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Multinational Corporations and Liability According to International Law

By Thomas Golson '13

International Law

Besides being an example of outstanding research and writing on a complex topic, I chose to submit this paper because it also manages to communicate important ideas, concepts, and global trends with clarity and delivers argument-evidence and examples in such a way as to generate and sustain interest from non-specialists, myself included!

-Jim Zaffiro


The Prestige Oil Spill

On November 13, 2003 an oil tanker, the Prestige, suffered a cracked stern at the hand of high seas off the Spanish coast. In less than a week, the entire tanker sank to the bottom of the ocean releasing 64,000 tons of oil into the Atlantic. The spill contaminated nearly 2,000 miles of beach, killed an estimated 300,000 sea birds, and put a massive economic strain on the fishing industry in both Spain and Portugal as activity was suspended in the affected area for six months. This spill remains to be the largest environmental disaster in the history of both Spain and Portugal. The real controversy in this disaster comes in the aftermath and cleanup of the spill.

The spill cost Spain a reported $4 billion in cleanup.1 Spain was helped with a very small amount of funds provided by the International Oil Pollution Compensation Fund, which is a treaty that relieves ship-owners from the liability of unforeseen problems such as the Prestige oil spill. Overall, the International Oil Pollution Compensation Fund was able to provide $224.8 million. After these funds were dispensed, public actors had to pay the rest of the total cost of the spill out of their own pockets. The Spanish government paid for an overwhelming amount of the cleanup and compensation. The insurance company that covered the tanker, London Steamship Owner’s Mutual Association, was held liable for a measly $25 million to cover the spill. Other than this fraction of a payout, the private companies involved in the oil spill, which included multinational corporations based in Liberia, Greece, Switzerland, Luxembourg, and Gibraltar, contributed nothing to the cleanup efforts or compensation for injuries. The Swiss based company, Crown Resources Inc., which owned the oil that the Prestige carried, was sold off and liquidated without paying any sort of compensation at all, even though the company at the time was owned by one of the largest corporations in the world, the Russian Alfa Group.2 When these facts became public the Spanish citizens were outraged. Spain and most of Europe began to cite failures in the ability of national and international law to hold multinational corporations and those involved in these types of disasters responsible for their actions. In an attempt to respond to this public outcry, Spain attempted to sue the agency that had approved the tanker as seaworthy, which was the American Bureau of Shipping. The suit was dismissed by a federal judge citing that the U.S. had no jurisdiction when it came to this case.3

It is apparent from this example that the liability of Multinational Corporations is being minimized in our current international system. Companies are able to pass the blame throughout the agencies involved resulting in no principle party taking responsibility for events that have occurred. The need for firm and resolute international law concerning the governance and responsibility of multinationals is obvious. With multinationals becoming a larger part of not only the economic global sector but the political sector as well, international law must step up and set the rules of the game for these international actors. In this paper I will address three ways in which multinationals look to avoid accountability in the international realm, dubbed liability minimization. I will also provide ways in which international law and policy can address these issues to create a world in which corporations are held accountable not only to their shareholders, but to the people whose lives they affect every day.

Definitions

A concise definition of a few terms may provide a clearer understanding of the issues at hand. First, a multinational corporation or MNC, is, in its most basic form, a business that manages production or delivers or provides services in more than one country. The most obvious examples of MNCs are McDonalds, Shell, ExxonMobil, and most car manufacturers. In the global economy MNCs are the main players in the market and are responsible for a majority of investment in many countries economies. MNCs are responsible for a third of all world trade and several are surpassing the economic standings of many countries. All these factors that define precisely what an MNC is contribute to what make them so difficult to regulate. Their actions are not confined to a certain territory, they are businesses, not governments, and their obligations are to their shareholder. A second important term is liability. Liability is the obligation of a certain party to take responsibility for their actions when those actions are found to be unlawful. Liability minimization is the intentional actions of a party to decrease the chance that they will be found liable for their actions without changing the actions that they may be found liable for.4

Outsourcing

The first way in which MNCs look to reduce their liability is through the practice of outsourcing. In the business world, outsourcing takes place when a company hires or contracts another company, which is not related to the first, to do some type of work. These companies are in no way related except through the contract of the outsourced work. Outsourcing provides a few different outlets for MNCs to reduce their liability.

Outsourcing work decreases the liability of the MNC through the contract of the work. The contract basically states that if there is to be any liability at all in the contract, the liability will be shared by both the principle and the contractor. This is a huge part of the contract and many contractors will not win the contract if they will not agree to the terms that the principle wants.5

In a more obvious fashion outsourcing jobs minimizes a MNCs vicarious liability. Vicarious liability is the responsibility of the employer for the employee, usually found in cases of misbehavior of employees. Instead of the MNC being responsible for its own employees, it simply passes the liability onto the contracted company. Although it would seem reasonable to believe that the MNC would not be responsible for the actions of the hired party, outsourcing should not simply be a way for MNCs to dodge liability in the case that something goes wrong. A perfect example of this would be two oil spills that happened a few years before the Prestige spill. In 1989 when the infamous Exxon Valdez oil spill occurred, ExxonMobil did not outsource the work of the tanker operator or the tanker owner and therefore was not protected from vicarious liability and was held responsible for the spill. On the other hand, in the 1999 Erika oil spill, the owner of the oil, much like in the Prestige case, had contracted out the tanker operator and the tanker owner. The company that owned the oil was able to defer vicarious liability citing that they did not own the ship or operate it so they could not be held responsible for the spill.6

In our example of the Prestige spill, the owner of the oil, Crown, was protected from liability through the principle/contractor relationship. Not only were they protected from liability, but also Crown Resources Inc. was fully knowledgeable of that protection. In a statement by the Vice President of Crown, the company indicated that “this is not our fault: we chartered a tanker which was available on the market and was up to the standards of an international maritime register. As cargo owners we are entitled to compensation of our losses.”7 This quote can be used to sum up the views of MNCs and what they believe their personal liability to be. Not only did Crown Resources deny any liability in the incident, they actually were paid $8 million by their insurance company to cover the oil that had been spilled into the sea. Even worse, Crown was found by a U.S. court to be completely in charge of the Prestige’s movements. In this case the only way that Crown could be found liable under its protection was to be directly sued by the ship owner or ship operator, neither of which happened before the company was sold and liquidated.

In total, MNCs use outsourcing to protect themselves from liability through the protection of contractual obligations and the transfer of vicarious liability. By doing so, MNCs can guarantee a reduction of exposure to the laws of the international and national world. We see this use of outsourcing in the case of the Prestige spill through the contracts used by Crown to protect them from liability. This protection even surpassed the findings that Crown was in control over the tanker.

Renegade Regime Regulation

A second way in which MNCs minimize liability is through renegade regime regulation. Basically, MNCs can use the jurisdiction of one state to protect themselves from the jurisdiction of another. MNCs use this to their advantage by seeking “refuge” in certain states, so-called secrecy havens. MNCs also use flags of convenience, which is choosing a certain ship nationality for the lack of legal enforcement that a certain state provides. Much like secrecy havens, flags of convenience can provide a sort of exclusive jurisdiction for the MNC, making it difficult for the laws of other nations applicable to the ship.8

The best way to conceptualize this type of liability reduction is through the example of the Prestige spill. The first case of renegade regime regulation occurred with the well-known secrecy haven of Liberia. Liberia has a massive corporate registry and is well known as a very confidential state when it comes to business practices. The Prestige was owned by a company called Mare Shipping. After extensive investigation, Mare Shipping was found to be a Liberian company. Even after this became public knowledge there was still extreme difficulty in tracking down who actually owned Mare Shipping. According to a few principles of business law in Liberia, the owners of the company had the right to remain anonymous. It is believed that the only thing that actually brought the owners of Mare Shipping to reveal themselves was the huge nature and public outcry of the Prestige incident. The owner of Mare Shipping was revealed to be a Greek family even after a Greek diplomat had assured Spain that the ship did not have Greek ties.9 The complications of finding out who the true owners of the ship were is attributed to use of secrecy havens. Secrecy havens give MNCs a wall to operate behind. This secrecy makes litigation nearly impossible. The havens prevent investigations, slow lawsuits, and create difficulty in figuring out whom to bring lawsuits against in the first place. This combined with rash statute of limitation requirements in most secrecy havens renders MNCs virtually untouchable by national level laws.

“Mechanical” by Carly Stratbucker

Another use MNCs get out of renegade regime regulation is through flags of convenience. Flags of convenience present MNCs with the opportunity to choose the law that governs them. With current international law, the flag state of a ship assumes jurisdiction over that ship when the ship is sailing. Flags of convenience have become very controversial over the past few decades as they have been linked to human rights violations, illegal maritime practices and illegal pollution. Basically, flags of convenience, much like secrecy havens, provide companies with a way to conduct business without being transparent in their practices. Unlike most factors that MNCs use to reduce liability, there is some action being taken against flags of convenience. The UN drafted the United Nations Convention on the Law of the Sea, which gives coastal and port states the right to apprehend ships that pollute into their waters. However, another article adapted to this convention gave flag states the right to suspend any charges that are incurred on their vessels within six months of the charging. There is also large competition between flag of convenience states. Nearly all flag of convenience states are not economic powerhouse states, such as Panama, Liberia, Malta, and the Bahamas. This competition for ship registry has contributed to a race to the bottom between these states. Whoever can provide the least enforcement of laws and the most privacy in business practices is going to win the majority of ships.10

When it comes to the Prestige spill the tanker took up the flag of the Bahamas, a well-known flag of convenience state. As the Bahamas was the flag state of the vessel, it took on a few responsibilities, such as determining if the ship is ready for sea, if the ship meets pollution standards and if the labor conditions of the ship are adequate. The Prestige being registered in the Bahamas guaranteed a few things for Mare Shipping. It ensured that there would be little to no enforcement of international standards and also the Bahamas exclusive jurisdiction would protect the vessel from other states laws. There is no doubt that when it comes to flags of convenience and secrecy havens, MNCs use renegade regime regulation to reduce their liability and exposure to international and national law.11

Corporate Structure

The final way in which MNCs dodge liability is through the corporate structure. Since MNCs are businesses they are designed from the ground up to prevent losses and promote capital gains. The way in which MNCs function as a legal group ensures that liability cannot really be transferred from one subsidiary to another. MNCs rely on the legal standing of the parent-subsidiary relationship to ensure that liability will be difficult to place.

Using the corporate structure, MNCs use the principle of limited shareholder liability to protect the parent company of the organization. Simplified limited shareholder liability means that parent companies are not responsible or liable for the actions of their subsidiary companies. The way in which MNCs are structured looks to maximize on this principle. Not only does limited shareholder liability keep the blame from spreading throughout the MNC, but also, if liability is found it is kept solely to one subsidiary or even more advantageous to a MNC, one person.12

MNCs also can use the largeness of their operations to help reduce liability. The scale of the operations that MNCs undertake presents a logistical challenge in bringing litigation against them. With operations taking place in multiple continents at various times it is nearly impossible to collect evidence and build a case against an MNC.13 The difficulty in getting multiple states to surrender evidence of dealings with these companies is astronomical. This is compounded when the MNC seeks refuge in a secrecy haven. The unwillingness of the haven to cooperate with investigations once again makes the MNC virtually untouchable. Filing a civil suit against an MNC is also out of the question. Most citizens that MNCs commit unjust acts upon are from impoverished, extremely poor, Third World countries. None of the citizens from these areas have the logistical capability to file a lawsuit against something as massive as a MNC. Even if they were capable of doing so, the grandiose nature of a MNC makes the citizen not even know where to start.14

Another issue the corporate structure lays out is the inability of courts to feel they have jurisdiction over these companies. Courts are very reluctant to assume jurisdiction over what they feel are foreign companies. In the Prestige spill, after an outcry from the Spanish public, the Spanish government filed suit against the company that had certified the Prestige as seaworthy. As the company that endorsed the vessel was American based, the suit was filed in the United States. When the suit arrived in court, it was nearly immediately dismissed by the judge saying that the U.S. court system had no jurisdiction over the case.15

The last way in which MNCs use the corporate structure to minimize liability is through the use of local incorporation and isolation from subsidiaries. Bringing cases against a parent company of an MNC will usually result in the blame being passed down the corporate ladder. Parent companies are able to skip out on lawsuits and say that a subsidiary company is responsible. In these cases, parent companies become separate legal entities in which the subsidiary companies are basically hung out to dry.16

Possible Solutions through International Law

“Untitled” by Shawn Sersland

Liability reduction has given MNCs the ability to be unaccountable and reckless in business practices. In the past, these megacorporations have been untouchable through the use of contracts, lack of policy enforcement, and basic corporate organization. Difficulty arises when placing responsibility on these companies as most are to be held accountable under national laws. With the wide scope of the actions of MNCs and their transnational nature it is no wonder that national law cannot deal with these issues. There is only one way to keep these conglomerates liable for all the actions that they undertake. That solution is international law. In four applicable ways, the international community can start holding the right people accountable for the activities that they undertake.

First, the international community has to recognize that enforcement of international laws and the reliance on national jurisdiction is failing miserably. Not only can this failure be seen in our example of the Prestige spill but also in the recent Deepwater Horizon Spill. Much like the Prestige spill, the operator, owner, manufacturer, and designer of the platform are all separate entities. British Petroleum has filled suits totaling over $40 billion against each of these companies, stating that it was negligence of these companies that led to the spill, using outsourcing as a way to reduce their liability in the case.17 The international community cannot let these claims by parent companies continue to be heard. There has to be recognition of the failure of national law to prevent instances such as this. Only when that realization is reached will we be ready to move forward into making progress on international laws that can be used to prevent liability reduction by MNCs and prosecute them directly for doing such.

Once the problem is recognized we can look to expand current national laws to the international level and create a global standard. Canada has a great way of attacking outsourcing as a means to reduce liability. A few Canadian laws have been established that allow the evaluation of contracts that specifically deal with outsourcing. In this assessment, liability of a parent company can be established if the contractor is found to be under direction of the hiring company. This legislation negates the attempts of MNCs to hide through contracts. I believe that if this were adopted as an international norm it would be nearly impossible for MNCs to even draft contracts that tilted liability away from them.18 The problem with adopting an international policy like this is the same problem that afflicts the national laws that currently govern MNCs, enforcement. This leads to the next step in a solution: court action.

With the limits of the national laws that are in place, courts are scared to infringe on another jurisdiction which usually results in no action taken on the suit. There could be possibly two solutions to this concern. The first would be to involve the International Court of Justice or the International Criminal Court. These courts could be used to establish some sort of universal check for the ethics of business in the international world. However, the ICJ has shown a reluctance to get involved in the corporate world. Another, more practical approach, would be for national courts to actually make decisions on these cases, instead of denying jurisdiction. Courts cannot be scared to make a decision on these claims. Once a single court is able to rule on one of these cases and not worry about infringing on jurisdictions a precedent will be set. This will give judicial systems the right to supersede national law in order to make decisions on transnational matters.

Another issue that needs to be addressed is flags of convenience. Flags of convenience have become a global issue and are responsible for not only liability minimization of MNCs, but illegal fishing practices, drug trafficking, and human trafficking. Of all the issues discussed, flags of convenience may be the easiest to combat. With just a slight buildup of current international law, flags of convenience can, for the sake of argument, be completely banned. Current international law states that there must be a “genuine link” between a ship’s owner and its flag state. However, the term “genuine link” is not really defined anywhere and basically has been up to the ship owner to define. There has been an effort to bring about a definition to this phrase in the United Nations. In 1986, the United Nations Convention for the Registration of Ships looked to define the phrase as the flag state having economic stake in the ship or providing mariners for the ship’s crew. Since 1986, only 14 countries have signed the convention and it requires 40 to come into force. Providing an incentive would be a simplistic way to get the remaining signatories that the convention needs.19

Finally, in addressing the corporate structure and secrecy of MNCs there is one main idea on how to pierce the corporate veil. This proposition is the international expansion of legal testing of MNCs. In states such as the US and the UK, parent companies can be found guilty for actions of subsidiaries if the parent company has shown a surplus of control over its subsidiary. The expansion of this principal to the international level would do wonders for testing MNCs for liability minimizations. This would help prevent the use of subsidiaries as scapegoats for parent companies. This forces the business definition of MNCs into the legal definition of MNCs. Bringing the two definitions together will prevent a major contributor of liability reduction. MNCs are able to play the two definitions off each other, using one or the other depending on the situation. Uniting the definitions will ensure that the corporate structure will not be able to isolate internal parts to minimize liability to the parent.20

Works Cited

  1. Spill Amount: Raul Garcia, WWF, The Prestige: One Year On; A Continuing Disaster, www.panda.org/downloads/marine/finalprestige.pdf
  2. The Alfa Group, Financial Highlights and Analysis, www.alfagroup.org/258/financial.aspx
  3. Reino de Espana v. American Bureau of Shipping Inc., No. 03 Civ. 3573, 2008, lexis nexis
  4. Robin Hansen. “Multinational Enterprise Pursuit of Minimized Liability: Law, International Business Theory and the Prestige Oil Spill.” Berkeley Journal of International Law 26.2 (2008): 410-451. Academic Search Premier. EBSCO.
  5. George S. Geis, Business Outsourcing and the Agency Cost Problem, 82
  6. Saga of Greed: Who is to Blame for Prestige Disaster, Indymedia Euskal Herria, www.euskalherri.indymedia.org/eu/2002/11/2703.shtml
  7. Id. at 6.
  8. Marc Lopatin, Tax Avoiders Rob Wealth of Nations, Guardian Observer, Nov. 12, 2002.
  9. Tanker Faces Break Up as Port Refuses Entry, Sydney Morning Herald, Nov. 19, 2002.
  10. Organization for Economic Co-operation and Development, List of Uncoperative Tax Havens Report, www.oecd.org/document/57/0,2340,en_2649_33745_30578809_1_1_1_1,00.html
  11. Emeka Duruigbo, International Relations, Economics and Compliance with International Law: Harnessing Common Resources to Protect the Environment and Solve Global Problems, 31
  12. Phillip Blumberg, Accountability of Multinational Corporations: The Barriers Present by Concepts of the Corporate Juridical Entity, 24 Hastings International & Company. L. Rev. 297, 304
  13. Jose Engracia Antunes, The Liability of Polycorporate Enterprises, 13
  14. Id. at 4.
  15. Id. at 3.
  16. Cynthia Day Wallace, The Multinational Enterprise and Legal Control: Host State Sovereignty in an Era of Economic Globalization, pg 658
  17. Leo King (21 April 2011). “BP £24bn lawsuits claim contractors failed to use modelling software properly”. Computerworld UK
  18. Id. at 4.
  19. Deirdre Warner-Kramer, Control Begins at Home: Tackling Flags of Convenience and lUU Fishing, 34 Golden Gate U. L. Rev. (2004), http://digitalcommons.law.ggu.edu/ggulrev/vol34/iss3/3
  20. Id. at 4.

Sources Not Specifically Cited

  1. Daphne Eviatar. “A Big Win for Human Rights.” Nation 280.18 (2005): 20-22. Academic Search Premier. EBSCO. Stranges, John B. “DUALISM AND DEPENDENCE: THE MULTINATIONAL CORPORATION IN CANADA.”Peace & Change 4.1 (1976): 40. Academic Search Premier. EBSCO.
  2. Ronald Müller and Richard D. Morgenstern. “MULTINATIONAL CORPORATIONS AND BALANCE OF PAYMENTS IMPACTS IN LDCs: AN ECONOMETRIC ANALYSIS OF EXPORT PRICING BEHAVIOR.” Kyklos27.2 (1974): 304. Academic Search Premier. EBSCO.
  3. Mahmood Monshipouri, Claude E. Welch Jr., and Evan T. Kennedy. “Multinational Corporations and the Ethics of Global Responsibility: Problems and Possibilities.” Human Rights Quarterly 25.4 (2003): 965-989.Academic Search Premier. EBSCO.
  4. Theodore H. Moran. “MULTINATIONAL CORPORATIONS AND THE POLITICAL ECONOMY OF U.S.-EUROPEAN RELATIONS.” Journal of International Affairs 30.1 (1976): 65. Academic Search Premier. EBSCO.
  5. Joseph S. Nye Jr “MULTINATIONAL CORPORATIONS IN WORLD POLITICS.” Foreign Affairs 53.1 (1974): 153-175. Academic Search Premier. EBSCO.