Projects in the extractive industries are often enormous, long-lasting, multi-billion dollar affairs. Given the disruption, potential for environmental disaster, and permanent changes in the state of the land, these projects tend to generate conflict and controversy, especially in low-income countries, where citizens may enjoy fewer legal protections. As a way to mitigate these risks, some nations require extractive firms to enter into “Community Development Agreements” (CDAs) with local communities. (CDAs—which are also sometimes known as Benefit Sharing Agreements, Impact Benefit Agreements, or Community Joint Ventures—are sometimes voluntary corporate social responsibility initiatives, but my focus here is on CDAs that are required by, and incorporated into, national regulatory frameworks.) At the most general level, CDAs are created through a process that engages local populations in important decision-making about the project and its profits. The process varies, but usually includes the following steps:
- Identify the people who will be affected
- Allow those identified to determine what the community could gain from the project (whether that be jobs, money, education, infrastructure, long-term benefits, etc.)
- Write a CDA that encompasses the demands of the community and aligns with regulatory requirements
- Provide monitoring tools to the affected population
- Set up dispute resolution systems
- Strategize for how to prepare the population for the end of the project’s lifespan.
This process takes time and can be expensive. But extractive projects typically last for decades, and so building a sustainable relationship with the local population is vital to the project’s success. After all, many corporations fund similar stakeholder engagement processes without being required by law to do so. That is because CDAs can be a good business decision: empowering the community allows the company to avoid violent conflict and signaling that the firm is a good corporate citizen.
For those countries that do require a CDA for extractive projects, the law also regulates the substantive terms, requiring CDA contracts to contain certain clauses–typically monitoring components, dispute resolution mechanisms, and local spending or employment quotas. However, one thing that is never included in a CDA is an anticorruption clause. The words “bribery” or “corruption” appear nowhere in the World Bank’s model CDA agreement, and the Columbia Center on Sustainable Investment (CCSI) is silent on the issue. Building on recent work by Abiola Makinwa and James Gathii, I posit that CDAs should include anticorruption clauses, to empower private citizens in fighting corruption in public contracts. The basic idea is to allow the recognized community members—those covered by the CDAs—as “third party beneficiaries” to the contract between the government and the extractive company. The community members would then be entitled to sue if there was corruption in the making or execution of the contract.
Anticorruption clauses in CDAs are a potential tool for citizens to seek redress for their corruption-induced injuries. To understand the reason why the clause would be helpful, it is important to understand, as a preliminary matter, that in both civil law and common law systems the background rule is that third parties cannot sue for violation of a government contract. For example, suppose a water company enters into a contract with a city and then, in violation of that contract, fails to maintain adequate pressure at fire hydrants. Suppose that as a result, a citizen’s house is destroyed in a fire. Under the usual background rule, the citizen—a “third party beneficiary”—cannot sue the water company for breach of its contract with the government (though the government can of course pursue its own legal remedies against the company). However, although this is the default rule, most countries do allow a third party beneficiary to sue if the contract has an explicit clause to that effect. Because a CDA is a contract between an extractive-sector firm and the government, one could insert a clause allowing third-party beneficiaries of the contract (to wit, members of the local community) to sue if they are adversely affected by bribery or other forms of corruption in the project.
I would propose writing the clause such that the community members have the right to sue when there is corruption in the making and/or execution of the contract. As an example of the former (corruption in the making), let’s say that a given country solicits bids from companies for a gold mining project. Evidence later comes to light that the company that ‘won’ the bid gave a bribe to the Minister of the Interior in order to secure the contract. Community members covered by the CDA could then exercise their right to sue. As an example of the latter (corruption in the execution), let’s say that the gold mine is in operation and evidence comes to light that the company is paying bribes to the local official in charge of environmental protection to look the other way on slurry discharges into a nearby river. This would be a breach of a provision in the CDA, requiring the company to comply with all relevant environmental laws. The community members could then exercise their right to sue under the anticorruption clause.
There are a few possibilities for how third party beneficiary clauses might be added to CDAs:
- Following Makinwa’s, suggestion, a country could mandate the insertion of a “sleeping” third-party beneficiary clause into all CDAs. Dr. Makinwa calls them “sleeping” clauses because third parties only obtain rights once some trigger has been switched. Third parties would not be able to initiate the lawsuit; they would merely be able to join; the goal being to balance the interests of the public, those who are supposed to benefit from government contracts, with the interests of the extractive company and the government in avoiding excessive litigation. If and only if evidence of corruption passes some threshold, then the previously identified third-party beneficiaries (in the CDA context, this is the ”community” defined by the terms of the CDA) would be able to join in a lawsuit. The community would also participate in any settlement negotiations, provide additional evidence of bribery, and receive some portion of the fine. Dr. Makinwa argues that the principal effect of such an arrangement would be to deter corruption before it occurs and to “give the public contract a public face.” One challenge for this approach, however, is that the clause might never be triggered. If the project is a flagship investment for the country, then the government will have a significant incentive not to investigate signs of corruption in the bidding process, especially when powerful government officials were involved in the bribery.
- Another alternative would be to scrap the “sleeping” aspect of the clause and allow members of the community to bring a suit directly. While such an approach could lead to excessive litigation (one reason for the general rule against third-party beneficiaries), other evidentiary and procedural requirements would still be in place and the result might well be more deterrence. However, if the community has too strong a right, the government and company could define the community as narrowly as possible, decreasing the overall effectiveness of the CDA. In some cases, the local population might be driven from the land so there are fewer (or zero) people to account for in the CDA.
- CDAs, like most contracts, can obligate the parties to pursue their claims in a particular forum or to go through certain dispute resolution processes. Just like Apple can require its customers to submit claims to commercial arbitration, a CDA might compel the parties, including the third-party beneficiary community members, to go to a particular judicial body or operate under a certain set of laws. In fact, most CDAs require that disputes go through mediation and arbitration processes before heading to court. If there is evidence of bribery and members of the community would like to pursue a legal claim against the corporation or the government, the CDA could require the community to bring the suit before a national bribery tribunal, a regional court that has jurisdiction for national corruption cases (such as the ECOWAS court in West Africa), or an investor-state arbitrator. A big challenge for this approach might be information access. How will the community have the capacity to go through a complicated and foreign legal process? This challenge could be overcome by adding another clause requiring the corporation fund educational campaigns within the community, capacity building, or support for local CSOs. Of course, if the entire operation is purely fraudulent and the company never meets any of its obligations under the CDA, then the local community would not be empowered to pursue its claims.
These are just some preliminary thoughts on how third party beneficiary clauses in CDAs might be implemented. No matter what the particular approach is, ensuring the community’s rights are enforceable and the population protected from retribution will be the key challenges. These are inevitable hurdles in institutionally weak states. But the possible benefits of the clauses surely are substantial enough that the World Bank and CCSI should consider adding them to their model CDAs.