizer, No. 01 Civ. 8118, 2002 US Dist. LEXIS 17436 (SDNY September 16, 2002) 16-18. 494 Wiwa v. Royal Dutch Petroleum Co, No. 96 Civ. 8386, 2002 US Dist. LEXIS 3293 (SDNY Feb. 22, 2002) 25. “Forced exile” arises where a person flees due to credible threats to his/her own life and safety: ibid at 26. 495 Presbyterian Church of Sudan v. Talisman Energy, 244 F. Supp. 2d 289 (SDNY 2003) 325. 496 Alvarez-Machain v. US 331 F. 3d 604 (9th Cir. 2003) 621-22. 497 Martinez v. City of Los Angeles, 141 F. 3d 1373 (9th Cir. 1998) 1384. 498 Kadic v Karadzic, 70 F. 3d 232 (2d Cir 1995) 236; Wiwa v. Royal Dutch Petroleum Co., No. 96 Civ. 8386, 2002 US Dist. LEXIS 3293 (SDNY Feb 22, 2002) 30-2; Sarei v. Rio Tinto, 221 F. Supp. 2d 1116 (CD Cal 2002) 1149-51. 499 Sarei v Rio Tinto 221 F Supp 2d 1116 (CD Cal 2002) 1151-55. 500 Burnett v Al Baraka Investment and Development Corporation 274 F Supp 2d 86 (DDC 2003) 99-100. 501 Sarei v Rio Tinto 221 F Supp 2d 1116 (CD Cal 2002) 1162. 502 Estate of Rodriguez v Drummond 256 F Supp 2d 1250 (WD Al 2003) 1264. 503 Wiwa v. Royal Dutch Petroleum Co., No. 96 Civ. 8386, 2002 US Dist. LEXIS 3293 (SDNY Feb 22, 2002) 36. 504 Ibid. 505 Tachiona et al v. Mugabe and ZANU-PF, 234 F. Supp. 2d 401 (SDNY 2002) 434.

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the rights to life, health, sustainable development, freedom from discrimination per se, and freedom of speech, as well as prohibitions on terrorism, cultural genocide, environmental abuses inside one State, constructive exile, expropriation by a State of its national’s property, forced prison labour, forced conscript labour, and transborder abduction.506 In addition to this, claims relating to more commonplace tortious or criminal behaviour, such as fraud, negligence, commercial torts, and conversion, also

507 fall outside the ATS, as they fail to raise international law claims.

With this brief overview of ATS application, we may now turn to some of the substantive issues pertaining to ATS activation. These are the doctrines mentioned above.

4.4.2.2 Substantive Issues Surrounding ATS Activation

State Action Coupled with Private Action.—

The Judiciary Act of 1789 contains the provision: “The district courts shall have original jurisdiction of a civil action by an alien in tort only, committed in violation of the law of nations or a treaty of the United States.”508 According to Douglas Branson, this provision of the ATS is to be understood through the following three points:

• First, not every tort violates the law of nations. “Whether a simple trespass or act

of negligence violates domestic law may not always be clear, let alone whether

509 it violates the law of nations (generally it does not).”

506 For the detailed citations and elaboration, see Joseph, Corporations and Transnational Human Rights Litigation, 27-28. 507 Ibid., 26. 508 Alien Tort Claims Act, 28 U.S.C. § 1350 (2006). 509 Douglas M. Branson, “Holding Multinational Corporations Accountable? Achilles’ Heels in Alien Tort Claims Act Litigation,” Santa Clara Journal of International Law 9 (2011): 230.

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• Second, the law of nations applies to nations, but in cases of certain grave acts

(involuntary servitude, genocide) the law of nations applies to individuals (jus

cogens offenses).

• Third, if the primary actor is a sovereign state, liability of those who assist the

state or state actors, or participate in their acts, may result in liability even if the

primary violation is not a jus cogens offence. Although the standard for aiding

and abetting as well as participation has been unclear, juridical persons who may

not be liable directly may become liable because of the acts of sovereign nations;

510 “liability by the backdoor, so to speak.”

These three points have been visible, more or less, in our overview above, but here we are concerned with the requirement of state action. Customary human rights norms, mostly, apply only in the context of governmental action. Only a small number of human rights norms apply in customary international law in the absence of state action, as is visible in the above three points.

Private actors can be held liable for certain human rights abuses if “a sufficient connection exists between the private actor and abuses committed by a government or, alternatively, between a government and the private actor’s abuses.”511 This means that in ATS claims against MNEs or other private bodies where state action is in question, some sort of joint responsibility of both the State and the private body must be established for the act under scrutiny in order for the case to proceed.512 In the early stages, ATS-based civil claims for violations of norms of public international law perpetrated abroad were mostly aimed at states and (foreign) public officials as human

510 Ibid., 231. 511 Joseph, Corporations and Transnational Human Rights Litigation, 26. 512 Ibid., 33.

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rights violators.513 This remains true despite significant changes to the modern world order brought about by globalization; the contemporary international legal order still maintains that “states are the principal bearers of international legal capacity and that the legal position of private (non-state) actors is determined in principle by national legal orders and by domestic legal norms.”514 After the Second World War, however, it has become more and more accepted that norms of public international law may sometimes also create direct rights and duties for private (non-state) actors, including not only individuals but potentially also corporate entities.515 McBarnet and Schmidt have noted in this respect:

For ATCA to become a tool of corporate accountability, three key

transformations were necessary. It had to be established, first, that the 1789 statute’s

reference to the law of nations could apply in the context of contemporary law on

human rights; second—given the focus of international law on states—that it could

apply to private actors other than just governments and state officials; and third, that

516 it could apply to business corporations.

These developments in international law may come later, but “a sufficient connection” has been required between the act of the corporation and state action. US courts have tended to use certain tests to determine “state action” for domestic law purposes under § 1983 to determine whether “state action” exists in an ATS claim.517

We need not go into the details of these tests. In most cases, it is the State that actually

513 Enneking, Foreign Direct Liability and Beyond, 79. 514 Ibid. 515 See generally Jennifer A. Zerk, Multinationals and corporate social responsibility: Limitations and opportunities in international law (Cambridge: Cambridge University Press, 2006). 516 As quoted in Enneking, Foreign Direct Liability and Beyond, 79. 517 Joseph, Corporations and Transnational Human Rights Litigation, 33. “The most extensive judicial discussion of the state action doctrine has arisen in the Unocal litigation. In Doe v Unocal (Unocal 2000), Lew J summarily dismissed the case, as he could not find a sufficient connection between Unocal and the abuses committed by the Myanmar military in the area of Unocal’s pipeline project.” Ibid., 35.

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perpetrates the abuse, and the plaintiff must establish a connection between the MNE and the abuse.518 This should be sufficient to indicate the significance of the state action doctrine.

The Act of State Doctrine.—

When the US court is required to consider, and adjudicate, a foreign sovereign’s official acts within its own territory, it may abstain from exercising jurisdiction. This is called the “act of state doctrine.”519 The reason for this is that the act falls within the political branches of government, and the it is their right to decide the issue. Consequently, the purpose of the doctrine is to maintain constitutional separation of powers. Not exercising jurisdiction in such a case amounts to acknowledging the theory of separation of powers and of granting preeminence, in the realm of foreign relations, to the political branches of government over the judiciary.520 The court will, thus, almost always evaluate the implications of the case on US foreign relations. If the implications

521 are substantial, the court will dismiss the case on the basis of “act of state.”

The US Supreme Court, in Banco Nacional de Cuba v. Sabbatino, has provided three factors by way of guidance for evaluating an “act of state” argument:

• First, the doctrine is less likely to apply when a State is accused of behavior that

is condemned by international consensus.

• Second, as the key question seems to be whether a court decision might impede

US foreign relations policy, the doctrine would not seem to apply in a human

518 According to Sarah Joseph, the state action requirement gives rise to the possibility of a number of jurisdictional blocks to litigation. First, foreign governments are largely immune from suit in the US under the Foreign Sovereign Immunities Act (FSIA). ATS does not remove sovereign immunity. Ibid., 39. 519 Sarei v. Rio Tinto, 221 F. Supp. 2d 1116 (CD Cal 2002) 1183. 520 Bigio v. Coca Cola Co., 239 F. 3d 440 (2d Cir. 2000) 452. 521 Banco Nacional de Cuba v. Sabbatino, 376 US 398 (SCt 1964) 428.

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rights context if the foreign State’s human rights record has already been publicly

denounced by the US government.

• Third, the doctrine is not likely to apply where the impugned foreign act is that

522 of a former government.

Quite often, where the “act of state” has arisen, the views of the US State Department have been sought. This is expected to confirm through the executive government’s view of “whether the litigation at hand would unduly interfere in its conduct of foreign

523 affairs.”

Avoiding the Political Question.—

The courts will not exercise jurisdiction if they resolve that the dispute at issue concerns a non-justiciable political question.524 The US Supreme Court has elaborated the tests for a “political question” as follows:

Prominent on the surface of any case held to involve a political question is

found a textually demonstrable constitutional commitment of the issue to a

coordinate political department; or a lack of judicially discoverable and manageable

standards for resolving it; or the impossibility of deciding without an initial policy

determination of a kind clearly for non-judicial discretion; or the impossibility of a

court’s undertaking independent resolution without expressing lack of the respect

due coordinate branches of government; or an unusual need for unquestioning

522 Ibid. 523 Joseph, Corporations and Transnational Human Rights Litigation, 41. “The Court does not inquire as to whether the view is ‘wise or unwise, or whether it is based on misinformation or faulty reasoning’. In a number of these cases, such as Kadic v. Karadzic, the State Department has not objected to the continuation of the litigation. However, in Rio Tinto, the State Department, possibly reflecting a new hostility by the Bush administration to transnational human rights litigation, submitted an opinion that the continuation of the litigation would harm US foreign policy interests in promoting the Bougainville peace process. This opinion was crucial to the court’s decision to dismiss the case.” Ibid. 524 For a good analysis, see N. S. Williams, “Political Question or Judicial Query: An Examination of the Modern Doctrine and its Inapplicability to Human Rights Mass Tort Litigation,” Pepperdine Law Review 28 (2001): 849.

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adherence to a political decision already made; or the potentiality of embarrassment

525 from multifarious pronouncements by various departments on one question.

The Court added that “[u]nless one of these formulations is inextricable from the case at bar, there should be no dismissal for non-justiciability on the ground of a political question’s presence. The doctrine of which we treat is one of “political questions,” not

526 one of “political cases.”

Operation of the Doctrine of International Comity.—

The doctrine of international comity is well known in international law. In simple terms it means “the recognition one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience.”527 According to Statement (Third) of the Foreign Relations Law of the US, the “doctrine of comity” essentially applies where the exercise of jurisdiction would be unreasonable in light of the connections to and interests of another affected

State in the litigation.528 This brief explanation is sufficient for our purposes here.

Some Purely Private Actor Abuses.—

In the first item under the substantive issues, we indicated that most human rights abuses (with reference to MNEs) are only prohibited by customary international law if committed by or in collusion with a governmental public actor. There are some human rights violations, however, that are an exception to this rule. These abuses are like genocide, certain war crimes, piracy, slavery, forced labour, and aircraft hijacking are

525 Baker v. Carr, 369 US 186 (SCt 1962) 217. 526 Ibid. 527 Hilton v. Guyot, 159 US 113 (SCt 1895) 164. 528 §403(1) (1987).

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prohibited by the law of nations, even in the absence of state action.529 According to

Douglas M. Branson, in a few instances, through their personnel, multinational corporations commit offenses which, even when committed by non-state actors, are against the law of nations. “Usually, however, plaintiffs claim that ATS liability exists because the multinational became somehow involved in the acts of another (sometimes the State, sometimes in the act complained of which is a jus cogens offense by a non- state actor, or, most frequently, the offending activity was by a non-state actor but which involves state action). Recent decisions have made clear that a multinational may become liable on the basis of having aided and abetted the other actor’s activity.”530 We may now turn to the procedural obstacles that pertain to the ATS.

Choice of Law Under ATS.—

A central feature of conflict of laws or transnational litigation is the issue of “choice of law.” The court needs to first decide what law is to be applied to resolve the issues in the case being considered. Is it to be the law of the forum, that is, the present court, or the law of the site of the impugned actions? The issue may be crucial for the defendant if the potential choice of law is significantly more lenient to the defendant than the other option. The approaches adopted by the courts with reference to ATS, may be listed in a summary fashion as follows:

529 See, e.g., Kadic v Karadzic 70 F 3d 232 (2d Cir 1995) 241-43; and Doe I. v. Unocal Corp., 963 F. Supp. 880 (CD Cal 1997) 891-92; Burnett v. Al Baraka Investment and Development Corporation, 274 F. Supp. 2d 86 (DDC 2003). 530 Branson, “Holding Multinational Corporations Accountable?,” 232.

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• Some US federal judges have decided that ATS prescribes “international law” as

the law governing the substance of the claim, while federal law governs

531 procedural matters.

• Other judges have opted for “federal common law” as the appropriate choice of

532 law.

• Some courts have applied the law of the foreign site of the relevant acts, where

that law is compatible with “international law and provides a remedy compatible

533 with the purposes of the ATCA and pertinent international norms.”

In general, the courts have not applied foreign law to frustrate the application of

534 ATS.

Procedural Obstacles in the US With Reference to ATS

In the previous section dealing with substantive issues, we have addressed problems of subject-matter jurisdiction with reference to ATS. We will discuss subject-matter jurisdiction for non-ATS problems later. In addition to the problems mentioned already, plaintiffs need to overcome formidable procedural obstacles. These obstacles are not confined to ATS alone, and may apply to all transnational litigation. The first procedural issue is that US courts cannot exercise jurisdiction over defendants unless they can establish “personal jurisdiction” over them. In addition to this, a US court may refuse to exercise jurisdiction on the discretionary ground of forum non conveniens.

These two procedural issues are discussed in some detail by Sarah Joseph535 and

531 B. Stephens, “Corporate Liability: Enforcing Human Rights Law through Domestic Litigation,” Hastings International and Comparative Law Review 24 (2001): 401, 408-9; see also Xuncax v Gramajo 886 F Supp 162 (D Mass 1995) 182-84. 532 Alvarez-Machain v. US, 331 F. 3d 604 (9th Cir 2003) 635. 533 Tachiona et al v. Mugabe and ZANU-PF, 234 F Supp 2d 401 (2002), at 418. 534 Joseph, Corporations and Transnational Human Rights Litigation, 41. 535 Ibid. See chapter 4 dealing with procedural issues.

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Liesbeth Enneking.536 The reader interested in details may approach these two sources.

Our purpose here is limited, therefore, the discussion will be very brief.

Personal Jurisdiction.—

The basic rule is that US courts exercise general jurisdiction over US nationals, including companies incorporated in the US, even for their extraterritorial activities.537

Foreign corporations are subject to general jurisdiction in US courts if they “do business” in the forum, that is they have substantial, ongoing business relations in the forum.538 This matter is so important, yet it is unfortunate that the standard of

“substantial business dealings” applied by the courts is quite vague, and its satisfaction can only be determined on a case-by-case basis.539 Nevertheless, in combination with the fact that under some circumstances US courts may also assume personal jurisdiction over foreign parent companies of multinational corporations on the basis of the presence within the jurisdiction of local affiliates means that the jurisdictional reach of

US courts in foreign direct liability cases over not only domestic but also foreign corporate defendants is potentially very broad.540 An example quoted to show the broad personal jurisdiction of US courts over foreign corporations is Wiwa v. Shell. This case shows that the presence within the forum of an investor relations office and its manager,

“both part of a local Shell subsidiary, was found by the New York federal court involved to provide sufficient grounds for the exercise of personal jurisdiction over two of the multinational corporations’ foreign parent companies, Royal Dutch Petroleum

536 Liesbeth Francisca Hubertina Enneking, Foreign Direct Liability and Beyond: Exploring the role of tort law in promoting international corporate social responsibility and accountability (The Hague, The Netherlands: Eleven International Publishing, 2012), 140 passim. 537 G. B. Born, International Civil Litigation in United States Courts 3rd edn. (The Hague: Kluwer Law International, 1996), 69-70. 538 Ibid., 100; Wiwa v. Royal Dutch Petroleum, 226 F. 3d 88 (2d Cir. 2000) 95; and Doe I v. Unocal Corp., 27 F. Supp. 2d 1174 (CD Cal 1998) 1184 (Unocal 1998). 539 Born, International Civil Litigation in United States Courts, 104. 540 Enneking, Foreign Direct Liability and Beyond, 141. “After all, most large multinational corporations have some kind of presence in the US.” Ibid.

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Company and Shell Transport and Trading Company, which were incorporated in the

Netherlands and the UK, respectively.”541 We may discuss the other procedural obstacle now.

Forum Non Conveniens.—

Forum non conveniens (FNC), which in Latin means “forum not agreeing,” is a common law legal doctrine on the basis of which a court may refuse to take jurisdiction over matters because there is a more appropriate forum available to the parties.542 The court does not consider this doctrine on its own motion; it is taken up only on the defendant’s application. The interpretation and effects of this doctrine may vary according to the different common law jurisdictions, as it is a matter of discretion.

It is only possible to highlight trends and difficult to uncover strict rules, because the doctrine is essentially applied at the discretion of the trial judge, with little scope for review of that decision.543 According to Sarah Joseph, a baseline proposition is that deference is to be given to the plaintiff’s choice of forum. After this a two-step test is applied. The first step is to establish that there exists an adequate available alternative forum. The second step is to weigh up the respective public and private interests at issue to decide which forum is the most convenient for the litigation.544 Dismissal on the basis of form non convenience usually has a devastating effect on a plaintiff’s case; cases are rarely re-litigated in the putative available foreign forum after FNC dismissal

541 Wiwa v. Royal Dutch Petroleum, 226 F.3d 88 (2nd Cir. 2000). See also Joseph, Corporations and Transnational Human Rights Litigation, 84-86 and Enneking, Foreign Direct Liability and Beyond, 141. 542 As a doctrine of the conflict of laws, forum non conveniens applies between courts in different countries and between courts in different jurisdictions in the same country, but not between counties or federal districts within a state. Here we are concerned with its applicability between different countries. 543 See Piper Aircraft v. Reyno, 454 US 235 (SCt 1981) 251. 544 Joseph, Corporations and Transnational Human Rights Litigation, 88.

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by a US court.545 The plaintiff, however, is in no way barred from approaching the other forum.

4.4.3 The Kiobel Judgement and the Probable Demise of

ATS Remedies

The Alien Torts Statute (ATS) has held great hopes for people around the world, especially for the victims of torts and crimes committed by or linked to the subsidiaries of multinational enterprises (MNEs) operating in developing countries. Ever since the

ATS was revived in 1980, it has been hailed in the academic community as an important milestone in the development of international law and the vindication of victims’ rights.546 Many experts have considered the ATS litigation as a leading example of how international legal norms can be developed and strengthened through domestic and non- state actors.547 After a series of interesting cases, the recent decision of the US Supreme

Court in Kiobel v. Royal Dutch Petroleum Co.548 appears to have upset the applecart.

In this section, we will try to understand the impact of this case and briefly describe its rationale.

Before we begin the description of the case in earnest, it is important to note some of the disappointment it has sent around the world. One view from South Africa raises

545 Ibid., relying on J Duval-Major, “One Way Ticket Home: The Federal Doctrine of Forum non Conveniens and the International Plaintiff,” Cornell Law Review 77 (1992): 650, 671- 72; and D. W. Robertson, “Forum Non Conveniens in America and England: ‘A Rather Fantastic Fiction’” Law Quarterly Review 103 (1987): 398. 546 Julian G Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” American Journal of International Law 107, no. 4 (2013): 839. 547 See, e.g., Harold Hongju Koh, “How Is International Human Rights Law Enforced?,” Indiana Law Journal 74 (1999): 1397, 1414 (describing how Filartiga and subsequent ATS cases helped build support for ban on torture); see also Anne-Marie Burley, “The Alien Tort Statute and the Judiciary Act of 1789: A Badge of Honor,” American Journal of International Law 83 (1989): 461, 489-93 (defending the use of ATS litigation to vindicate broader abstract norms). 548 133 S. Ct. 1659, 569 US 12 (2013).

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a number of questions that we reproduce here. Meetali Jain and Bonita Meyersfeld have the following to say:

While it is important to examine the legal rationale put forth in Kiobel, it is

equally if not more important to query the role of the ATS, as a narrow legal

framework, in the quest for global justice. Why, for example, is the only forum for

possible legal relief for a small, vulnerable community in Nigeria, in the US? Does

this in itself reflect a power disparity between the Global North and the Global

South that must be addressed and redressed? And if we want meaningful justice for

the Ogoni people, and the millions like them throughout the developing world,

should we consider regional and domestic forms of recourse? Given that the ATS,

as a US instrument, has not proven to be an effective recourse against abuses

perpetrated by the US government, what are the alternative fora that exist for

marginalised communities, anywhere in the world, to challenge the economic

hegemony of states such as the US in the Global North? Finally, what are the

implications of the lawyering involved in ATS litigation in building movements

that create transnational narratives, and what are the lessons learnt from decades of

549 ATS litigation for client-centered lawyering?

The ATS, and hence this case, revolves around what is called “the presumption against extraterritoriality.”550 The presumption is courts should not apply U.S. law

549 Meetali Jain and Bonita Meyersfeld, “Lessons from Kiobel v Royal Dutch Petroleum Company: developing homegrown lawyering strategies around corporate accountability,” South African Journal on Human Rights 30 (2014): 431 (footnotes omitted). 550 According to Ingrid Wuerth, however, “[t]hese questions included not only the amenability of corporations to suit and the statute’s extraterritorial application, but also the potential immunity of individual defendants, the appropriate deference to afford the U.S. government as to the statute’s interpretation and case-by-case application, the existence and scope of an exhaustion requirement, the application of the forum non conveniens doctrine, the viability of aiding and abetting claims, the source of applicable law, and the statute’s purpose and substantive scope. The Court’s first modern ATS case, Sosa v. Alvarez-Machain, clarified that the ATS permitted federal common law claims based on contemporary customary international law norms of requisite specificity and universality, but this standard itself generated uncertainty, and the opinion explicitly left open issues of deference and exhaustion. As lower courts and litigants hacked their way through a thickening jungle of unresolved ATS issues, clarification from Congress or the Supreme Court felt long overdue.” Ingrid Wuerth, “International Decisions: Kiobel v. Royal Dutch Petroleum Co.:

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extraterritorially in violation of international legal rules, which limit the jurisdictional reach of national laws.551 During the nineteenth century, international law imposed strict restrictions and jurisdictional limits on the extraterritorial application of domestic statutes.552 The presumption against extraterritoriality is considered to be an application of what is called “the Charming Betsy canon,” a canon that encouraged courts to construe U.S. statutes in conformity with international legal rules.553 It was in the first half of the twentieth century, however, that the international law rationale for the presumption against extraterritoriality became untenable because international law changed.554 The change came after the Permanent Court of International Justice, the precursor of the ICJ, decided the famous Lotus case in 1927.555 Lotus established the permissive rule that states can apply their laws extraterritorially unless there is a specific prohibition barring the extraterritorial application of domestic law. The words of the

Court are as follows:

Far from laying down a general prohibition to the effect that States may not

extend the application of their laws and the jurisdiction of their courts to persons,

property and acts outside their territory, [international law] leaves them in this

The Supreme Court and the Alien Tort Statute,” The American Journal of International Law 107 (2013): 602. 551 David L Sloss, “Kiobel and Extraterritoriality: A Rule Without a Rationale,” Md. J. Int’l L. 28 (2013): 242. Sloss himself refers to John H. Knox, “A Presumption Against Extrajurisdictionality,” American Journal of Internaltional Law 104 (2010): 351, 352 (For most of U.S. history, the Supreme Court applied a presumption against extrajurisdictionality: that is, a presumption that federal law does not extend beyond the jurisdictional limits set by international law). 552 David L. Sloss, Michael D. Ramsey & William S. Dodge, “International Law in the Supreme Court to 1860,” in International Law in the U.S. Supreme Court: Continuity and Change 7, 38 (David L. Sloss, Michael D. Ramsey & William S. Dodge eds., 2011), as cited in Sloss, “Kiobel and Extraterritoriality: A Rule Without a Rationale,” 242. 553 Murray v. Schooner Charming Betsy, 6 U.S. (2 Cranch) 64, 118 (1804) ([A]n act of Congress ought never to be construed to violate the law of nations if any other possible construction remains). 554 Sloss, “Kiobel and Extraterritoriality: A Rule Without a Rationale,” 242. 555 S.S. “Lotus” (Fr. v. Turk.), 1927 P.C.I.J. (ser. A) No. 10 (Sept. 7).

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respect a wide measure of discretion which is only limited in certain cases by

556 prohibitive rules.

The Lotus case, thus, removed the restriction that had existed in international law on the extraterritorial application of domestic statutes. In Kiobel, the defendants, however, argued that international law prohibits U.S. courts from applying U.S. law extraterritorially to “foreign cubed” cases, that is, cases involving foreign plaintiffs, foreign defendants, and foreign conduct.557 This argument is obviously untenable in the light of what has been quoted from Lotus. Sloss argues that:

In the year 2013, there is no blanket rule of international law that prohibits

States from enacting legislation to regulate the activities of foreigners in foreign

countries. Nor is there any rule of international law that prohibits domestic courts

from exercising jurisdiction over foreign-cubed cases. To the contrary, the

universality principle is a widely accepted principle of international law that

authorizes States to apply their laws extraterritorially to address heinous conduct

that violates universal human rights norms. The universality principle is not limited

558 to criminal cases; it applies equally to civil cases.

If extraterritorial jurisdiction is consistent with international law, because it falls within the scope of the universality principle, then why did the Supreme Court, or the defendants, even concern themselves with this issue. Sloss also maintains that even if the Supreme Court wants to preclude application of the ATS to foreign-cubed cases, it

559 cannot legitimately invoke an international law rationale to justify that outcome.

556 Ibid., 19. 557 Sloss, “Kiobel and Extraterritoriality: A Rule Without a Rationale,” 242. 558 Ibid. (footnotes omitted). 559 Sloss, “Kiobel and Extraterritoriality: A Rule Without a Rationale,” 242.

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Sloss himself refers to four rationales in all,560 while others talk about a “separation of

561 powers” rationale. We shall be referring to both, briefly, to explain the impact of the case.

4.4.3.1 Factual Background to Kiobel

In early 2013, many “international lawyers held their collective breath,”562 waiting for the judgment of the United States Supreme Court in the case of Kiobel v. Royal Dutch

Petroleum Company, which was handed down in April 2013.563 Kiobel concerned the liability of particular multinational corporations for aiding and abetting the Nigerian

Abacha regime, which perpetrated crimes against the Ogoni community in the heart of the Niger Delta. The key question facing the court was whether the Alien Tort Claims

Act (otherwise known as the Alien Tort Statute, ATS), could ground a claim of Nigerian nationals in the US. The facts of the case are as compelling as the judgment. “But even more significant is the extensive global fixation on this case and the underlying legal

564 mechanism on which it is premised.”

These facts have been borrowed from the article by Meetali Jain and Bonita

Meyersfeld, although the judgement itself contains a detailed narration of the facts as recounted by Chief Justice Roberts.565 The Kiobel case happened in Ogoniland in the

Niger Delta. In 1956, the Netherlands-based Dutch Company, Royal Dutch Petroleum, and the British-based corporation, Shell UK (the respondents), created a joint venture in Nigeria called the Shell Petroleum Development Corporation (SPDC). The SPDC

560 “Analysis of recent judicial decisions applying the presumption against extraterritoriality indicates that U.S. courts and commentators invoke at least four different rationales for the presumption: an international law rationale; a domestic political science rationale; an international relations rationale; and a domestic judicial policy rationale.” Ibid., 241. 561 See generally Julian G Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” American Journal of International Law 107, no. 4 (2013): 835–841. 562 Jain and Meyersfeld, “Lessons from Kiobel v Royal Dutch Petroleum Company: developing homegrown lawyering strategies around corporate accountability,” 431. 563 569 US 2013, 133 S Ct 1659 (2013). 564 Jain and Meyersfeld, “Lessons from Kiobel v Royal Dutch Petroleum Company: developing homegrown lawyering strategies around corporate accountability,” 431. 565 133 S. Ct. 1659, 569 US 12 (2013).

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began oil extraction and production in this oil-rich region. This was not just any ordinary oil field: the SPDC became one of Shell’s biggest producers of oil and, equally important, Shell became an essential source of the Nigerian government’s income. By

1994 Ogoniland had produced about US$30 billion worth of oil. The Ogoni people did not benefit from this lucrative arrangement. Their share of the natural resources in their land has been minimal. Indeed, the impact on the Ogoni people has been profoundly negative: there have been 2,976 oil spills from a poorly-maintained network of aboveground pipes (this is the equivalent of 2.1 million barrels of oil). Soot and pollution are ever-present contaminants; water sources are heavily toxic; vegetation is destroyed; public health is adversely affected by petroleum hydrocarbons in the air and water, soil and sediments. In the early 1990s, a popular grassroots movement known as the Movement for the Survival of the Ogoni People (MOSOP) was formed to demand human rights and environmental justice. When the Ogoni population began to protest this degradation, they were met with a cruel and repressive response. The Nigerian government, at the behest, and with the assistance, of the SPDC’s holding corporations

(Royal Dutch Petroleum and Shell), intervened. The Nigerian military, aided and abetted by Royal Dutch and Shell and their agents: “engaged in a widespread and systematic campaign of torture, extrajudicial executions, prolonged arbitrary detention, and indiscriminate killings constituting crimes against humanity to violently suppress this movement.”566 The Nigerian government allegedly actively conspired in the murder of Ogoni writer and activist Ken Saro-Wiwa and eight other Ogoni leaders.

Saro-Wiwa was an outspoken critic of the Shell Oil regime in the Delta region of

Nigeria and assisted in bringing international attention to the plight of the Ogoni people.

566 The authors have cited the Brief for Petitioners in Kiobel v. Royal Dutch Petroleum Co., Shell Transport and Trading Company PLC, Shell Petroleum Development Company Of Nigeria, Ltd., petition filed 06/06/2011 in the Supreme Court of the United States.

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He prompted non-violent agitation against Shell starting in the early 1990s. Shell Oil is alleged to have provided vehicles, money and other resources to the Nigerian military to carry out the torture and murder of Saro-Wiwa and other Ogoni activists. In 2009,

Shell Oil settled a New York lawsuit brought against it on the basis of Saro-Wiwa’s murder for US$15.5-million. A group of Nigerian nationals managed to escape

Ogoniland and were granted political asylum in the US, where they filed a suit against the corporations involved in the Ogoniland oil extraction (the petitioners). Because of the complicity of the Nigerian government, the Ogoni people were precluded from a fair and open judicial process in Nigeria. The petitioners included Esther Kiobel, the first petitioner, who applied individually and on behalf of her late husband, who was killed by the Nigerian authorities, for financial support and assistance from the SPDC and its shareholders, Royal Dutch Petroleum and Shell UK. The petitioners alleged that the corporation provided food, money and transport to Nigerian government agents, whilst allowing the use of their premises for attacks on those people protesting the environmental destruction wreaked by the companies.

This matter became known as the Kiobel case and relied on the ATS for legal relief.

4.4.3.2 The Decision in Kiobel and its Rationale

The Kiobel Court has not answered all questions nor has it ended all debates, but “it did resolve at least one issue with surprising unanimity: both the opinion for the Court by

Chief Justice John Roberts and the main concurring opinion by Justice Stephen Breyer refused to interpret the ATS as authorizing universal jurisdiction.”567 All nine justices, rejecting decades of lower-court precedent and widespread scholarly opinion, held that

567 Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” 835.

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the ATS excluded cases involving purely extraterritorial conduct, even if the alleged

568 conduct constituted acts that are universally proscribed under international law.

If a state seeks to exercise jurisdiction outside of its territory, then international law requires this state to justify such action on the basis of some connection to its territory, nationality, or national security interests. Such requirements flow naturally from fundamental international legal principles of “sovereign equality and noninterference in the domestic affairs of sovereign states.” These principles are so fundamental that they have been made part of the UN Charter.569 International law has, however, long recognized an exception to this framework for a certain set of serious crimes. Under this principle, any nation has the right to exercise prescriptive and adjudicative jurisdiction over certain crimes, irrespective of any connection between that crime and its territory.570 This type of jurisdiction is called “natural jurisdiction.” Accordingly, states have invoked universal jurisdiction to apply their criminal laws to acts like piracy, but, in the modern era, universal jurisdiction is often justified by the severity and heinousness of the crimes, like criminal liability for acts such as torture and genocide,

571 even if those acts had no territorial or other connection to a state.

In an overview of the growth of ATS litigation, we have already recorded some of the legal issues and questions involved. It will be our endeavour here to name and describe some of the important cases, although very briefly, that made major contributions to the law.

568 Ibid. 569 UN Charter Art. 2. 570 Prescriptive jurisdiction means that a state has the right to create, amend or repeal legislation without any limitation. 571 Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” 835.

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Filartiga v Pena-Irala.—

Although the Filartiga court did not invoke universal jurisdiction directly, it relied on the “well-established, universal prohibition of torture under customary international law to support its decision to apply the ATS to the Paraguayan defendant.”572 Joel

Filartiga’s son (Paraguayan citizens) had been tortured and killed by Paraguayan authorities. Several years later, in New York, Filartiga’s daughter, Dolly Filartiga, saw her brother’s torturer walking down the street. She was referred to Center for

Constitutional Rights (CCR). The CCR caused to be drafted and served papers against

Americo Norberto Pena-Irala (a Paraguayan citizen), just before he was scheduled to be deported to Paraguay, for wrongfully causing the death of Filartiga’s son. The

Second Circuit Court recognised its jurisdiction to determine Pena-Irala’s liability based on the ATS. This was a major development that led to more than three decades of human rights litigation in the US courts.

Victims in various cases have invoked the ATS more than 150 times in the last two decades.

Kadic v. Karadzic.—

In Kadic v. Karadzic, the Second Circuit held that international law permitted the imposition of civil liability on natural persons for certain universally proscribed acts under international law. The Kadic court also cited with approval the Restatement

(Third) of the Foreign Relations Law of the United States, which noted that, while universal jurisdiction was typically applied in the criminal context, “international law also permits states to establish appropriate civil remedies” for universally proscribed acts. This ruling was one of the first times that a U.S. court recognized that at least some

572 Ibid.

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ATS cases involve the exercise of universal jurisdiction.573 This case also extended the application of the statute to private defendants, commanders, and corporations responsible for human rights violations. According to Ingrid Wuerth, “Beginning in the mid-1990s, however, ATS litigation focused increasingly on corporate defendants such as Barclay National Bank, Chevron, Del Monte, Ford, IBM, Rio Tinto, Talisman

Energy, and Unocal, all of whom allegedly aided and abetted foreign governments’ human rights violations such as slave labor, extraordinary rendition, apartheid, war crimes, and torture. Major law firms represented these deep-pocket defendants, and plaintiffs were sometimes represented by private, for-profit lawyers working on a contingency fee. The cases increased dramatically in their scope and complexity. Suits against corporate defendants also caused concern about ATS litigation within the U.S.

Department of State, especially under the George W. Bush administration. The government began to advocate for the dismissal of many suits (including some against individuals) based on the presumption against extraterritoriality, foreign policy

574 considerations, and the rejection of aiding and abetting liability.”

Sosa v. Alvarez-Machain.—

This connection between the ATS and universal jurisdiction became more explicit in

2004 when the Supreme Court decided Sosa v. Alvarez-Machain. Although the Sosa case arguably did not require the invocation of universal jurisdiction since it involved

U.S. government action, the Court made clear that any ATS cause of action must satisfy a rigorous “specific, universal, and obligatory standard.” The Court highlighted the importance of this standard not only as a way to conform to historical understandings

573 Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” 835. 574 Wuerth, “International Decisions: Kiobel v. Royal Dutch Petroleum Co.: The Supreme Court and the Alien Tort Statute,” 604.

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of the ATS’s substantive scope but also as a way to satisfy concerns about judicial abuse of ATS powers that could negatively affect U.S. foreign relations. Justice Breyer’s concurring opinion in Sosa, however, directly embraced universal jurisdiction as a way to mitigate concerns about judicial overreaching based on the ATS, suggesting that limiting ATS claims to universal jurisdiction crimes for which there was widespread international recognition would safeguard international comity. Citing an amicus brief filed by the European Commission, he noted that nations have, in a narrow set of crimes, reached a “procedural agreement that universal jurisdiction exists to prosecute

575 a subset of that behavior.”

Decision in Kiobel.—

Despite its prominence in Sosa and subsequent academic support, both the Roberts majority opinion and the Breyer concurring opinion rejected a universal jurisdiction reading of the ATS. Roberts also noted that there is no historical or legislative history to support making the United States the “custos morum of the whole world,” that is guardian of the world’s morals. In other words, he saw no basis for reading the ATS to authorize U.S. courts to exercise universal jurisdiction. Given Roberts’s reliance on the presumption against extraterritoriality, it is not surprising that he gave universal

576 jurisdiction little consideration.

But given Breyer’s endorsement of universal jurisdiction in his concurring opinion in Sosa, it is striking that Breyer’s concurring opinion in Kiobel carefully avoided basing its claim on universal jurisdiction. Neither Roberts nor Breyer offers any

575 For all these details, see Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” 835-36. 576 Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” 838.

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historical evidence to support their rejection of a universal jurisdiction reading of the

577 ATS.

Separation of Powers Rationale.—

According to Julian Ku, the ATS was quite popular after 1980, but it was not without critics.578 The first such criticism was registered by Judge Robert Bork in Tel-Oren v.

Libyan Arab Republic.579 This criticism was based on what Ku calls the “separation of powers critique of the ATS.”580 Bork held that the ATS was merely a “jurisdictional” statute, that is, it did not define conduct thus it did not authorize courts to create a private cause of action. Consequently, no claims could be brought under the ATS itself unless or until Congress defined conduct and created specific causes of action. To find otherwise, Bork said, would raise “grave separation of powers problems.”581 This meant that judges by admitting conduct defined by international law norms as causes of action would be treading on the toes of Congress and not staying in their own domain. Bork, however, did not challenge the significance of international law in the domestic legal system. His criticism is based on the principle that “the conduct of the foreign relations of our Government is committed by the Constitution to the Executive and Legislative—

‘the political’—Departments.”582 Bork’s approach—the decision to recognize a cause of action under international law is reserved for Congress—was not given much attention in the beginning, but it has been used extensively by courts and lawyers since

577 Ibid. 578 Ibid., 839. 579 Tel-Oren v. Libyan Arab Republic, 726 F.2d 774 (D.C. Cir. 1984). 580 Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” 839. 581 Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” 839. 582 Tel-Oren v. Libyan Arab Republic, 726 F.2d 774, 801 (quoting Oetjen v. Central Leather Co., 246 U.S. 297, 302 (1918)).

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the late 1990s.583 Thus, in Sosa, the Supreme Court’s first extended analysis of the ATS, both the defendants and the U.S. government as amicus curiae adopted Bork’s argument that the ATS did not create a cause of action and that to hold otherwise would threaten separation of powers, but Sosa did not fully close the door on federal court activity.584 The lower courts were merely instructed to be prudential and to limit

585 separation of powers conflicts.

Ku says that in the light of this background, it is not surprising that, when the

Supreme Court returned to the ATS in Kiobel, separation of powers concerns were again front and center; both of the Court’s main opinions recognized separation of powers concerns raised by ATS cases.586 Thus, Chief Justice Roberts said in the main opinion, “[T]he danger of unwarranted judicial interference in the conduct of foreign policy is magnified in the context of the ATS, because the question is not what Congress has done but instead what courts may do.”587 Justice Breyer too, giving up his earlier acceptance of universal jurisdiction, gave a concurring opinion citing the need to

“minimize international friction” caused by ATS lawsuits.588 This rationale is vindicated by the fact that there has been opposition from foreign governments like the

United Kingdom and the Netherlands, as well as by the U.S. government itself, to judicial insertion of causes of action in the ATS.589 According to Ku, the ultimate question then was: Should the “international friction” with these nations (as well as

583 Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” 839. 584 Ibid. 585 Ibid. 586 Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” 840. 587 Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct. 1659, 1664 (2013). 588 Ibid., 1674. 589 See Supplemental Brief of the Governments of the Kingdom of the Netherlands and the United Kingdom of Great Britain and Northern Ireland as Amici Curiae in Support of Neither Party, Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct. 1659 (2013) (No. 10-1491) (arguing against the applicability of the ATS overseas); Brief of the United States as Amicus Curiae in Support of Petitioners, Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct. 1659 (2013) (No. 10-1491).

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Nigeria) be overcome by universal norms, or should it be deferred to political or diplomatic measures?590 Kiobel leaves the resolution of this question to Congress, which is likely to have superior informational and technical expertise on how to make this determination.591 The extraterritorial application of the ATS has thus come to an end, thus, pronouncing the death of this form of legislation.

4.5 Direct Tort Liability of Multinationals and State Tort

Laws in the USA

Now that the ATS has been reinterpreted by the US Supreme court, and rendered almost ineffective, other significant alternative bases for suing corporations for their overseas breaches of human rights exist in the USA. These alternative bases will now become more important and prominent. Our purpose here is not to go into the details of these bases, but to identify them. These alternative bases are: ordinary US tort law as an avenue for challenging human rights abusive behaviour by MNEs that extend beyond the extraordinary circumstances envisaged by ATS, TVPA, §1331, and RICO. A very brief explanation follows.

4.5.1 Tort Jurisdiction

According to Sarah Joseph, US State courts have subject matter jurisdiction over

“transitory torts,” torts committed in other countries which are unlawful under the law of that foreign country, and where that country’s law is consistent with the policies of the US forum.592 Further, US federal courts also have “diversity jurisdiction” to

590 Ku, “Kiobel and the surprising death of universal jurisdiction under the Alien Tort Statute,” 840. 591 Ibid. 592 Joseph, Corporations and Transnational Human Rights Litigation, 65.

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consider civil law complaints arising between aliens and US citizens, with aliens suing,

593 if the claim is over a certain amount.

Those who advocate keeping U.S. state and federal courts open to claims for human rights violations committed by foreigners on foreign soil often invoke the common law notion of “transitory torts.”594 According to Keitner, records have survived from at least four cases that were brought in state court in the 1790s by U.S. plaintiffs against foreigners for conduct that occurred outside of the United States, including Waters v.

Collot (Pennsylvania, 1794), Rose v. Cochrane (New York, 1794), Dunant v. Perroud

(Pennsylvania, 1796), and Parnell & Stewart v. Sinclair (Virginia, 1797).595 In each of these cases, the state court had jurisdiction by virtue of the foreign defendant’s

596 “transitory presence” in the United States at the time of the suit.

Among the examples of cases against MNEs in US state courts, the following may be quoted:

• Doe v. Unocal.—Unocal was sued, besides the ATS cases, in the Central District

Court of California and the Superior Court of California under a variety of causes

of action. Both the federal and State cases concern Unocal’s alleged legal

responsibility for gross human rights abuses, including killings, tortures, forced

labour, destruction of property and forced removals of entire villages, perpetrated

by the Myanmar military whilst it provided security for the Yadana pipeline

project, of which Unocal was a participant. In the State court, the plaintiffs argued

593 Ibid. 594 Chimene I. Keitner, “State Courts and Transitory Torts in Transnational Human Rights Cases,” U. C. Irvine Law Review 3 (2013): 83. 595 Ibid., 84. “Two of the suits (Collot and Perroud) involved conduct in French colonies by French colonial officials, one (Cochrane) involved conduct by a British captain on board a British ship during the evacuation of Charleston, and one (Sinclair) involved conduct by a British privateer on the high seas.” Ibid. 596 Ibid.

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that Unocal is liable for the torts of wrongful death, battery, false imprisonment,

intentional infliction of emotional distress, negligent infliction of emotional

597 distress, negligence per se, and conversion.

• Union Carbide gas plant disaster in Bhopal, India.—On 2 December 1984, a

lethal gas methyl isocyanate leaked from Union Carbide’s Bhopal subsidiary and

killed thousands of people in Bhopal, and maimed or disabled hundreds of

thousands more. A personal injuries action was brought by the Indian

government and a number of private plaintiffs against the parent corporation in

New York. The plaintiff claimed that the parent company was liable under the

tort of negligence. The substantive tort claims were never tested in New York, as

the case was dismissed for forum non conveniens (FNC) on the ground that it

should more appropriately be heard in India.

• A series of transnational tort claims brought by Ecuadorian plaintiffs against

Texaco regarding its alleged responsibility for contamination of the environment

in the Amazon region, which has caused associated health problems. The first

claim, Sequihua v. Texaco, filed in Texas, was dismissed for FNC.

• Similar claims against Southern Peru Copper with regard to alleged

environmental damage in Peru have also been dismissed for FNC.

When a court exercises ordinary transnational tort jurisdiction, it often decides such cases according to the law of the site of the tort, which may be more lenient to the tortfeasor than US law. The issue of “choice of law,” the law to be applied in a case, is likely to prove much more complex and problematic in such cases, compared to ATCA cases.598 Further, transitory tort claims are more vulnerable to dismissal on the ground

597 Joseph, Corporations and Transnational Human Rights Litigation, 68. 598 Ibid., 74.

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of forum non conveniens, a doctrine which permits the dismissal of a case on the

599 grounds that it should be litigated in another forum.

4.5.2 Jurisdiction Under §1331

Sarah Joseph explains that transnational human rights cases may also arise in federal courts as claims for violations of international law, including international human rights law.600 Federal courts have jurisdiction over matters arising under the Constitution and federal laws under 28 USC § 1331, and “Federal laws” include self-executing treaties ratified by the US. The relevance of federal “treaty” jurisdiction in human rights matters, however, has been curtailed by the US executive practice of issuing a declaration upon ratification that human rights treaties are not self-executing. The learned author also said that §1331 jurisdiction “might provide a ready-made replacement for ATCA causes of action if it is settled that it provides a cause of action as well as federal jurisdiction for violations of customary international law.”601 What is needed is that the courts should interpret the statute more liberally to include universal jurisdiction.

Under this section, we may include statutes like RICO dealing with racketeering and corruption. We have already said that we will take up corruption issues in a later chapter, probably the next.

599 Joseph, Corporations and Transnational Human Rights Litigation, 74. 600 Ibid., 77. 601 Ibid., 74.

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4.6 Tort Claims Against Multinationals in UK, Canada,

Australia and Some European Countries

The vast majority of cases against corporations, that is, from the transnational human rights perspective, have arisen in the United States. This is obvious as there are more juridical advantages for plaintiffs pursuing novel legal actions available there. Sarah

Joseph has recorded some details of transnational human rights litigation in three other common law countries: England, Australia and Canada. We cannot pursue this analysis here, primarily due to similarity of jurisdictions and problems faced by plaintiffs. We merely offer the conclusion drawn by the learned author:

Subject matter jurisdiction in non-US jurisdictions has been based on tort law,

though there is the possibility of suits in England and Canada being based in the

future upon allegations of breaches of customary international law. As in the United

States, transnational human rights litigation against companies has focused on

preliminary matters, such as FNC and choice of law. Recent decisions indicate that

England, Australia, and Canada may be more amenable jurisdictions for plaintiffs

regarding FNC, personal jurisdiction over defendants, and the application of

doctrines of abstention, such as the “act of state” doctrine. These countries have

more rigid and predictable rules regarding choice of law than the United States, but

the “public policy” exception applies so as to preclude the application of foreign

laws that exempt defendants from liability for gross violations of human rights.

Finally, foreign sovereign immunity is broader in these non-US jurisdiction

compared to the US, and could operate to exclude cases against corporations who

602 are accused of acting jointly with governments.

602 Joseph, Corporations and Transnational Human Rights Litigation, 74.

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In other places she has pointed out that these are untested jurisdictions, although some cases are found for each. Now that the application of the ATS has been restricted by

Kiobel, it is possible that plaintiffs may start turning to these countries with their complaints and claims.

As compared to this, Liesbeth Enneking has dealt at some length with the possibility of such cases in the Dutch System.603 The plaintiff and defendant in Kiobel have also fought out their claims there.604 Much as we would like to record all the developments in that jurisdiction, space does not permit us to do so.

603 Enneking, Foreign Direct Liability and Beyond, 205 passim. 604 “Around the same time that the US civil claims against SPDC and its Anglo/Dutch parent company were settled, Shell became the target of civil claims in the Netherlands, this time for its responsibility for the harmful consequences of a number of oil spills from SPDC-operated pipelines; these claims, brought by a number of Nigerian farmers and the Dutch NGO Milieudefensie (Friends of the Earth Netherlands).” Ibid.

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CHAPTER 5 SEEKING SOLUTIONS AND REMEDIES BASED ON DOMESTIC AND INTERNATIONAL LAW FOR TORTS COMMITTED BY MNEs IN PAKISTAN

We have now completed the story of multinational corporations with reference to the torts they commit all over the world, especially in countries that are still in the early stages of development. As already explained, these countries are eager for the investment that MNEs bring in their wake. Pakistan is one such country. In this chapter, we will try to assess what solutions and remedies may be available to the victims of torts in Pakistan as the country eagerly seeks investment by inviting and facilitating these giant corporations. The possible solutions and remedies, against MNE torts, available to Pakistan, and the problems to be overcome, begin to emerge gradually as we briefly overview what has been said and done in the previous chapters.

In the first chapter, we identified the fact that MNEs can meet the investment needs of developing countries with relative ease due to their vast networks and global reach.

To obtain this much needed investment, developing countries grant the corporations huge concessions. Some of these countries may even go to the extent of violating the human rights of their citizens in order to please these giant corporations, or the corporate groups that back them. They are eager to please the MNEs for investment, but do not have a developed law of torts for protecting their citizens and for dealing with possible violations committed by the MNEs. In fact, their tort law mechanisms are quite inadequate. Pakistan we have said is a country that is eager to please these corporations in return for investment, but has a decadent law of torts that is less efficient

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today than what it was when the British rule ended more than six decades ago.605 This law is in need of immediate attention, not only for dealing with MNEs, but also for securing the rights of its poor citizens and for making them aware of such rights. The first line of defence against possible violations of rights and the commission of torts will be an efficient and swift law of torts including supporting mechanisms.

We also pointed out, in the next chapter, how the MNEs have grown into powerful institutions ever since the British East India Company and other similar organisations arrived in this world.606 Today, some of these giant corporations are richer and more powerful than many nations and countries.607 Many of these groups and corporations are present in Pakistan, but there is very little information available about them. The

Securities and Exchange Commission of Pakistan (SECP) cannot even provide, or does not wish to provide, a simple list of these corporations present in Pakistan.608 At least, there is almost nothing available on SECP’s website, which is quite comprehensive otherwise.609 There are almost no details about the parents and subsidiaries, or to which corporate groups these corporations belong, nor is there any meaningful information about their operations in Pakistan. What little information that we were able to gather in this chapter was obtained after considerable effort and hard work. Further, there are no NGOs that are concerned with or monitoring the activities of these corporations, especially the impact of their operations on the environment or the way in which CSR obligations are being met.

Most MNEs are part of large corporate groups that exist as networks of parents, subsidiaries and associated undertakings. Individual corporations have legal

605 The details of this deteriorating law of torts were presented in section 1.6 of the first chapter. 606 Some of these were Dutch and French companies. 607 For the details refer to chapter two. 608 They are generally referred to as foreign companies in the Companies Ordinance, 1984. 609 See http://www.secp.gov.pk/.

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personality, but corporate groups have not been assigned personality either by municipal laws or by international law.610 This prevents victims of colossal tort disasters from claiming adequate compensation from the group as a whole. It is strange, however, that states have considered a de facto personality for these corporate groups when it is a matter of imposing taxes or recovering other dues. The manner in which the law for corporate groups operates was explained towards the end of chapter three.

It appears that there is a kind of collusion in the law too where the interests of the state have been met by the corporation in return for the state’s neglect and overlooking of the claims of the ordinary citizens, especially the victims of torts.

The victims of torts committed by these corporate groups worldwide are in reality left with a single remedy and that is the “piercing of the veil” of the subsidiary to reach the assets of the parent. This in reality amounts to bringing down the wall of limited liability. Limited liability is like a veritable fortress within which the rich parent of the subsidiary resides. Penetrating the walls of this fortress is not easy.611 There was some hope in the form of the Alien Torts Statute (ATS). In fact, the hopes of the victims were raised through three decades of encouraging litigation. The Kiobel judgement delivered by the US Supreme Court in 2013 has dashed these hopes. The judgement has denied extraterritorial application of the ATS.612 All is not lost, however, and there are possibilities of suing corporate groups under certain Federal laws as well as tort laws of individual states within the United States. There are also some possibilities of suing in the UK, Canada, Australia, and even in some European countries. Nevertheless, these are mostly untrodden paths, and developing precedents in this area is going to be a long

610 The issue of personality for corporate groups was discussed at length in chapter 3. 611 The issue of limited liability and waiing it in the case of torts has been dealt with in the first part of chapter four. 612 The impact of the judgement has been presented in chapter four after a discussion of the Alien Torts Statute (ATS). The entire judgement deserves to be read for understanding the various issues underlying this very short but interesting statute.

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drawn and protracted battle.613 A clear path and remedy may not be visible for some time to come.

Pakistan is, therefore, left to forge its own remedies, in addition to those that may be available in other jurisdictions. With a decaying law of torts and a faltering legal system, the task of seeking adequate and suitable solutions and remedies for torts committed by MNEs in Pakistan may appear exceedingly difficult. All that can be done, in the light of the above description, and in the light of the grounds covered in the previous chapters, is to make suggestions for the improvement of tort law within the existing legal system. This is needed, not only for dealing with torts by MNEs, but also for securing the rights of the people in general. An improved tort law will enhance the ability of the system to grapple more efficiently with the seeking of remedies abroad.

Beyond this, remedies within the legal system of Pakistan may be sought from Islamic criminal law, that is already implemented, by linking it to corporate manslaughter when multiple deaths are caused through mass torts. The environmental laws in the country may also be brought into service. At the international level the corrupt practices laws, suing under tort law in foreign jurisdictions, and international CSR regulation may be explored,614 but we will do this for another study. Finally, there is a greater need and scope for NGO activity in Pakistan. What is more important for purposes of this study is to undertake a final overview of different remedies that may be available outside

Pakistan in different jurisdictions, including accountability of MNEs under international law. The present chapter will be devoted to these issues.

613 An brief description of these different jurisdictions has been provided at the end of chapter four. 614 These have not been discussed so far, but will be addressed in this chapter.

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5.1 Reviving and Strengthening of Domestic Tort Law

In section 1.6 of the first chapter, we have dealt comprehensively with the law of torts as it prevails in Pakistan. The history of its development since the days of the British rule was traced and then attention was turned to the causes of its failure and decadence in Pakistan, and so also India for that matter. We began by saying that when a subsidiary of a multinational corporation commits a tort in the host country, the plaintiffs have several options, and the first of these is to sue the subsidiary in the host country.615 The other option of suing the subsidiary in the home country arises when the damage caused in the host country, in terms of loss of life and the environment, is collossal, and the subsidiary does not have a sufficient net worth to cover the damages that can possibly be awarded.

The multinational corporations, however, are extremely powerful even in the case of torts being tried in the host country. We may repeat a quotation that we included in the first chapter: “Corporations are powerful global actors that some states lack the resources or will to control. Other states may go as far as soliciting corporations to cooperate in impinging human rights. These realities make reliance on state duties inadequate.”616 The power of these corporations appears highly magnified when the mechanism for implementing the first option, of suing in the home country, is in a state of disintegration. In the discussion in the first chapter, we tried to identify the causes due to which the law of torts is not developing in Pakistan. The following causes were identified:

615 Eroglu, Multinational Enterprises and Tort Liabilities, 97. 616 Ratner, “Corporations and Human Rights,” 461.

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• Court-fee and the British: The British wished to preserve the revenue collected,

therefore, they imposed heavy court-fee. This has been undone in Pakistan

considerably in the last decade or more.

• Lack of Interest on the Part of Lawyers: With the deterioration of the law of

torts, lawyers appeared to have lost interest in this field as well as their skills.

• The Role of the Doctrines of Champerty and Maintenance: The two doctrines

are the major reason for the neglect of law of torts in Pakistan. These doctrines

need to be abolished forthwith.

• No Codification: The law of torts was not codified by the British, unlike the

criminal law, contracts and other laws. Sir Fredrick Pollock, probably realising

that this law too should be codified, prepared a draft and presented it as a proposal

to the Indian government for codification. This proposal was not accepted.

Out of these, we consider the codification of the law of torts and the abolition of the doctrines of champerty and maintenance to be crucial. The lack of interest by lawyers may also be traced back to the absence of codification of the law, as we will indicate below. These two solutions will go a long way in reviving the law of torts in this country. This solution is not confined to claims against multinationals. The law of torts guarantees the basic rights of the citizens and protects them against all transgressions.

The solutions are, thus, essential irrespective of the problem of multinationals being addressed in this thesis.

5.1.1 A Code for Tort Law in Pakistan

In the first chapter, it was pointed out that one of the probable causes of the failure of tort law is the absence of comprehensive codification in this area. Here we may point out that Islamic law that prevailed in the Indian Sub-Continent for many centuries

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before the British rule, and even for a considerable time during this rule, was also uncodified. Nevertheless, it operated through a system that had developed other institutions through which the people became aware of their rights. These were the existence of muftis and other experts in the system. When the British rulers started codifying common law, they did so for contracts, transfer of property, criminal law, procedure and many other areas. The law of torts was not codified. This law consists of age-old rights about which the ordinary Englishman is aware because of his history and the legal environment in which these rights are implemented and secured. The citizens of India had no idea of these rights.

Some of the torts are also crimes. Whenever such a tort is committed, the aggrieved person invariably seeks the option of the criminal law. There is no civil claim for assaults, battery, trespass or other torts; the criminal process is activated. This was also the position in the case of defamation. The criminal process was preferred instead of a claim for damages. In the year 2002, the Defamation Ordinance, 2002 was passed.

Since the implementation of this Ordinance, there has hardly been any case of defamation under the criminal law. The civil remedy is pursued. This shows that when the people are made aware of the civil remedy, they are likely to prefer a claim for damages rather than seeking a criminal penalty. In a society like Pakistan, a claim for damages may have a greater deterrent force than the criminal penalties that are seldom implemented.

The most recent example may be cited about medical malpractice claims. Medical malpractice law revolves around the concept of negligence.617 When an act performed

617 Michelle M. Mello and David M. Studdert, “The Medical Malpractice System: Structure and Performance,” in Medical Malpractice and the U.S. Health Care System, ed. William M. Sage and Rogan Kersh (Cambridge University: Cambridge University Press, 2006), 11.

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on an individual results in injury in a situation in which there is no intent to injure, it is called negligence. When a professional commits negligence it is called malpractice.

This may apply to any professional: lawyer, engineer, chartered accountant and so on.

Thus, medical malpractice is a professional’s negligence.618 In the nineteenth century, when civil action for malpractice was contemplated, plaintiffs often sought recourse for breach of contract, whereas in the twentieth century virtually all malpractice actions

619 have been tortious actions predicated on the legal concept of negligence.

In Pakistan, there have been very few cases of medical malpractice. It is said that until recently there were only two judgements by the superior judiciary in more than six decades. A report by the Consumer Network said:

According to Nasir Maqsood, a Karachi based lawyer, “We have only two

judgments on medical negligence in Pakistan from 1947 to 2003.” There are many

reasons for this almost virtual absence of medical malpractice litigation culture in

Pakistan. Some pertain to general lack of awareness on the part of patients about

their healthcare rights, societal norms and belief systems whereas others pertain to

620 administrative and legal domain.

The people have started believing that the medical profession has started behaving more like businessmen, the quality of service has deteriorated and the people appear to be at the mercy of the medical businessman. News reports are full of articles like

Medical negligence: A growing problem in Pakistan; Postcard USA: Pakistan’s

618 Myrtle Flight, Law, Liability, and Ethics: for Medical Office Professionals, 5th ed. (United States of America: Delmar, Cengage Learning, 2011), 94. 619 Neal C. Hogan, Unhealed Wounds: Medical Malpractice in the Twentieth Century (New York: LFB Scholarly Publishing LLC, 2003), xii. 620 The Network for Consumer Protection, Medical Negligence: Tragedy Under Wraps (Islamabad: The Network Publications, 2006), 16.

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doctors who kill; PMDC lacks authority to deal with medical negligence cases.621 More recently, however, probably due to a steep rise in cases of medical negligence, more cases are coming to the courts, but the remedies available to the victims are inadequate and insignificant.622 The main cause of people not having recourse to the courts is the lack of awareness amongst the general public about their healthcare rights. This absence of awareness is to be found not only in the illiterate majority, but also among the educated people.623 In our view, the lack of awareness and the paucity of cases and lawsuits is the absence of codification.

The situation has changed radically, at least in the Province of Punjab. The lead, as in many areas of law reform, was taken by India. The Indian courts gradually read the meaning of services into their new consumer law and then medical services were included in the fold. There have many cases in India since then, and in some cases the courts have awarded damages that may be compared with those that are awarded by

American courts.624 The Indian model took some time to develop, but its essential features were copied in the Punjab Consumer Protection Act, 2005. The term medical

621 See Muhammad Hanif Shiwani and Amin A. Muhammad Gadit, “Medical negligence: A growing problem in Pakistan,” Journal of Pakistan Medical Association http://jpma.org.pk/full\_article\_text.php?article\_id=2837 (acessed May 8, 2015). 622 See, e.g., Salman Siddiqui, “Low compensation for medical negligence,” available at http://www.thenews.com.pk/Todays-News-3-204735-Low-compensation-for-medical-negligence. “And while people in the country have increasingly been approaching the courts in cases of medical negligence in hopes of receiving compensation, others argue that there is no roadmap in place for aggrieved parties to sue negligent hospitals and doctors. On average, five new cases of medical negligence are being filed in the Sindh High Court every year. There is somewhere between the ranges of 150-200 cases currently be heard at the court, which include civil and criminal negligence, a lawyer said. The cases include cases of patients being prescribed incorrect medication, and surgical-negligence with numerous suffering from short-term and long-term mental and physical trauma. A former secretary of the Pakistan Medical Association (PMA) said that a number of medical negligence cases were being heard at the Supreme Court and High Courts. The hospitals accused of negligence include top tier hospitals and doctors in the country, he said. He said most such cases are settled out of courts with hospitals and doctors coughing up compensation money to the aggrieved parties but clarified that the number of cases that went unreported is larger than the number of cases being heard in the courts or being settled outside of court.” 623 The Network for Consumer Protection, Medical Negligence, 12. 624 The first medical negligence case of its kind is that of Dr. Balram Prasad v. Dr. Kunal Saha & Others, Civil Appeals No. 2867, 692, and 2866 of 2012. In this case the Supreme Court of India imposed damages that are likely to touch more than 11 crores (equivalent to 20 crores in Pakistan).

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services were included under the term “services” in the newly adopted consumer Act.625

The other Provinces, including the Federal Capital, have followed suit or are likely to follow suit in their already existing consumer laws.626 The Punjab law has also created institutions and other mechanisms on the pattern of the Indian model,627 but there is a total lack of awareness of this law, its standards, and procedures among the public as well as the medical professionals who can be made liable for acts of negligence. Despite all this, the codified law is having a tremendous impact and cases of medical negligence have multiplied considerably. In a recent case, the court has awarded millions in

628 damages.

The main point to be made here is that a crucial area of the law of torts lay dormant for six decades with only two judgements handed down by the courts. This field has now burst into prominence and activity due to its inclusion in consumer law that is codified. It confirms that the citizenry does not really appreciate how the common law works, and it is only codification that will make the law active and effective. It was for this reason that Sir Fredrick Pollock prepared a draft bill on the request of the British government, but ultimately the Indian government decided not to undertake codification in this area at that time. In the first chapter we said that the reason perhaps was that the public was not sufficiently educated to understand this law. The real reason though appears to be that government of that time wished to discourage litigation in this area, as is visible from the excessive court-fee629 introduced to discourage such

625 The Punjab Consumer Protection Act 2005 (Pb. Act II of 2005). 626 The Consumer Protection Acts of the other Provinces have not altered the definition of “services” as yet to include medical services. 627 See, e.g., Part VII of the Punjab Act, Consumer Protection Council. 628 Wajih Ahmad Sheikh, “Liver damage: Consumer Court orders doctor to pay millions in damages,” Report filed August 11, 2015. http://www.dawn.com/news/1199727 (Accessed May, 2016). 629 It is only recently that the government of Pakistan reduced the court-fee to some extent.

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suits.630 It was an excellent effort and needs to be taken up once again. The government of Pakistan must treat this as the most important law reform project. The law of torts in a codified form will attain multiple objectives. The most important will be the securing of rights of the citizens within the country. It will help the system deal with the rich and the powerful, whether these are individuals or corporations. This law will then prepare the way for proceeding to a foreign jurisdiction if necessary.

There are several projects that are ongoing in the world today from which help can be sought for drafting this law. Thus, for example, the European Group on Tort Law

(formerly also called “Tilburg Group”) is a group of scholars in the area of tort law established in 1992. The group meets regularly to discuss fundamental issues of tort law liability as well as recent developments and the future directions of the law of tort.

The Group has drafted a collection of Principles of European Tort Law (PETL) similar to the Principles of European Contract Law drafted by the European Contract Law

Commission.631 There is another project ongoing in China too.632 Finally, Pollock’s draft itself can be used as a basis.

5.1.2 Abolishing the Doctrines of Champerty and

Maintenance

In the first chapter (section 1.6.5.3), we briefly indicated that the non-abolition of the doctrines of champerty and maintenance is one of the major reasons for the backwardness of tort law in Pakistan. Here we wish to assert that if these two doctrines

630 The Bill is found as an appendix to his book: “A Bill to define and amend certain parts of the Law of Civil Wrongs.” It consists of 9 chapters and 73 sections. Chapter VII deals with the tort of nuisance, that is, damage arising out of public nuisance and the tort of private nuisance. Pollock, A Treatise on the Law of Torts, 527–83. 631 http://www.egtl.org/ (accessed 15.12.2014). The Group and its various centres have produced yearbooks on tort and insurance law. See, e.g., Tort and Insurance Law Yearbook—European Tort Law 2007, Helmut Koziol and Barbara C. Steininger eds. (Vienna: Springer-Verlag/Wien, 2008). 632 See chapter one for the details.

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are abolished, the law of tort can be revived in an almost magical way. The main idea is that the citizens are mostly poor, there is rampant corruption in the legal system like other areas in the country, the litigation process is protracted, expensive and time consuming. The result is that the ordinary citizen cannot even dream of suing a rich and powerful opponent. If, however, a poor citizen were to agree with a lawyer that the lawyer will undertake litigation on behalf of the citizen and bear all the financial and other burdens; if the lawyer wins the case, the damages may be shared by the citizen with the lawyer according to a previously agreed upon percentage. This will not only secure the rights of the poor citizen, but will also revive the system of tort law in the country.

What stands in the way of this solution are the two doctrines of champerty and maintenance. The doctrines originating in the common law, have been abolished in most of the common law world, except Pakistan—and India (Pakistan usually follows

India). Thus, two countries that need to abolish these archaic doctrines most are upholding them in a total state of unawareness and callous indifference, while the rest of the world has walked away from them. It is proposed here that these doctrines be abolished forthwith, and the lawyers be permitted to help clients in securing their rights under tort law as is now the practice in the rest of the common law world. To understand the exact meaning of this proposal we need to explain what we mean by these doctrines and what will be the exact impact of their abolition.

Maintenance, in the context of torts and litigation in general, means the “stirring up of litigation by giving aid to one party to bring a claim without just cause or excuse.”633

The target of this doctrine, inter alia, is the lawyer. The purpose is to discourage

633 W.V.H. Rogers, Winfield and Jolowicz: Tort (London: Sweet & Maxwell, 2006), 876.

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frivolous litigation. It means that lawyers should not aid and encourage people to file cases where genuine causes of action do not exist. In Pakistan, there is abundant frivolous litigation despite the application of this doctrine, but the cause may not be lawyers; it is usually the litigants who seek personal satisfaction or are motivated by a desire to seek revenge. “[C]hamperty is the particular form of maintenance which exists when the person maintaining the litigation is to be rewarded out of its proceeds.”634

This doctrine means that if a lawyer helps a person with the understanding with his client that the damages awarded to the client will be shared by them, then this is unlawful. The Ontario Court of Appeal in McIntyre Estate v. Ontario (Attorney

General),635 described maintenance and champerty as follows:

Maintenance is directed against those who, for an improper motive, often

described as wanton or officious intermeddling, become involved with disputes

(litigation) of others in which the maintainer has no interest whatsoever and where

the assistance he or she renders to one or the other parties is without justification or

excuse. Champerty is an egregious form of maintenance in which there is the added

636 element that the maintainer shares in the profits of the litigation.

These doctrines arose in medieval England, at a time when there was a general disregard for litigation and an understanding that lawsuits were an evil to be avoided whenever possible.637 At common law, maintenance and champerty were both crimes

634 Ibid. 635 [2002] 61 O.R. (3d) 257 (C.A.). 636 Ibid. 265-266. 637 Max Radin, “Maintenance by Champerty,” 24 CALIF. L. REV. 48 (1935), 68 as cited in Jason Lyon, “Revolution in Progress: Third Party Funding of American Litigation,” 58 UCLA L. Rev. 571 (2010), 575.

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and torts, as was barratry.638 But, since the passing of Criminal Law Act 1967 in the

639 United Kingdom, these doctrines are no more considered as crimes and torts.

In modern times these two doctrines were resisted. The defences advanced were so numerous and “imposing liability for” these acts “so outdated that the law ceased to serve any useful purpose.”640 The principal practical importance of champerty has been

“to invade contingency fee arrangements.”641 Contigency fee agreement should not be confused with conditional fee. Conditional fee means that the client can pay later, on completion of the court proceedings. There is no problem with this, the main problem is with “contingent fee,” which is “an arrangement between a solicitor and client for the payment of fee only if the client wins the case.” This is still considered against public policy in some jurisdictions including Pakistan.

Maintenance and champerty642 were introduced into American legal system through the common law, but debates about their continuing validity have existed nearly as long as the U.S. legal system itself.643 Courts began to question the utility and effectiveness of these doctrines as early as the middle of the nineteenth century.644 Scholars like Max

Radin, who objected the doctrines of maintenance and champerty in his study in 1935, argued that these doctrines were almost dead in practice and absolutely out of step with

638 Barratry is bringing of vexatious litigation or litigation for the purpose of harassment or profit. 639 Sections 13(1)(a) and 14(1) of the Criminal Law Act, 1967 as cited in W.V.H. Rogers, Winfield and Jolowicz: Tort (London: Sweet & Maxwell, 2006), 876. 640 W.V.H. Rogers, Winfield and Jolowicz: Tort (London: Sweet & Maxwell, 2006), 876. 641 Also called as ‘Damages-based agreements’ (DBAs). DBAs are a type of ‘no win, no fee’ agreement under which a lawyer can recover an agreed percentage of a client’s damages if the case is won, but will receive nothing if the case is lost. 642 It includes legal financing, also known as litigation financing, third party funding, legal or litigation funding. 643 Jason Lyon, “Revolution in Progress: Third Party Funding of American Litigation,” UCLA L. Rev. 58 (2010): 571-609, 581. 644 Ibid.

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American thinking regarding litigation at that time.645 In the United States, or in most states, the doctrines of maintenance and champerty stand abolished and even contingent fee is allowed. Contingency fees are permitted by all the courts in the USA to facilitate the plaintiffs without any financial means providing them with an opportunity to file a lawsuit.646 Contingency fees have been permitted on the principle that allowing a plaintiff with a successful claim to pursue justice is more important than preventing champerty, which can effectively be eliminated through the supervision of the court.647

In 1997, the Massachusetts Supreme Court in Saladini v. Righellis648 ruled that the doctrines of maintenance and champerty “no longer shall be recognized in

Massachusetts.” The court reasoned that: “The champerty doctrine is [no longer] needed to protect against the evils once feared: speculation in lawsuits, the bringing of frivolous lawsuits, or financial overreaching by a party of superior bargaining position.”

The court explained that new tools such as fee regulations, sanctions rules and the doctrines of unconscionability, duress and good faith provide sufficient safeguards to protect against the “evils” the common law doctrines were originally intended to address.649 The Supreme Court of South Carolina adopted the Saladini analysis in

Osprey v. Cabana Limited Partnership650 in 2000.

645 Max Radin, “Maintenance by Champerty,” CALIF. L. REV. 24 (1935): 68-74, 48 as cited in Jason Lyon, “Revolution in Progress: Third Party Funding of American Litigation,” UCLA L. Rev. 58 (2010): 571-609, 575. 646 Susan Lorde Martin, “The Litigation Financing Industry: The Wild West of Finance Should Be Tamed, Not Outlawed,” FORDHAM J. CORP. & FIN. L.10 (2004): 55-77, 55- 57 ; See also Paul H. Rubin, “Third Party Financing of Litigation,” Northern Kentucky Law Review 38 (2011): 673-685, as cited in Nicolas Dietsch, “Litigation Financing in the U.S., the U.K., and Australia: How the Industry has Evolved in Three Countries.” Northern Kentucky Law Review 38 (2011): 687-711, 689. 647 Susan Lorde Martin, “The Litigation Financing Industry: The Wild West of Finance Should Be Tamed, Not Outlawed,” FORDHAM J. CORP. & FIN. L. 10 (2004): 55-77, 55 as cited in Nicolas Dietsch, “Litigation Financing in the U.S., the U.K., and Australia: How the Industry has Evolved in Three Countries.” Northern Kentucky Law Review 38 (2011): 687-711, 689. 648 687 N.E.2d 1224 (Mass. 1997). 649 See, also Bates v. State Bar of Ariz., 433 U.S. 350, 376 n.32 (1977). The Supreme court abandoned the notion that litigation should be “viewed as an evil in itself.” 650 532 S.E.2d 269 (S.C. 2000).

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During the course of twentieth century, litigation has been viewed as “a noble tool that can lead to transformative social change.”651 And therefore, third party funding has become increasingly available to US litigants in recent years.652 At least three states—

Maine, Ohio and Nebraska—have enacted legislation to regulate third party legal funding, and these statutes primarily apply to loans in personal injury suits rather than

653 commercial suits.

The common law principles of champerty and maintenance have been rejected by many legislatures throughout the world during the 1970’s and 80’s. Efforts were made in Canada, for example, to follow the United States in this field.654 Courts of Ontario,655

Alberta656 and Nova Scotia657 have not considered any such arrangements contrary to public policy and viewed them as being capable of promoting access to justice.658 It has been maintained that today, contingent fees are now allowed in Australia, Brazil,

Canada, the Dominican Republic, France, Greece, Ireland, Japan, New Zealand, the

659 United Kingdom and the United States.

In Arkin v. Borchard Lines Ltd,660 the trial judge commented that, “[i]t is indeed highly desirable that impecunious claimants who have reasonably sustainable claims

651 Jason Lyon, “Revolution in Progress: Third Party Funding of American Litigation,”UCLA L. Rev. 58 (2010): 571-609, 588. 652 UK, Review of Civil Litigation Costs: Preliminary Report, Volume 2 by Lord Justice Rupert Jackson (London: Her Majesty’s Stationery Office, 2010). 653 Jason Lyon, “Revolution in Progress: Third Party Funding of American Litigation,” UCLA L. Rev. 58 (2010): 571-609, 575. The statutes are: Maine Consumer Credit Code Legal Funding Practice, Me. Rev. Stat. tit. 9-A, §12 (2009); Nebraska Nonrecourse Civil Litigation Act, Neb. Stat. Ann., § 25- 3303 (West 2010); and Non-Recourse Civil Litigation Advances, Ohio Rev. Code Ann. Tit. 13, § 1349.55 (West 2008). 654 See, for example, Walter C. Williston, Contingent Fee in Canada, 6 Alta. L. Rev. 184 (1968). 655 Metzler Investment GMBH v. Gildan Activewear Inc., [2009] O.J. No. 3315. 656 Hobsbawn v. Atco Gas and Pipelines Ltd., (May 14, 2009) Calgary 0101-04999 (QB). 657 MacQueen v. Sydney Steel Corporation, (October 19, 2010), Halifax 218010 (SC). 658 Steve Tenai, Nicholas Saint-Martin, “Third Party Funding Of Class Actions,” This paper was prepared for the 8th National Symposium on Class Actions, (Osgoode Hall: April 28-29, 2011), 10. 659 Herbert M. Kritzer, Risks, Reputations, and Rewards: Contingency Fee Legal Practice in the United States (Stanford: Stanford University Press, 2004), 258-259. 660 [2005] EWCA Civ 655.

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should be enabled to bring them to trial by means of non-party funding” and further that it is “highly desirable in the interests of providing access for such claimants to the courts that non-party funders …should be encouraged to provide funding, subject always to their being unable to interfere in the due administration of justice.”661. The court of Appeal while recognising the beneficial role of these arrangements drew a distiction between the litigation agreements made before court and the arrangements that give effective control in litigation to the funders, thus diminishing the purpose of

662 abolishing champerty.

The High Court of Australia has gone a step further and held in Campbells Cash and Carry Pty Ltd. v. Fostif Pty Ltd.663 that it is not contrary to public policy for a commercial or non-party funder to not only finance but, also to control the litigation.664

Similary, the Supreme Court of Appeal of South Africa decided in Price Waterhouse

Coopers Inc and Others v. National Potato Co-operative Ltd,665 that “an agreement in terms of which a person provides a litigant with funds to prosecute an action in return

666 for a share of the proceeds of the action is not contrary to public policy or void.”

Both as crimes and torts “maintenance and champerty” have been abolished in the

United Kingdom.667 Conditional fee is also allowed in the United Kingdom and § 58 of the UK Courts and Legal Services Act 1990 recognizes such an arrangement. However, contingency fee agreements were considered against public policy. But, since April

661 Ibid. at para. 16. 662 Ibid. at paras 38-40. 663 [2006] HCA 41. 664 Steve Tenai, Nicholas Saint-Martin, “Third Party Funding Of Class Actions,” This paper was prepared for the 8th National Symposium on Class Actions, (Osgoode Hall: April 28-29, 2011), 7. 665 [2004] ZASCA 64. 666 Ibid., at para. 52. 667 Sections 13(1)(a) and 14(1) of the Criminal Law Act, 1967 as cited in W.V.H. Rogers, Winfield and Jolowicz: Tort (London: Sweet & Maxwell, 2006), 876.

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2013, under the Damages-Based Agreements Regulation of 2013,668 contingency fee agreements are now permitted in the United Kingdom. This implies that lawyers can legally conduct litigation as well as arbitration in return of a share of any damages.

Previously it was only allowed for employment and other tribunal work.

In addition to conditional fee agreements and contingent fee arrangements, litigation financing industry also emerged during 1990s, first in the USA, then the UK followed by Australia.669 These companies, through contractual arrangements, provide money for different expenses including lawyer fees, court costs, expert witness fees, and plaintiff’s living expenses while the litigation is pending.670 In return, third party receives a percentage from the proceeds, if the litigant is successful. Litigation financing companies in the USA at present deal with all kinds of lawsuits including personal injury, patent litigation, copyright infringement, and employment discrimination.671 In the UK, the abolition of champerty and maintenance and introduction of conditional fee agreements opened a way for third-party funding.672

Consequently, contingent fee arrangements have also been allowed under the UK

673 law.

The litigation financing industry is still developing in the U.K.674 However, in

Australia, the funding industry has become widely accepted and more successful than the U.S. and the U.K. in incorporating financing agreements into the state’s legal

668 This regulation came into force on 1st April 2013. Section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) amends section 58AA of the Courts and Legal Services Act 1990 to permit damages-based agreements (DBAs). Certain requirements that DBAs must meet in order to be enforceable are set out in the Damages-Based Agreements Regulation 2013. 669 Nicolas Dietsch, “Litigation Financing in the U.S., the U.K., and Australia: How the Industry has Evolved in Three Countries.” Northern Kentucky Law Review 38 ( 2011): 687-711, 705. 670 Ibid., 688. 671 Ibid., 693. 672 Ibid., 699. See also Arkin v. Borchard Lines Lt. [2005] EWCA Civ 655. 673 Damages-Based Agreements Regulation of 2013. 674 Nicolas Dietsch, “Litigation Financing in the U.S., the U.K., and Australia: How the Industry has Evolved in Three Countries.” Northern Kentucky Law Review 38 ( 2011): 687-711, 702.

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system.675 Australia has been more receptive to litigation financing agreements than the

U.S. or the U.K.676 The Supreme Court of New South Wales in Domson Pty. Ltd. v.

Zhu,677 refused to rescind a financing agreement on the grounds that the financing firm had controlled too much of the litigation. The court argued that third-party funding agreements are not against public policy.678 And even went so far as to point out the irony of suing a financing firm that has been hired to finance litigation, on the terms of the original agreement.679 The development of litigation finance industry in the US, the

UK and Australia has provided access to justice to needy and poor plaintiffs.

The above overview of the law shows that not only have the doctrines of champerty and maintenance been abolished in the whole common law world, in the interest of justice and welfare of the plaintiffs, a whole litigation financing industry has developed.

What then is the position in Pakistan? It appears that the legal fraternity is oblivious of all these developments in the world regarding the abolition of these two doctrines.

Pakistan usually looks towards India before carrying out any kind of legal reform. We will, therefore, look at the position taken in India.

As recorded in an Indian case (Dr. V.A. Babu v. State of Kerala),680 the law of maintenance and champerty was applied in a different way in India, that is, in the old way:

675 See Standing Committee of Attorneys-General, Discussion Paper on Litigation Funding in Australia, 4 (May 2006) as cited in ibid. 676 Nicolas Dietsch, “Litigation Financing in the U.S., the U.K., and Australia: How the Industry has Evolved in Three Countries.” Northern Kentucky Law Review 38 ( 2011): 687-711, 703. See also, Campbells Cash and Carry Pty Ltd. v. Fostif Pty Ltd. [2006] HCA 41. 677 [2005] N.S.W.S.C. 1070, 1070. 678 Ibid., 1071. 679 [2005] N.S.W.S.C. 1070, 1071. See also, QPSX Commc’ns Pty. Ltd. v. Ericsson Austl. Pty. Ltd., [2005] 219 A.L.R. 1. 680 2010 (9) SCR 1039.

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Following the judgment of the Supreme Court in AIR 1954 S.C. 557 their

Lordships held that if no Advocates are involved in the agreement, the agreement

does not become illegal or unenforceable in India for the only reason that the same

is Champerty. The agreement which was considered by the Supreme Court in AIR

1954 S.C. 557 was an agreement between an Advocate and a litigating claimant

under which it was agreed that the entire litigation will be financed and conducted

by the Advocate without claiming any charges in advance but once the fruits of the

litigation are realized, the Advocate will be given 50% of the same. The Supreme

Court did not enforce the agreement noticing that an advocate was involved.

…

But the distinction between the law in England and the Indian law regarding

Champerty agreements is that while in England Champerty agreements, whoever

the parties to the same are, are per se illegal. [while] in India such agreements

become per se illegal only if advocates are involved.

It is obvious here that the Supreme Court of India was influenced by the law that prevailed in the UK prior to 1967. Further, the Court did not bother to find out the position in the United States and other jurisdictions including the developments regarding the litigation financing industry. Contingency fee agreements too are not permitted in India. The Indian Bar Council prohibits lawyers from charging fees to their clients contingent on the results of the litigation or claim a percentage or share in the damages awarded by the court.681 In the landmark case of Ganga Ram v. Devi Das,682 the court held such an agreement to be void and against public policy and also against professional ethics.

681 Bar Council of India Rules, Part VI, Chapter II, Section II, Rule 20: “An advocate shall not stipulate for a fee contingent on the results of litigation or agree to share the proceeds thereof.” 682 61 P.R. (1907).

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The law in Pakistan appears to be the same.683 Whatever the position in Pakistan, it is suggested that contingent fee for a lawyer should be allowed in tort cases. Failing this, the rights of the poor people, who do not have the resources to go to courts with their tort claims, will go waste. The law of torts will remain “the rich man’s game.” The power of the law must be unleashed for the sake of the poor and their rights. This will open the door for the development of tort law in Pakistan. So far, growth in this very important branch of the law stands arrested. In addition to this, the Pakistani legal system can also ensure better access to justice to impoverished claimants by making rules and initiating legal financing industry in the country. This will be particularly useful when there is need to pursue claims in foreign jurisdictions against MNEs. The sooner these reforms are carried out the better it will be for the poor and downtrodden of this country.

5.2 Corporate Manslaughter: Devising and Introducing a

Domestic Remedy

Before we discuss the issue and problems of corporate manslaughter, it will be appropriate to recall the last two points of description about the Bhopal disaster and tragedy stated in chapter 2 of this study. We have stated there as follows:

• In addition to the US litigation, a criminal lawsuit against Union Carbide and

Warren Anderson, its former CEO, has been ongoing in the Indian legal system

since 1989. In June 2010 a court in India handed down a verdict in the case. It

found Union Carbide India Ltd. and seven executives of the company guilty of

683 Contigent fee agreements are also not allowed in Pakistan. Under rule 5 of the Canons of Professional Conduct and Etiquettes, approved and adopted by the Pakistan Bar Council, an advocate cannot accept the whole or part of the property in respect of which he has been engaged to conduct the case in lieu of his remuneration or reward. These Canons need a thorough reexamination in any case, so that archaic and ancient cumbersome requirements are removed.

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criminal negligence. The company was required to pay a fine of 500,000 rupees

($10,870) and the individuals were each sentenced to two years in prison and

fined 100,000 rupees ($2175) a piece.

• On 2 August 2010, the Indian Central Bureau of Investigation filed a petition

with the Supreme Court seeking a harsher punishment for the accused in this

case. This petition sought to reinstate charges of culpable homicide against the

accused; a September 1996 order had reduced the charges from culpable

homicide to criminal negligence. In May 2011, the Supreme Court rejected this

684 petition and declined to re-open the case to reinstate the harsher charges.

This is what was done by the Indian legal system in the case of 3000 initial and 15000 consequential deaths caused by the tragedy. The remedy is absolutely inadequate. The hands of the Indian Courts were tied; they could not do better. It is in this background that we have to examine the remedy for deaths caused by the actions of a multinational corporation. The main issues that we face are: Will the rules of corporate manslaughter help if these are implemented in Pakistan? Will the rules of qiṣāṣ and diyat, as applied in Pakistan, help if combined with the proposed rules of corporate manslaughter?

684 Ibid. Bhopal: Bhopal court on Friday scheduled hearing related to 7 Indians accused in Bhopal gas tragedy case to March 30, 31 and April, 1 & 2. Handed out sentence by a lower court in Bhopal for causing death by negligence in 2010, the accused including former Union Carbide India Ltd (UCIL) chairman Keshub Mahendra, former managing director Vijay Gokhale, former vice-president Kishore Kamdar, former works manager J Mukund, former production manager S P Choudhary, ex plant superintendent K V Shetty, ex production assistant S I Quershi—challenged the verdict in district and sessions court. They pleaded the disaster was fallout of a design defect in the Union Carbide Bhopal plant, which was built by the American company. The court has scheduled back-to-back hearing of the case on March 30, 31, and April 1 and 2 and we are arguing in the case, one of the counsels for the accused Ajay Gupta told TOI. On June 7, 2010, court of chief judicial magistrate sentenced these accused under Section 304-A (causing death by negligence) of the IPC. There was one more Indian among accused R B Roychoudhary, then assistant works manager of UCIL, who died during the process of trial. All of them got bail and challenged the verdict of lower court in the district and sessions court Bhopal. The methyl isocyanate gas that leaked from Union Carbide plant on the night of December 2 and 3, 1984, killed and maimed thousands. http://timesofindia.indiatimes.com/city/bhopal/Back-to-back-hearing- against-Indian-accused-from-Mar-30/articleshow/51066791.cms (visited March 26, 2016).

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To understand, analyse and assess the impact of these issues, we need to study the rules for corporate manslaughter as they have been applied in certain jurisdictions. The best candidate for this is the UK Corporate Manslaughter Act, 2007. We shall briefly study these below. Once this is done, we will attempt to combine the provisions of the

Pakistan Penal Code pertaining to qiṣāṣ and diyat with the proposed corporate manslaughter laws for assessment of the impact and for arriving at a possible solution.

5.2.1 Manslaughter Under Common Law and Forms of Qatl

Under Islamic Law

Manslaughter under English law, for some time, has been divided into two main types: voluntary manslaughter and involuntary manslaughter.685 Voluntary manslaughter flows from murder when three defences are pleaded. The three defences are: diminished responsibility; loss of control; and suicide pact.686 In these defences, the defendant does not deny killing the victim, nor does he deny malice aforethought, but asks to be excused from full liability. If successful, the defendant must be convicted of voluntary manslaughter.687 This type of manslaughter is not relevant for corporations, therefore,

688 we will not pursue it further.

685 UK Law Commission, Criminal Law: Involuntary Manslaughter: Consultation Paper No. 135 (London: Her Majesty’s Stationery Office, 1994), 1. 686 Jacqueline Martin and Tony Storey, Unlocking Criminal Law (Oxford: Routledge, 2013), 306. 687 Ibid. 688 UK Law Commission, Criminal Law: Involuntary Manslaughter, 2. This is what has been done by this Law Commission report. “The Paper is not concerned with those parts of the law of manslaughter (sometimes collectively called the law of voluntary manslaughter) which depend on the presence of the necessary mens rea for murder, and are therefore most easily regarded as partial defences to a charge of murder. The law of killing whilst under diminished responsibility, the law of killing whilst under provocation and killing by a survivor of a suicide pact are therefore not discussed in the Paper.” Ibid.

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“Involuntary manslaughter describes any form of unlawful killing where there is no proof of malice aforethought.”689 There are three forms of involuntary manslaughter: constructive manslaughter or unlawful act manslaughter; gross negligence manslaughter; and reckless manslaughter.690 The UK Law Commission focuses on the

691 first two alone, calling the first as unlawful act manslaughter.

The UK Law Commission’s paper we are referring to states that the law of involuntary manslaughter as it has developed has problems. This is probably due to the fact that it is entirely a matter of common law, and it has to be pieced together from decided cases. “Even more than most parts of the criminal law which suffer from that handicap, involuntary manslaughter has always been notorious for its uncertainty, and its lack of any clear conceptual vocabulary.”692 The report says that the conceptual position “has been made, if anything, worse by the efforts of courts in the last thirty years, to keep the law within something like decent bounds. These efforts have had to be undertaken on an ad hoc basis, without the support of a proper framework of policy and analysis.”693 This is the position of unlawful act manslaughter, which is tainted by the doctrine of constructive liability which underpins this part of the law.694 The law of

“gross negligence manslaughter,” the report says is in “an even worse state.”695 Finally, the Report adds that this “unpromising background makes it inevitable that it is difficult

689 Martin and Storey, Unlocking Criminal Law, 306. 690 Ibid. 691 UK Law Commission, Criminal Law: Involuntary Manslaughter, 2. It does, however, acknowledge the term constructive manslaughter. “The alternative name for this form of manslaughter, ‘constructive manslaughter,’ draws attention to the fact that this species of manslaughter is based upon constructive liability. The law ‘constructs’ culpability for manslaughter out of some lesser crime committed by the defendant which has accidentally caused death. Because of this feature of the offence, the accused’s mental state is not assessed with reference to the death which he has accidentally caused, but only in relation to his unlawful act.” Ibid., 10. 692 Ibid., 8. That part of it which is now described as ‘unlawful act manslaughter’ has been from time to time “the object of complaint, not to say bewilderment, for over a century.” Ibid. 693 Ibid. 694 Ibid. 695 Ibid.

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to state the law with any certainty, let alone succinctness. It is also virtually impossible to identify any governing principles or policy which inform it.”696 It is for this reason that it has been recommended many times that the offence of involuntary manslaughter

697 be abolished altogether.

At one time it was thought that the commission of a tort was sufficient to ground a conviction of involuntary manslaughter if death resulted. For example, in Fenton,698 where the defendant was convicted of manslaughter on the basis that he had committed the unlawful act of trespass to property.699 This approach quickly changed and the law now requires that the defendant commit a criminal offence. In Franklin,700 the court stated that “The mere fact of a civil wrong committed by one person against another ought not to be used as an incident which is a necessary step in a criminal case.”701 If there is no criminal offence, then there is no possibility of a manslaughter conviction regardless of how “dangerous” defendant’s acts may have been.702 Without going into further details, we may say that this is the crucial difference between English law and

Islamic law. The English law places emphasis on its being a crime, while the emphasis in Islamic law is on “compensation,” that is, it emphasises the tort aspect of manslaughter. We may, therefore, describe briefly the way Islamic law considers this offence.

696 Ibid. 697 These recommendations are spread all over this report. 698 (1830) 1 Lew CC 179. 699 Martin and Storey, Unlocking Criminal Law, 330. “In 1830, for example, the defendant had thrown some stones down a mine. They broke some scaffolding which caused a wagon to overturn, killing the deceased. Tindal CJ directed the jury that the defendant’s act in throwing the stones was a trespass, and as such was sufficient for manslaughter.” UK Law Commission, Criminal Law: Involuntary Manslaughter, 11. 700 (1883) 15 Cox CC 163. 701 As quoted in Martin and Storey, Unlocking Criminal Law, 330. 702 Ibid.

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Homicide is of four types in Islamic law: murder (qatl ‘amd); culpable homicide

(qatl shibh i ‘amd); qatl khata’ (homicide by mistake); and qatl that is within the meaning of khata’.703 Out of these we are primarily concerned with the last two types.

We may see how the Pakistan Penal Code (PPC) implements it. The following sections

704 are relevant.

318. Qatl-i-khata’.—Whoever without any intention to cause death of, or

cause harm to, a person causes the death of such a person, either by mistake

of act or by mistake of fact, is said to commit qatl-i-khata’.

Illustrations

(a) A aims at a deer but misses the target and kills Z who is standing by.

A is guilty of qatl-i-khata’

(b)A shoots at an object to be a boar but it turns out to be a human being.

A is guilty of qatl-i-khata’.

319. Punishment for qatl-i-khata’.—Whoever commits qatl-i-khata’ shall be

liable to diyat:

Provided that, where qatl-i-khata’ is committed by any rash or negligent

act, other than rash or negligent driving, the offender may, in addition to

diyat, also be punished with imprisonment of either description for a term

which may extend to five years as ta‘zīr.

703 Abῡ Bakr Kᾱsᾱnῑ, Badᾱ’i‘ al-Sanᾱ’i‘ fῑ Tartῑb al-Sharᾱ’i‘ (Urdu), 7 vols. (Lahore: Diyᾱl Singh Trust Library, 1997), 434. See also the relevant sections in the Urdu translation of Aḥkām al- Qur’ān by Abū Bakr al-Jaṣṣāṣ, published by the Shariah Academy, International Islamic University, Islamabad. 704 See sections 318 to 323 of the Pakistan Penal Code, 1860.

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320. Punishment for qatl-i-khata’ by rash or negligent driving.—Whoever

commits qatl-i-khata’ by rash or negligent driving shall, having regard to the

facts and circumstances of the case, in addition to diyat, be punished with

imprisonment which may extend to ten years.

321. Qatl-bis-sabab.—Whoever, without any intention to cause death of, or

cause harm to, any person, does any unlawful act which becomes a cause for

the death of another person, is said to commit qatl-bis-sabab.

Illustrations

A unlawfully digs a pit in the thoroughfare, but without any intention to

cause death of, or harm to, any person. B while passing from there falls in it

and is killed. A has committed qatl-bis-sabab.

322. Punishment for qatl-bis-sabab.—Whoever commits qatl-bis-sabab

shall be liable to diyat.

323. Value of diyat.—(1) The court shall, subject to the injunctions of Islam

as laid down in the Holy Qur’ān and Sunnah and keeping in view the

financial position of the convict and the heirs of the victim, fix the value of

diyat which shall not be less than the value of thirty thousand six hundred

and thirty grams of silver.

(2) For the purpose of sub-section (1), the Federal Government shall, by

notification in the official gazette, declare the value of silver, on the first day

of July each year or on such date as it may deem fit, which shall be the value

payable during a financial year.

There may be slight differences in the way the above law has been implemented in

Pakistan through the Penal Code and as it is found in the traditional law. For our

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purposes, the main point is that in whatever way death is caused the consequence is the payment of blood money or diyat. The only thing to be established is the causal link between the act, direct or indirect, and the consequential death. In short, someone has to pay the compensation when death is not due to natural causes or when death cannot be justified. The complications associated with the nature of the law governing involuntary manslaughter in UK are avoided here. We may now turn to corporate liability for manslaughter.

5.2.2 Corporate Liability for Qatl i Khata’ (Manslaughter) and for Qatl bis Sabab in Law and Islamic Law

A corporation or a company is a legal person. The meaning of personality with respect to a company was affirmed in the well known case of Salomon v. Salomon & Co Ltd.705

A corporation, being a legal person, is criminally liable even though it has no physical existence.706 This capacity of the corporation to be liable for statutory offences is set out in the UK Interpretation Act 1978. Defining the term “person” it says that in every

Act, unless the contrary intention appears, “person” includes a body of persons, corporate or unincorporate. The rule, however, has existed for over a hundred years as it is also found in the previous Interpretation Act of 1889.707 It is interesting to note that the interpretation also includes unincorporated bodies such as a partnership. Further, as well as being liable for statutory offences the law also recognises that a corporation can be criminally liable for common law offences.708 The same rule applies in Pakistan.

Section 11 of the Pakistan Penal Code defines the term “person” as follows: “The word

705 (1897) AC 22. 706 UK Law Commission, Criminal Law: Involuntary Manslaughter, 90. 707 Martin and Storey, Unlocking Criminal Law, 187. 708 Ibid.

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‘person’ includes any Company or Association, or body of persons whether incorporated or not.”709 It is pertinent to point out that there is a disagreement in Islamic literature about the legality of a fictitious person other than a natural person. The more plausible argument is that it was not allowed.710 This does not prevent the application of the existing criminal law to corporations, otherwise the officers and managers of the corporations will become directly liable. The rule about corporations is being followed as a reality that exists and cannot be avoided till such time that an alternate rule is available. The same is the position with respect to fiat currency and the rules of ribā

(interest), zakāt (poor-due), kaffārah (expiation) and other matters. The liability of the corporation is applied through three principles and is subject to two exceptions, which may be mentioned and escribed very briefly here. The principles by which a corporation may be liable are: the principle of identification; vicarious liability; breach of statutory duty.711 The principle of identification states that where an offence requires mens rea it is necessary to show that the corporation had the required mens rea. The corporation has no body and no mind, therefore, this causes problems in making corporations liable.

To overcome this, the courts have sought to identify a person (or persons) within the company structure whose mind is the “directing mind and will”712 of the corporation.

The rule was established through a series of cases,713 It may be mentioned here that in the sections of the Penal Code we have listed above, mens rea is not required as the offences are those of strict liability. A simple rule would be to make the Managing

Director (CEO), Directors and the Secretary of the corporation answerable, that is, all

709 Section 11 of the Pakistan Penal Code, 1860. 710 For a detailed analysis and ruling on the issue see Imran Ahsan Khan Nyazee, Corporations in Islam (Islamabad: Federal Law House, 2007). 711 Martin and Storey, Unlocking Criminal Law, 187. 712 In the Privy Council Lord Hoffmann pointed out that the phrase “directing mind and will” had first been used by Viscount Haldane in Lennard’s Carrying Co. Ltd. See next note. 713 Lennard’s Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd., (1915) AC 705; DPP v. Kent and Sussex Contractors Ltd., (1944) KB 146; ICR Haulage Ltd., (1944) KB 551; and Moore v. I. Bresler Ltd., (1944) 2 All ER 515.

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those who are deemed officers of the corporation. In other cases, the same rule as that in English law may be followed. The second principle is that of vicarious liability, and the corporation can be made liable for the acts of omissions of its employees, that is, other than officers of the company. In the same way, the principle of breach of statutory

714 duty are well known.

The two general exceptions to corporate liability for criminal offences operate like parameters within which the corporation will be held liable. First, a corporation cannot be convicted of an offence where the only punishment available is physical, such as imprisonment or community service.715 Thus, corporations cannot be convicted for murder. In cases of imprisonment fines may be substituted. The second exception says that corporations cannot be liable as a principal for crimes such as bigamy, rape, incest or perjury, which by their physical nature can only be committed by a real person, but

716 they can be held liable.

5.2.3 Reform in the United Kingdom and Required in

Pakistan for Corporate Liability for Manslaughter

In the last few decades of the twentieth century there were a number of highprofile disasters in which people died as a result of poor practice by a corporation. Our purpose here is not to trace this history here, as a number of sources are available from which this history can be gleaned.717 Briefly, these among others were: the Herald of Free

Enterprise disaster in 1987, in which 192 people died; the King’s Cross fire in 1987, in

714 The Companies Ordinance, 1984 may be examined for a list of such offences. 715 Martin and Storey, Unlocking Criminal Law, 187. 716 Ibid. 717. See, e.g., UK Law Commission, Criminal Law: Involuntary Manslaughter, 89 passim and Jacqueline Martin and Tony Storey, Unlocking Criminal Law (Oxford: Routledge, 2013), 195 passim

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which 31 people were killed; the Clapham rail crash in 1988 when 35 people died and nearly 500 others were injured; and the Southall rail crash in 1997 when seven people were killed and 150 injured.718 The Law Commission’s consultation paper has the following to say:

At the same time we should not ignore what appears to be a widespread feeling

among the public that in cases where death has been caused by the acts or

omissions of comparatively junior employees of a large organisation, such as

the crew of a ferry boat owned by a leading public company, it would be wrong

if the criminal law placed all the blame on those junior employees and did not

also fix responsibility in appropriate cases on their employers who are

operating, and profiting from, the service being provided to the public. If the

law is able to address these concerns, consideration also needs to be given to

the question whether it is the law of manslaughter, as opposed to, for example,

719 a regulatory offence, which is the appropriate response in such cases.

718 Martin and Storey, Unlocking Criminal Law, 195. 719 UK Law Commission, Criminal Law: Involuntary Manslaughter, 89 (footnotes omitted).

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Thus, initially it was thought that a corporation could not be liable for manslaughter, but the matter was resolved in P & O European Ferries (Dover) Ltd

(1991) when, following the Herald of Free Enterprise disaster, P & O were charged with manslaughter. The problems highlighted here led to a general review of the law on manslaughter by the Law Commission.720 After considerable deliberation and another report that we have relied upon here, Law Commission,

Reforming the Law on Involuntary Manslaughter, in 2007, the Corporate

Manslaughter and Corporate Homicide Act was passed by Parliament. The section

721 dealing with the offence of corporate manslaughter reads as follows:

(1) An organisation to which this section applies is guilty of an offence

if the way in which its activities are managed or organised—

(a) causes a person’s death, and

(b) amounts to a gross breach of a relevant duty of care owed by the

organisation to the deceased.

The section reads this way as the offence is based on the Law Commission’s new proposal about an offence of manslaughter based on gross negligence rather than on unlawful act manslaughter. Section 2 of the Act widens the scope of the offence to include other organisations. These are: (a) a corporation; (b) a department or other body listed in Schedule 1; (c) a police force; (d) a partnership, or a trade union or employers’

722 association, that is an employer.

720 Law Commission, Legislating the Criminal Code: Involuntary Manslaughter (Law Com No 237) (1996). 721 Corporate Manslaughter and Corporate Homicide Act 2007 (2007 CHAPTER 19), section 1. 722 Ibid., section 2.

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The law in Pakistan does not need such extensive deliberations for implementation.

The corporation falls within the meaning of “person” found in the Penal Code. The offences falling under qatl-i-khata’ and qatl-bis-sabab do not need mens rea as they are strict liability offences. There is also no need to show breach of some duty or gross negligence. All that is needed is to prove a causal link between death and the act of the corporation through any of its employees. The defendants will be all the officers of the corporation, that is, CEO, directors and company secretary. In short, there is no real need of amendment in the law, but the state may make a suitable addition to show that henceforth corporations will be liable under these sections. There are other sections that may be used for other injuries. The value of the blood money for one person is 30,630 grams of silver, which at todays rate is not more than US $18000, which is the rough equivalent of two million Pakistan rupees. In any one case, the value of the cumulative blood money that may have to be paid may not exceed the assets of the subsidiary. If it does, however, then the Islamic concept of the ‘āqilah may be used to rope in the parent and associated corporations.

This deals with the remedy for loss of life and limb caused by a multinational corporation, or any other corporation for that matter. The proposal here has not included the police force or other government bodies or even partnerships, however, all government companies are included as they are corporations and cannot be exempted under Islamic law. Having dealt with a new domestic remedy, we may now turn to the solutions and remedies available outside the country, especially after the Kiobel judgment that was discussed in detail in the previous chapter.

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5.3 Post-Kiobel Strategies: International Law and Foreign

Jurisdictions

In the previous chapters of this study, two things stand out very clearly in the context of multinational enterprises (MNEs) or transnational corporations (TNCs) as they are referred to by some international bodies. The first point, which is acknowledged by all writers concerned with these institutions, is that the MNEs have come to immense power, matching and sometimes exceeding that of states, in the national and international political economies of the present world order. MNEs dominate virtually the entire international legal order, influencing key international institutions and gaining extraordinary structural ability divided into parents, subsidiaries and associated organisations. Not only do some of these organsiations possess greater power than the smaller states, they operate in collaboration with state power to attain their strength and accumulation of capital. According to some, state power is indispensible to the conditions of accumulation for capital and that it is the state itself that has provided the

“conditions enabling global capital to survive and navigate the world.”723 This collaboration with state power results in immense influence over the resources of the world and thus over the economic and political lives of millions of human beings. It also results in occasional human tragedies like the one in Bhopal and later in Nigeria

(Kiobel).

723 Ellen Meiksins Woods, Empire of Capital (New York & London: Verso, 2005), 139.

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The second point that has emerged, especially in the previous chapter, that the 2013

Kiobel judgment has thrown a damper over ATS litigation, which had created so many hopes in the hearts of tort victims and human rights activists all over the world, even if it has not signalled the death knell for such litigation. Indeed, there are some who still believe that that the case will invite more ATCA litigation, because so many issues remain unresolved, and because Kiobel does not provide true guidance and cannot serve as precedent.724 Well known authorities like Janet Dine have been skeptical all along of the real worth of the ATS. Thus, she believes that although the ATS litigation has been valuable in showing “how complex extraterritorial claims are, how difficult it is to sue

MNCs and the fact that no matter how ‘common sense’ the solution appears to outraged human rights and environmental activists, legal solutions remain elusive. It is important to emphasise that even when the ATCA boom was at full power, some of the claims of the NGOs were of dubious validity. There was undue optimism by some human rights commentators who read the legal precedents in their ‘best’ light.”725 As most of the cases were settled out of court, she says: “I would argue that it is wrong to call such settlements victories because the law has not been thereby developed to cover the instances of abuse forming the substance of the claim: there is no precedent for the future.”726 She says again: “The reputational risks for companies were intensified, and there were some successes in gaining compensation for victims. However, when the dust of the ATCA subsides I hope that the optimistic hype is not repeated in other spheres.”727 After noting such views, we may look at the solutions, strategies and remedies that may be available to a country like Pakistan.

724 Ralph G. Steinhardt, “Kiobel and the Weakening of Precedent: A Long Walk for a Short Drink,” (2014) 107 American Journal of International Law 107 (2014): 841–842. 725 Janet Dine, “Jurisdictional Arbitrage by Multinational Companies: A National Law Solution?” Journal of Human Rights and the Environment 3 (2012): 44-69, 53. 726 Ibid. 727 Ibid.

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In the light of the above and as a consequnce of this study, we can identify three solutions and remedies. The first belongs to the area of human rights and international law. This solution requires international law to do something that has not been done as yet. The second solution pertains to domestic law again, but it is a solution that emerges from the study of the ATS litigation over the decades and its likely failure. The third solution is in the form of a strategy or the identification of options that may be available for suing companies abroad for commission of torts.

5.3.1 Holding the MNEs Accountable Under International

Law

As has been stated again and again in this study that MNCs are powerful corporate entities that have the capacity to operate across borders in ways that defies the regulatory control of any one state. The international human rights system, on the other hand, is state-centric. Accordingly, most ot the strategies, for placing some constraints on this ever-growing power of the corporations, remain mostly voluntary and over- friendly to corporate interests. This means that at the global level no adequate accountability structure exists.728 This type of thinking started turning into a movement after the Bhopal tragedy. For example, Baxi wrote, “[T]he continuing movement of the

Bhopal-violated beckons a new jurisprudence of human solidarity in a runaway globalizing world.”729 Dine points out that multiple studies now suggest that TNCs should be subject to direct human rights and environmental duties: “The first decade of this century has not revealed a better world for the poor; rather, research shows that

728 Penelope Simons, “International Law’s Invisible Hand and the Future of Corporate Accountability for Violations of Human Rights,” Journal of Human Rights and the Environment 3 (2012): 7. 729 Upendra Baxi, “Writing about Impunity and Environment: The ‘Silver Jubilee’ of the Bhopal Catastrophe,” Journal of Human Rights and the Environment 1 (2010): 23.

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inequality has been rampant, and studies suggesting that powerful companies should have responsibilities towards the planet and to stakeholders other than shareholders are now legion.”730 A strong movement is gradually developing as many scholars and writers now feel that the time now arrived for the imposition of mandatory, universal human rights accountability for TNCs. As this might need the radical adjustment of the

Westphalian international legal order based on the principle of state territorial sovereignty, the introduction of a mandatory regime for corporations may not be easy.

5.3.2 The Concept of the Enterprise and the New Company

Law

The second proposal comes from Janet Dine and it may be more relevant for our new company law Bill. After examining the whole situation, and relying on her recent experience in participating in the drafting of the Albanian company law, she has the following to say:

I believe that national laws in the rich nations and the powerful blocks, particularly America and Europe, but increasingly in emerging states such as China, India, Brazil and Russia, are now the key to regulating MNCs’ environmental and human rights duties effectively. The Albanian example implies that if states draft legislation to design directors’ duties in parent and subsidiary companies as a whole (deploying an “enterprise” concept of liability), this would significantly alter the operational culture of companies and thereby produce a more effective form of

731 environmental and human rights liability.

730 Janet Dine, “Jurisdictional Arbitrage by Multinational Companies: A National Law Solution?” Journal of Human Rights and the Environment 3 (2012): 44-69, 53. 731 Ibid., 45.

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This quotation is self-explanatory, and we will not pursue the matter further as that will take us into a discussion of company law and directors duties. Based on her article, however, a separate proposal will be sent to the Securities and Exchange Commission of Pakistan with specific recommendations about which sections of the draft Bill of

2015 may be amended suitably to incorporate these proposals.

Nevertheless, pressure has building for some kind of intervention by the United

Nations. On 26 June 2014, at the 26th session of the UN Human Rights Council, a resolution supporting the “elaboration of an international legally binding instrument on

Transnational Corporations and Other Business Enterprises with respect to Human

Rights” was formally adopted.732 Much before, this there were the controversial UN

Norms on the Responsibility of TNCs and other Business Enterprises with Regard to

Human Rights.733 There is resistance by the corporations, because these Norms attempted to impose direct human rights obligations on corporate actors.734 In addition to these developments, there are some unique proposals by writers. Thus, Maya Steintz has made a post-Kiobel proposal for the establishment of an International Court of Civil

Justice (ICCJ) with jurisdiction over cross-border torts, which she claims will solve the issue of the “missing forum.”735 This, however, is a tort based proposal, as can be seen.

732 UNHRC, Elaboration of an international legally binding instrument on transnational corporations and other business enterprises with respect to human rights, A/HRC/26/L.22/Rev.1, 25 June 2014. 733 UNESCOR, Norms on the responsibilities of transnational corporations and other business enterprises with regard to human rights (2003), E/CN.4/Sub.2/2003/12/Rev.2, 26 August 2003. 734 Kinley, Nolan and Zerial, “The Politics of Corporate Social Responsibility: Reflections on the United Nations Human Rights Norms for Corporations,” Companies and Securities Law Journal 25 (2007): 30, 35. 735 Maya Steinitz, “The Case for an International Court of Civil Justice,” Stanford Law Review Online 67 (2014):75.

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We feel that NGOs in Pakistan, if not the state itself, must actively pursue such projects and proposals at the proper international forums. Controlling the MNEs is after all in the interest of the poor citizens of Pakistan.

5.3.3 Options for Litigation Abroad

We have already proposed that the law of torts be revived in the country and that the concept of corporate manslaughter be employed for recovering compensation for loss of life and limb. In case of environment disasters, the environmental law that is still in its infancy and has been declared a provincial subject, should be activated.736 When the losses caused are huge or there are gross violations of human rights, and the capital of the subsidiary is not sufficient to cover the losses, the victims may wish to purse the parent corporation abroad. It has already been stated in the previous chapter what the post-Kiobel options are. Here we may very briefly list them.

• Most multinationals are from the United States. Accordingly, if a company is not

sued under the ATA, the other options are found under some federal laws (as

indicated earlier) and also under State tort laws. In most of these cases, the

remedy sought will be the piercing of the corporate veil for access to larger funds

of the parent.

• It is also possible to sue MNCs in the United Kingdom,737 Canada and Australia.

736 The Punjab Environment Protection Act, 2012 provincialises PEPA, which was a federal stutue. After the Eighteenth Amendment, this is a step towards the province ensuring the environmental rights. The Chairperson of the Environment Protection Tribunal, which had remained defunct for considerable time has also been appointed. A number of other steps have also been taken. Visithttp://tribune.com.pk/story/375484/environment-issues-judge-finally-appointed-to-tribunal/ (accessed June, 2016). The Sindh province has also passed the Sindh Environmental Protection Act, 2014, as has the Khyber Pakhtunkhwas province: Khyber Pakhtunkhwa Environmental Protection Act, 2014. 737 See Chandler v Cape, [2012] EWCA (Civ) 525 (Eng).

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• Many multinationals belong to Europe and it is possible to pursue them in

European jurisdictions. It is important, however, to note two provisions. First, the

Brussels I Regulation which provides that “national courts within the EU have

jurisdiction over all who are domiciled in their national jurisdiction.” This means

that concepts like a corporation’s “statutory seat,” “central administration” or

“principal place of business” are important. Second, the Rome II Regulation that

imposes a uniform rule dictating that the applicable law of a claim shall be the

law of the state where the damage occurred, irrespective of where the claim is

brought. This means, the courts in the EU must apply the law of the state where

738 the harm was caused.

This ends our study. We may now turn to the last chapter and record the conclusions.

738 See Robert McCorquodale, “Waving Not Drowning: Kiobel Outside the United States,” American Journal of International Law 107 (2014): 846-851.

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CHAPTER 6 CONCLUSION: THE WAY FORWARD FOR PAKISTAN

In this chapter we may state in a concise way what has been done in the previous chapters. We will state briefly what has been done in each chapter, and then follow this up with a few recommendations that have been emphasised in this study.

6.1 The First Chapter

Developing countries like Pakistan, while benefitting from direct foreign investment of the multinational corporations, are threatened by their presence in the country, which can wreak havoc in terms of torts, human rights violations and environmental disasters that these giant corporations may bring in their wake. Once a disaster is caused, the first remedy for the victims is to seek compensation from the assets of the subsidiary that has caused the disaster and is operating in the country. This tort threat from the multinational is multiplied manifold if the host country has a weak tort law and an ailing and lethargic legal system. This is the case with Pakistan. The first chapter, after elaborating the serious problem posed by the multinational companies and explaining the investment needs of the country, describes at some length the weaknesses and inadequacies of the law of torts in Pakistan. Added to this is the lack of awareness among the masses, even the educated among them, about the impending danger for the people and for the environment in which they live. The chapter also points out that when the assets of a subsidiary are not sufficient to cover the damage caused, it may become necessary to pursue the parent of the subsidiary in its home country or other foreign jurisdiction. The problems posed by legal personality and limited liability

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within the municipal law, to some extent, acquire a menacing form in the foreign jurisdiction, which requires a thorough understanding of these attributes of the corporation. There is thus a dire need of assessing the whole situation and determining the remedies and the courses of action available in case of devastation caused by these companies. In addition to this, there is a need to create a proper information system about these MNCs and a monitoring system that will enable the country to take preventive and evasive action prior to its happening. At present there is no such system and it is not even known how many of these giant corporations are present in Pakistan.

6.2 The Second Chapter

These giants started off as chartered companies that acquired large empires over a few centuries. Gradually, all business activity started gyrating toward this business form that was based on legal personality and was granted the powerful attribute of limited liability, which helped these business concerns to grow into large corporations. It was these two attributes—personality and limited liability—that were crucial for the growth of these companies, and the law jealously guarded them for this purpose. As a result, these corporations grew so large that they moved out of their home countries and developed powers of manipulating and moving resources on a global scale. Economists explain this phenomenon as “economies of scale” that lead to further power by cutting down transaction costs. As these corporations grew in size so did their projects. This also led to huge disasters and catastrophes and consequently the commission of torts worldwide. Most of these torts, human rights violations, and environmental disasters took place in developing countries. This goes to prove that lack of effective laws and adequate monitoring makes the giants more rash and reckless.

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These giants are present in Pakistan, just as they are in other developing countries.

The dilemma of all these countries is that if they impose too many restrictions on the

MNCs, they will take their investment elsewhere. This is especially true if the developing country does not offer a very large market, like the huge markets of India,

China and certain South American countries. The major issue then facing Pakistan is: how does it attract investment and yet keep these giant concerns in check in order to avoid the commission of torts and human rights violations along with the averting of environmental devastation on its land and sea.

6.3 The Third Chapter

To propose solutions and remedies for the torts and other unlawful acts of multinational organizations, we first need to understand the nature of these corporations that no longer exist as single entities, but as groups of corporations dealing with a single enterprise,

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with the number of corporations within the group going up to hundreds and in some cases thousands. Each of these corporations has its own legal personality and the protective attribute of limited liability. The result of this complex structure is that in case a wrongful act leads to the award of damages, the two attributes of independent personality and limited liability limit the access to the assets of the corporation operating in the host countries. The larger group or enterprise is protected due to the web of personalities and limiting of liabilities, and the assets of the parent and other siblings is beyond the reach of the domestic courts. This happens when the parent of the groups and the group as a whole is exercising true control and is benefitting from the act of this culprit corporation.

What then is the nature of the personality of the individual concern? What are the theories that govern it? If there is no joint personality for the larger group, is there a law governing these corporate groups that determines when they are to be treated as a single enterprise and how this group is to operate? And, in case of claims against it what are its rights and liabilities? If there is a law in some jurisdictions, then what are the possibilities and options for claimants in a developing country like Pakistan to have access to the assets of the parent and other sister subsidiaries? If there is no law for the larger group, then what are the possibilities of the claimants in the host country suing the larger group in its home country, and what is the likelihood of the courts in the home country piercing the veil of the single entity for reaching the resources of the parent and the rest of the group? Further, looking at the interests of the developing countries as a whole, with an eye to the future, what is the possibility of these poorer countries urging the home countries to adopt measure of corporate social responsibility with or without the laying down of laws for more responsible behaviour. For this to be possible, it has to be determined whether the corporation and its personality have been created by a

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private act or by an act of the state so that in the former case placing restrictions will not be easy, while it may be in the latter case. In addition to this, on the basis of such reasoning, will it be possible for the states, as grantors of legal personality, to enter into multilateral treaties for placing some constraints on these corporate giants through international law or will it just be non-binding recommendations for voluntary adoption of a code on CSR?

In all the above cases, the direction can only be clear once the two attributes of personality and limited liability—behind which these corporations hide in courts and during litigation—are thoroughly analysed and studied to understand their current jurisprudence in the world. Accordingly, the attribute of personality for the whole group has been examined in this chapter and the implications of limited liability for the group and its members will be analysed in the next. There are several theories that are put forward for the existence or grant of personality. Each theory has its own implications for how far one can go in restricting the movement and actions of these corporations.

A study of personality, its underlying theories and the law governing such groups tells us what kind of action is possible for protecting developing countries in the light of remedies available. A search is, therefore, undertaken in this chapter, in various jurisdictions, to assess whether a law of groups is actually found in some jurisdictions.

The studies undertaken by authors like Blumberg, and the law of the “Konzern” in

Germany, are surveyed. The conclusion reached is that while the law may treat them as a group where disclosures are required for profit distribution and for taxes owed to the governments, the group is not treated like a group with a single personality for purposes of torts.

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6.4 The Fourth Chapter

If these large groups do not have a single personality and are split into smaller units with independent personalities, what remedies does the existing law of the home countries provide to the victims of torts or disasters in the smaller countries for granting compensation in host countries? First, what are the various avenues of legal action or what is called “forum shopping” available to a country like Pakistan. Second, if these concerns are sued in their home countries, then what are the different types of lawsuits that can be initiated. Most of the corporations belong to America or Europe including the United Kingdom. What are the remedies in each of these jurisdictions?

The entire research above involves issues of limited liability and what Blumberg calls “piercing the veil jurisprudence.” In any kind of legal action, the basic issue is whether the veil of personality of the corporation operating in the host country can be pierced in the home country to extend the liability, that is limited to the assets of a single subsidiary operating in the home country, to the parent corporation. The discussion must begin with the concept of limited liability, as personality issues have already been addressed in the previous chapter. How and when can the veil be pierced once the claimants have reached the home country and lodged its claims in her courts.

After introducing the idea of tort claims and multinationals, this chapter analyses the concept of limited liability and tort claims at some length. The concept is studied in the context of tort claims against multinationals and corporate groups. The different proposals submitted by writers and experts are surveyed and studied. The relevance of limited liability for multinational group is then affirmed. Litigation in the USA under the Alien Tort Claims Statute (ATS) is studied in considerable detail till the decision in the Kiobel case. The Kiobel judgement spelled out the virtual demise of ATS Remedies.

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Experts are now contemplating other remedies like direct tort liability of multinationals under State tort laws in the USA. In addition to this tort claims against multinationals are also possible in the UK, Canada, Australia and some European countries. The conclusion, however, is that the enthusiasm that was once visible through ATS litigation is no longer there, and it will take some time before precedents under the other options are developed and are made available.

6.5 The Fifth Chapter

Multinational corporations are present in Pakistan in some form or the other. Some of these enterprises are operating multiple plants with the potential of generating disasters.

The corporations employ hundreds and thousands of workers. There is every possibility that torts can be committed or human rights violations can occur. The corporate law of

Pakistan does take notice of parent and subsidiary corporations and attempts to establish a link between them. A new proposed law, which is called the Corporate Law Bill 2015, does the same and there is no further enhancement. This law is merely for disclosure purposes to take into account the accounting and taxation problems. Beyond this, the law merely talks of the registration of foreign companies. There are almost no cases in which companies have been sued for damages or where the corporate veil has been pierced. A few cases in which this has been done are those of fraud.

What kind of remedies are then available to the victims? First, theoretically, the companies can be sued under tort law. Second, for certain kinds of defects in goods and services, the newly established consumer courts may be approached. Third, and this may need further work and research, where death is caused, the criminal liability of these corporations can be determined. The Islamic law of bodily offences provides a minimum payment of diyat in cases of death and injuries of different kinds. More

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recently, the courts have been active in providing remedies for human rights cases. A substantial body of cases is available and may be relied upon for awarding of damages.

All these are possibilities when the damage caused or damages to be awarded are

fully covered by the assets of the unit operating locally. In such a case, the foreign

courts will not entertain a case for damages as an adequate remedy is available in the

host country. It is only when the claim far exceeds the assets of the local unit that a case

may be filed in the home country of the enterprise. The Kiobel judgement has thrown a

damper on the pursuit of parent companies in home countries, at least in the USA. The

situation, however, is not as bad as may appear at first sight. As far as deaths caused

are concerned, the local law, if extended to apply to corporations as is being done all

over the developed world. This may be true whatever the number of deaths or physical

injuries. It is only when environmental disasters alone or in association with human

rights violations lead to colossal damage that the option of going to the home country

for a solution will be needed.

The last chapter then focuses on the possible actions that are possible for Pakistan

in the light of the study that has been undertaken in the chapters that have preceded.

These include general proposals like improvement in the law in general as well as

specific proposals directed towards identified remedies. These proposals and

suggestions are recorded below in the form of recommendations.

6.6 Recommendations

The study makes the following general and specific recommendations:

1. The first major suggestion that this study make is that law of torts must be revived

forthwith. This is necessary not only for dealing with the torts committed by

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foreign companies, but for all torts committed whether these are by companies

or individuals. The world has moved so far ahead in this area, while Pakistan

appears to have taken a backward step from the position where the British left

this country and its legal system. The specific recommendations that are made

within this general recommendation are the following:

(a) The first specific recommendation is that the law of torts must be codified

in a comprehensive manner that takes into account all new torts that have

received attention in developed countries. Codification is expected to have

a tremendous impact on this law; in fact, the impact might be

revolutionary. This is also expected to have a healthy effect on the legal

system as a whole.

(b) The other specific recommendation in this area is the immediate abolition

of the archaic doctrines of champerty and maintenance. The doctrines have

been abolished in the entire common law world; only India and Pakistan

are still clinging to these old ideas. The abolition of these doctrines may

encourage the awareness of rights among the public, which is something

that is critically needed in Pakistan. This step is likely to secure the rights

of the poor very effectively.

2. The second major recommendation here deals with cases in which death is caused

or injury is caused to limbs. The example we may quote here is that of the Bhopal

tragedy in India. Corporate manslaughter has been implemented in several

jurisdictions, in particular in the United Kingdom. In Pakistan, after the criminal

law was amended in accordance with Islamic law. Very little change is required

in the current law of qatl-i-kha t.a’ (manslaughter) and for qatl bis sabab as laid

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down in the Pakistan Penal Code. Corporations are already included in the

meaning of “persons.” This law can have very wide applicability, but for the time

being it should be confined to private corporations and government companies.

3. A new law for corporations is under consideration in Pakistan. This is called the

Company Law Bill 2015. It is suggested that this law should focus more on the

law of corporate groups. The amendments suggested by Janet Dine, and recorded

in the previous chapter, must be given serious attention. We may recall her words

that we quoted in the previous chapter. She said: “The Albanian example implies

that if states draft legislation to design directors’ duties in parent and subsidiary

companies as a whole (deploying an “enterprise” concept of liability), this would

significantly alter the operational culture of companies and thereby produce a

739 more effective form of environmental and human rights liability.”

4. The other discussions in the previous chapters, and those before it, pertain to the

options available to Pakistan outside the country. These concern the options to

sue MNEs abroad along with certain efforts Pakistan can make for promoting

international efforts to regulate these large corporations.

739Janet Dine, “Jurisdictional Arbitrage by Multinational Companies: A National Law Solution? ” Journal of Human Rights and the Environment 3 (2012): 44-69, 45.

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APPENDIX 1 LITERATURE SURVEY

Tortious liability of the MNCs is almost unknown in Pakistan, and there is absolutely no literature in this area by Pakistani lawyers, judges or academics. The literature discussed below is, therefore, by foreign authors. Their writings are very important for

Pakistan insofar as they identify the inadequacy of the tort systems in host countries and highlight the remedies that may be available to the plaintiffs when they opt for suing the MNC in its place of domicile. The writings of these international authors are also important when one has to consider the movement based on human rights as well as that promoted by UNCTAD and OECD. For Pakistan, the main source is statutory law of Pakistan relating to industries, employees and consumers. The authors reviewed have dealt primarily with the removal or restriction of limited liability, piercing of the corporate veil and holding the true owners and top managers liable for the tort actions of subsidiaries. In addition to this, other authors dealing with human rights and MNCs as international subjects liable for guaranteeing human rights have been considered and will be referred to within this study.

Muzaffer Eroglu: Multinational Enterprises and Tort Liabilities An

Interdisciplinary and Comparative Examination

A great deal of useful work has been done by Muzaffer Eroglu.740 His analysis is based on an interdisciplinary methodology. Legal practice considers MNCs as vertically structured organisations, but an interdisciplinary examination, he says, reveals more

740 Muzaffer Eroglu, Multinational Enterprises and Tort Liabilities: An Interdisciplinary and Comparative Examination (Cheltenham, UK: Edward Elgar, 2008).

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complex horizontal structures with unique characteristics. The difference in method reveals a conflict, and the conflict also creates problems of liability and prevents satisfactory solutions to problems of tort liability in the context of MNCs. Law-makers at the national and international level should take immediate steps to create solutions based on these new findings of interdisciplinary characteristics of MNEs. Furthermore, the examination should focus on the modern definition of MNEs. First, a comprehensive definition of the concept of MNEs must be produced in law.741 The author also maintains that there is a conflict between economic principles that are based on the aim of reaching profit maximization and legal principles that are based on reaching basic justice. The economic theory accepts the injustice for creditors but it claims that limited liability creates incentives for society as whole and, thus, it is justifiable and must be sustainable.

Moreover, the economic theory assumes that creditors can alter the terms by negotiating with the company. However, shifting the risk causes unsolved problems in the case of international mass torts since tort victims involuntarily involve in corporations. As a result, shifting the risk gives very important incentives to company groups to structure themselves as a group of limited liability entities.742 Eroglu claims that limited liability is difficult to justify in the context of tort claims because of the very nature of corporate torts, particularly in the case of subsidiaries. The nature of the corporate tort prevents acceptance of limited liability with victims of torts. There is a legal impossibility since the parties are not identifiable in advance. This makes the claim of limited liability unjustifiable in this context. The corporate veil, he says, may be pierced if the parent had a certain level of control over the subsidiary. In such a case,

741 Ibid., 93. 742 Ibid., 81.

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the court may lift the corporate veil and hold the parent liable if additional conditions

are met. Therefore, the parent corporation may be held liable for the torts of its subsidiary, especially where the nature of their corporate relationship suggests that the subsidiary has become a mere instrumentality or alter ego of the parent corporation.743

The jurisdictional and form non conveniens problems are also discussed which affect the tort liability claims in home states of the MNCs. Comparative analysis of statutory as well as case law has been done by the author. The views of Philip I.

Blumberg and Jennifer A. Zerk have also been discussed and analysed by the author.

The author has mainly concentrated on jurisdictional and company law problems dealing with foreign jurisdictions. The present research will focus on tort law and company law problems with regard to Pakistani legal system as well. As tort law is in infancy in Pakistan, MNCs have greater opportunities to commit tort and very rare instances of bearing the loss in cases of disaster.

Jennifer A. Zerk: Multinationals and Corporate Social Responsibility Limitations and Opportunities in International Law

Jennifer A. Zerk in her book744 has discussed to what extent does domestic law, as enforced by domestic courts, provide a means of obtaining redress against multinationals for loss or damage arising from poor health, safety or environmental standards overseas. Until recently, the experiences of plaintiffs in national courts had not been very encouraging. However, a series of pro-plaintiff decisions have re-ignited interest in the regulatory possibilities afforded by private claims.745 There has been a sharp increase in the number of ‘foreign direct liability’ (FDL) claims in the past

743 Ibid., 144. 744Jennifer A. Zerk, Multinationals and Corporate Social Responsibility: Limitations and Opportunities in International Law (Cambridge: Cambridge University Press, 2006). 745 Ibid., 228 (of which the House of Lords decision in Lubbe v. Cape plc is a good example).

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decade.746 This has affected many countries including UK, USA, Australia and Canada.

She argues that FDL claims are a potentially important source of regulatory pressure on parent companies of multinationals, but this depends on two things: first, the willingness of home state courts to accept jurisdiction and, second, substantive rules of parent company liability. As far as the question of jurisdiction is concerned, she discusses that home states are entitled to take jurisdiction over cases involving a locally incorporated parent company as a defendant, including cases concerning damage or injury occurring overseas. However, in some common law states (and particularly in the USA) foreign plaintiffs must still face up to the likelihood that proceedings relating to foreign damage or injury will be ‘stayed’ (i.e. stopped) in favour of a more

747 ‘convenient forum’ (under the doctrine of forum non-conveniens).

Zerk elaborates in detail the circumstances where a parent company of a multinational will be liable for damage or harm arising out of the activities of its foreign affiliates. She has discussed various legal theories on which a tort-based case against a parent company might conceivably be built. These can be grouped under the headings of ‘primary’ liability (the liability of a party for the consequences of its own conduct or activities), “vicarious” liability (the liability of a party for the conduct of those deemed to have been acting on its behalf), ‘secondary’ liability (the liability of a party for its participation in, or a contribution towards, a tort committed by another) and finally (and most controversially), “enterprise” liability (the liability of a party for the activities of another on the basis that together they are involved in a single commercial enterprise).748 This gives rise to several questions here. First, was the parent company sufficiently involved in the day-to-day management of the subsidiary to justify the

746 FDL claims are claims brought in home state courts that target, not the subsidiary, but the parent company. 747 Zerk, Multinationals and Corporate Social Responsibility, 199. 748 Ibid., 215.

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imposition of liability? To what extent does a parent company have duties of ongoing supervision? And is there a point at which the subsidiary’s own negligence is such that the parent can no longer be said to have ‘caused’ the harm? Will an increase in FDL claims against parent companies of multinationals cause parent companies generally to take greater responsibility of their foreign subsidiaries? Or will parent companies conclude that the best way to minimise the legal risks will be to adopt a ‘hands-off’ approach?749 Could a parent company be held vicariously liable for the negligence of a foreign affiliate on the basis that the affiliate was an ‘agent’ of the parent company?750

Could a parent company be liable for the negligence of a foreign affiliate on the grounds that it has ‘aided and abetted’ the commission of a tort?751 All these questions will be considered in this thesis. The author has focused on international law and Corporate

Social Responsibility (CSR). She has discussed practical problems relating to designing of international CSR regimes of multinational corporations and how international law can offer more opportunities for the social and environmental regulation of multinational corporations. CSR is one of the solutions which will be covered by this research. It will look into the role of CSR in developing countries and its inclusion in the national legislation.

Richard Meeran: “Tort Litigation against MNCs for violation of Human Rights: An Overview of the Position outside US” According to Meeran in his article752 it is not possible to obtain civil legal redress for human rights violations per se directly against corporations (whether as direct

749 In Re Bhopal case it was suggested that companies can reduce their legal liabilities by delegating maximum powers and autonomy to their foreign affiliates. 750 This issue was considered in Adam v. Cape Industries Ltd. 751 This was discussed in Dagi v. BHP [1997] 1 VR 428. 752Available at: http://www.leighday.co.uk/LeighDay/media/LeighDay/documents/Anglo%20- %20silicosis/Tort-litigation-against-multinational-corporations-by-Richard-Meeran.pdf?ext=.pdf.

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perpetrators or on the grounds of complicity with state perpetrators). Cases of tort against MNCs have been pursued specifically on the law of negligence. The primary objectives of litigating on law of negligence are to (a) provide a level of compensation to a victim of negligence, reinstating the victim in the position that he/she would have been in if the negligence had not occurred and (b) act as a deterrent against future torts by the wrongdoer and others generally. These objectives correspond with those of MNC accountability. Meeran is of the view that such cases allege harm caused by negligence arising from a breach of a ‘duty of care’. Since they involve claims for compensation and are invariably costly, these cases may serve to achieve critical elements of MNC accountability, namely monetary redress for victims and deterrence against future human rights violations. An approach involving allegations of negligence has been criticised for lessening the significance of the alleged misconduct and harm (whereas the converse criticism has been levelled in some quarters at the use of allegations of fundamental international human rights violations in MNCs claims). Nevertheless, this approach has the advantage of relatively less complexity and more favourable law on

753 jurisdiction (in the European Union).

Likewise Zerk, Meeran has also discussed that to overcome the corporate veil, allegations have centred on the “direct negligence” of the parent company for harm caused by its own wrongdoing (instead of or in addition to its responsibility for the negligence of its subsidiaries). The principal allegation is that the parent company breached a “duty of care” which it owed to individuals affected by its overseas operations e.g. workers employed by subsidiaries and local communities, and that this

754 breach resulted in harm.

753 Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, Brussels I Regulation. 754 As mentioned earlier it was discussed in Cape Plc., 13.

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Meeran himself litigates such cases755 therefore he has discussed several issues keeping in view the practical realities that lawyers and victims face during such litigations. Therefore, he has suggested that tort litigation provides a practically valuable route to achieve the key objectives of MNCs accountability for human rights violations in developing countries. This approach involves allegations of negligence rather than human rights violations, which may be regarded as diminishing the significance of the harm, but on the other hand has the advantages of (a) simplicity and

(b) being potentially applicable to fundamental human rights violations as well as violations of socio-economic rights.

Philip I. Blumberg: “Asserting Human Rights against Multinational Corporation under United States Law: Conceptual and Procedural Problems”

Blumberg has done a great deal of work in this area. In this article756 he reviews the conceptual and procedural problems under American law presented by the growing tide of litigation involving the assertion of claims against American parent corporations of multinational groups for alleged violation of international human rights abroad in the conduct of their global enterprises. The author discusses that institution of a suit against a parent company creates many problems. First, it creates difficulties in preparing a compliant. The plaintiff must allege and prove the parent’s participation in the acts complained, unless the case rests on vicarious liability, of the parent corporation under traditional “piercing the corporate veil”, agency law or some theory of enterprise liability. The law requires specific allegations of the involvement of the parent in the

755 Leigh Day & Co. at http://leighday.co.uk/Our-team/partners-at-ld/Richard-Meeran. 756 Philip I. Blumberg, “Asserting Human Rights Against Multinational Corporations under United States Law: Conceptual and Procedural Problems,” American Journal of Comparative Law 50 (2002): 493.

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tortuous actions complained of. Allegations of parent participation and control are insufficient.

The next obstacle is of the doctrine of Forum non Conveniens under which the courts have to decide whether to take up the case or not. There is dearth of cases in which the courts have dared to challenge the doctrine of forum non conveniens. This is the direct result of the practical consequences of the application of the entity law concepts in determining the amenability of the foreign subsidiaries of the multinational corporate groups. The situation of America has changed though a little in cases arising under Alien Torts Claim Act (ATCA)757 and Torture Victim Protection Act (TVPA).758

The ATCA provides federal subject matter jurisdiction when three factors have been satisfied: (1) the plaintiff is an alien; (2) the grievance is a tort; and (3) tort has been committed in the violation of law of nations. The TVPA is a companion statute providing a civil remedy for individuals who have been subjected to torture. In the light of these cases and statutes we can develop our legal system as it is a dire need of the

759 time.

Kristen Jansen: “Multinational Corporations and Accountability for Human

Rights Abuses: Beyond Limited Liability”

The author in “Multinational Corporations and Accountability for Human Rights

Abuses: Beyond Limited Liability,”760 has discussed that corporations’ status as a separate entity has evolved around three different philosophies. First is the ‘artificial

757 28 U.S.C. 1350 (2001). 758 1991. 759 Blumberg, “Asserting Human Rights Against Multinational Corporations under United States Law,” 503. 760 Kristen Jansen, “Multinational Corporations and Accountability for Human Right Abuses: Beyond Limited Liability,” available at http://www.baruch.cuny.edu/facultyhandbook/BriloffPrizes.htm.

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person’ theory in which the law makers and jurists granted rights to sue and to be sued, to own and transfer property etc, all rights distinguished from real persons and those individuals who own its shares from time to time.761 This initial theory then gave to another theory known as “contract theory,” viewed the corporation as an association of individuals contracting with each other in organizing the corporation. This second theory resulted in decreased involvement of the state and incorporation was left to incorporators and shareholders. This theory provides that the constitutional rights of the shareholders are attributed to the corporation because the courts will always look beyond the nature of the individuals whom it represents.762 It does not follow that the corporation still does not enjoy its historical rights, separate from those of the shareholder, nor did it follow that individual shareholders could somehow invoke those

“core” rights. The third theory of the corporation as a separate juridical entity characterizes the corporation as an organic social reality with an existence independent of, and constituting something more than, its changing shareholders. This view of the corporation is also known as the “natural theory,” “the real entity,” or “realism” theory and is the prevailing modern view. The “real entity” concept grants corporations their own rights akin to those granted natural persons and separate from and beyond those associated with its state created rights shareholder interests.

There is considerable debate over which of these theories should prevail in today’s legal regime. The author suggests that the corporation, in fact embraces all of these three notions. The courts have adopted these various philosophies at different times according to the societal norms which strengthened the entity law and have been reinforced through the legal construct of limited liability.

761 Philip I. Blumberg “The Corporate Entity in an Era of Multinational Corporations,” Del. J. Corp. L. 15 (1990): 283-285. 762 Ibid., 293.

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Kristen is of view that this third phase of the corporate juridical unit viewing the corporation as a “’real entity’ with its own interests transcending those of its shareholders, has dominated corporate law for decades” and has led to the growth in both the number of corporations and the size of corporations.763 However, this “real entity” concept of the law has gone unchallenged while courts have grappled not with the idea of the “real entity” itself, but rather, with just how many additional rights beyond the “core” rights should be extended to it. When corporations are members of a larger corporate group, the corporation and the enterprise are no longer identical. The reality of the growth of multinational corporations involving multiple businesses is that the group of corporations forming the enterprise is run collectively by the coordinated activities of numerous interrelated corporations under common control. The author argues that for holding the MNCs accountable for tortious wrongs the shield of limited liability needs to be removed and the courts need to focus on the corporate analysis rather than the separate corporate personality.

Hugh Collins, “Ascription of Legal Responsibility to Groups in Complex

Patterns of Economic Integration”

The author has discussed764 that the principle of personal responsibility has been transmuted to group responsibility but it restricts the attribution of legal responsibility to MNCs. The reason is the presence of internal legal boundaries between the capital units. The owners of the capital have unlimited freedom to determine the size and shape of legal personalities which bear the burden of legal responsibilities. By adopting patterns of vertical disintegration of productive activities, they can avoid liabilities and

763 Ibid., 295. 764 Hugh Collins, “Ascription of Legal Responsibility to Groups in Complex Patterns of Economic Integration,” Modern Law Review 53 (1990): 731.

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can restrict another’s rights. The common law principle of personal responsibility leads to injustices in case of MNCs, for it does not penetrate the separation of legal identities.

Therefore, a parent is not held responsible for the debt of its subsidiary and a main contractor is not liable for the tort of its subcontractor, when in reality they constitute an integrated productive organization. The power to determine the boundaries, size and shape of these independent units gives a license to these corporations to evade legal responsibilities towards others. The author has described this as capital boundary problem.

This general principle that one person should not be held responsible for the acts of the others cannot be applied on the complex economic structures like MNCs as the formal separation of legal entities may conceal the fact that in reality these constitute one unit and should be treated as single group for attributing legal responsibility. These separate entities can be linked together as single unit by way of three statutory techniques ownership, authority and contract. These principle ways can be used to combat the capital boundary problem. The concept of associated employer searches for common ownership; the concept of shadow director looks for authority; the first supplier for secondary industrial action rests on a contractual link. But all these statutory techniques have their drawbacks. The concept of associated employer is extended to parent and subsidiary company but it depends upon the term “control.” The control is judged from the number of shares that a parent holds in the affiliate.765 The concept of shadow directors signifies the uplifting of the corporate veil principle. It will be applied to MNCs if one company is the director of the other and not that it just appoints its director by having control through voting power.766 In direct contractual

765 Ibid., 739. 766 Ibid., 741.

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relations, the employees have the right of lawful industrial action against a neutral employer, if they are associated employers or direct suppliers or customers of the primary employer.767 Though these legal mechanisms provide a way to remove the distinction between parent and subsidiary but still the traditional principles are hardly ignored by the courts.

Meredith Dearborn, “Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups” The author has discussed in this article768 that principle of entity and limited liability are one of the crucial features of corporate law, which shield the corporation’s owners

(its shareholders) from the debts of the corporation beyond the amount of their investment. Even today, the principle outline of the corporate form remains much the same as it existed a century ago. Piercing the corporate veil is the only exception to the limited liability principle. The exception to the limited liability principle is usually referred to as “piercing the corporate veil,” or the “alter ego doctrine,” which is a common law exception to the statutory grant of limited liability. Since its inception, piercing has been the exception to the rule of limited liability. Most, if not all, states will disregard the corporate fiction of limited liability and hold a shareholder liable for the debts of the corporation but only under a restricted set of circumstances.

Generally, there are two core problems with the entity theory of the corporation.

First, the doctrine has uncertain social and economic efficacy in the context of tort creditors. Second, it applies poorly and irrationally to cases of corporate groups. These

769 problems are precisely those that corporate law at its inception did not address.

767 Ibid., 742. 768 Meredith Dearborn, “Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups,” California Law Review 97 (2009) 195. 769 Ibid., 205.

245

The author is advocating for enterprise liability exclusively in the context of tort committing subsidiary or affiliate corporations. He argues that at least apparently courts almost unanimously respect limited liability and corporate separateness. He has covered the views of many scholars like Philip Blumberg, Christopher D. Stone, Robert

Thompson, Hansmann and Krakmaan on the enterprise theory. He is of the view that the entity theory of the corporation is unable to account for the different normative and economic realities presented by the parent-subsidiary relationship or the problem of tort creditors. When these issues arise together and where a subsidiary or affiliated corporation commits a tort, the existing normative and economic realities demand a different set of legal solutions.

Later the author has discussed in detail the law of Germany in the context of

“control jurisdictions.” Germany has pioneered a statutory system in which a parent and a subsidiary are treated as a single economic unit under certain circumstances.770

Germany’s system attaches liability to the parent company’s ability to exercise control over its subsidiary. Many other countries have followed Germany’s lead and created

771 similar regimes like Brazil, France and Portugal.

Dearborn has also covered India’s approach which provides the most compelling example of enterprise liability that solely considers the group status of the multinational enterprise. This approach was taken after the much-publicized Bhopal disaster in India.

The enterprise theory existing in US772 and different laws including bankruptcy, Federal regulatory laws and labor laws has been discussed by the author in great detail.

770 Ibid., 215. 771 Ibid., 220. 772 Ibid., 230.

246

Henry Hansmann and Reiner Kraakman, “Toward Unlimited Shareholder

Liability for Corporate Torts”

The authors in this article773 have advocated unlimited liability principle to be applied to not only closed held firms but also publically traded corporations. Though, it seems to be unlikely that shareholders would bear the personal liability for the tortious acts of the public company. The doctrine would reach shareholders of closely held companies, specially, parent corporations of the subsidiaries. They argue that it is essential that unlimited liability be extended to public companies as a general rule otherwise the benefits of unlimited liability will be undermined by evasion of liability through partial

774 or complete sales of risky subsidiaries to individual shareholders.

According to the writers piercing the corporate veil is a simple form of unlimited liability. Under this doctrine it can be decided that in certain situations shareholders can be held liable for the torts of the corporation and rule of limited liability may be disregarded. The courts need to find those particular cases and to what extent the shareholders can be held responsible. The distinction between veil piercing principle and unlimited liability is only theoretical. The authors have suggested a rule of pro rata shareholder liability for corporate torts in case of retaining limited liability principle.

But arguments supporting limited liability seem to be unpersuasive for the writers relating to the corporate torts and corporate law. If abolishing limited liability in tort for corporations is a good policy, then it also makes sense to abolish individual limited liability for torts by allowing tort claims in case of personal bankruptcy.775 The joint and several rule prevails in partnerships but the shareholders are responsible for

773 Henry Hansmann and Reiner Kraakman, “Toward Unlimited Shareholder Liability for Corporate Torts” Yale Law Journal 100 (1990-1991): 1879. 774 Ibid., 1894. 775 Ibid., 1886.

247

corporate tort personally where in exceptional cases piercing veil rule is applied.776 The unlimited liability rule would also discourage investment of shareholders hazardous industries.777 The courts have competence to adjust tort damages according to the nature of the corporate defendant and this approach is far better than the limited liability. Thus the choice between limited and unlimited liability interacts with the rule of tort liability.778 The authors suggest that one must focus on the tort law rather than the conventional corporate law principles in cases of corporate torts. The weaknesses of limited liability concept have been shown to demonstrate the efficacy of unlimited liability in corporate tort.

Timothy P. Glynn, “Beyond ‘Unlimiting’ Shareholder Liability: Vicarious Tort

Liability for Corporate Officers”

The author in this article779 has suggested vicarious liability for high-ranking corporate officers instead of limited or unlimited shareholder liability. There are benefits attached to limited liability but it also inflicts costs and encourages extremely perilous corporate activity. These costs are most distinct in tort cases because victims of tort are not often in a position to protect themselves by supervising corporate activities or bargaining with corporate actors.780 Some scholars781 propose restricting limited liability negating vicarious liability for corporate torts arguing that it should be extended to some or all shareholders in close corporations. Others have proposed alternatives, such as pro rata

782 liability, suggesting that liability for corporate tort should extend to all shareholders.

776 Ibid., 1892. 777 Ibid., 1883. 778 Ibid., 1887. 779 Timothy P. Glynn, “Beyond ‘Unlimiting’ Shareholder Liability: Vicarious Tort Liability for Corporate Officers’ Vanderbilt Law Review 57 (2004): 329. 780 Ibid., 331 781 Ibid., 331: Philip I. Blumberg, Note, Robert Thompson, David Leebron. 782 Ibid., 331: Henry Hansmann and Reinier Kraakman, Christopher D. Stone.

248

A few, including the author, has taken a serious note on extending vicarious liability to the corporate primary stakeholders and management. It is necessary in the current regime to hold top corporate officers responsible for the torts of their enterprises. Despite extreme criticism of the scholars on limited liability principle, it remains the key feature of company law. Therefore, reforms proposed for unlimited liability seems to be unpersuasive.783 Although courts have utilised “veil piercing” theory to expand the liability of shareholders but it has not served a meaning development. Veil piercing principle is quite unpredictable and uncertain in practise.

784 Thus the shareholder liability proposals would be ineffective.

The author has argued that the better solution is to connect control with accountability. The highest-ranking officials should be vicariously responsible for the torts of the enterprise instead of controlling shareholders. Top management officers in a better situation to bear risk within the corporation. They are in efficient position to control and avoid risks and bargain for risk spreading among shareholders, customers and insurers. Officer liability will be effective because there will be at least one natural person who could not escape vicarious liability if the enterprise is deficient in resources

(capital or insurance) to satisfy the claim of tort victims. The author claims that holding high ranking officials vicariously responsible for corporate torts is more realistic approach than unlimited shareholder liability.785 Vicarious liability does not depend on veil piercing. Courts can execute this principle through “Respondeat Superior” doctrine. Vicarious liability can be extended to a principal for the torts of agents subject to the control of principal. Therefore, the risk of loss is shifted to the person who can control the tortious activities.786 Thus, when a tort is committed in a corporation,

783 Ibid., 332. 784 Ibid., 333. 785 Ibid., 334. 786 Ibid.

249

principal liability in the law of respondeat superior should extend to the firm as well as the top-ranking officers because they exercise direct control over corporate activities and are the most capable risk bearers. Therefore, the author proposes to synthesis modern tort and corporate law theory to resolve the conflict between limited liability

787 and goals of tort regime.

787 Ibid., 335.

250

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