Incorporating the Third Party Beneficiary Principle in Natural Resource Contracts

• Publication year: 2014
• Citation: Vol. 43 No. 1

Incorporating the Third Party Beneficiary Principle in Natural Resource Contracts

James Thuo Gathii^*

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TABLE OF CONTENTS

I. INTRODUCTION.................................................................................94

II. CURRENT EFFORTS AT ADDRESSING EXTRACTIVE RESOURCES .... 100

III. THE THIRD PARTY BENEFICIARY PRINCIPLE..................................102

A. Introduction to Third Party Beneficiary Principle...................102
B. The Evolution of Recognizing Third Party Beneficiary Rights........................................................................................104
C. The First Restatement of the Law of Contracts........................107
D. The Second Restatement of the Law of Contracts....................109
E. Modern Application of Third Party Beneficiary Principle in the United States..................................................................110
F. Evolution of the Third Party Beneficiary Principle Abroad .... 112

IV. BASIS OF THIRD PARTY LEGAL INTERESTS IN RESOURCE CONTRACTS....................................................................................114

A. Consistency Between Wishes of Contracting Parties and Third Party Beneficiaries.........................................................114
B. Resource Development Should Benefit Local Citizens.............117
C. Interests of Justice and Morality...............................................125
D. Public Policy Rationales...........................................................129

V. OBJECTIONS AND RESPONSES TO THIRD PARTY BENEFICIARY STANDING IN RESOURCE CONTRACTS............................................133

VI. CONCLUSION...................................................................................137

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I. INTRODUCTION

Citizens of low-income, resource rich countries have absolutely no voice in the negotiation or signing of natural resource contracts between their governments and private investors, even though they are almost always deeply (and often detrimentally) affected by the terms of the contracts and resource extraction. To make matters worse, government officials in low-income, resource rich countries often lack both capacity and experience to negotiate complex contracts with multinational corporations, which can ultimately harm both the government and its citizens.¹ There is no symmetry between the negotiating ability of low-income, resource rich countries and experienced and vastly wealthy multinational corporations. It is notable that the issues involved go beyond bargaining power, resources and capacity; there is generally no transparency in either contract negotiations or in revenues that companies pay to access natural resources. However, this article addresses a different aspect of natural resource contracting: the Third party Beneficiary principle and how it can protect the rights of citizens in third world countries.

When resource extraction harms local communities, those communities are often without legal remedy.² Because these citizens did not sign the contract,

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they lack privity, and as non-parties to the contract, they consequently lack contractual remedies. For these reasons, classic contract law—in the absence of a promise to third parties and consideration from third parties—prohibits third parties from having standing to sue on that contract or to enforce the contract.³ Therefore, it is crucial that third party communities in low-income, resource rich countries are granted third party beneficiary rights, which would give them the necessary standing to sue on the contract.⁴

Many recent examples demonstrate the necessity for third party beneficiary status. One prominent example arose when the Cree Nation of Quebec objected to a uranium mining project on its territory.⁵ The investor, Strateco Resources, sued Quebec, seeking a final decision to permit the project to proceed.⁶ When the Cree Nation filed an intervention action seeking to be joined in the suit with full rights of participation, Strateco Resources objected on the basis that the Cree were not privy to the negotiations for the approval of the mining project and therefore could not intervene in the action.⁷ Cree Nation Grand chief Dr. Matthew coon come replied, arguing:

[T]he requirement of social acceptability as a condition for development in Eeyou Istchee is an essential aspect of the successful nation-to-nation relationship between the Crees and Quebec. Strateco's legal action represents a fundamental

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challenge to the principle of social acceptability, and to our treaty rights. We are committed to protecting our environment and our treaty rights, for current and future generations.⁸

Notably, unlike in the United States, France, and the United Kingdom, Canadian contract law does not recognize the Third Party Beneficiary Principle.⁹

Another prominent example is the case between residents of Kitui County in Kenya and Fenxi Mining of China.¹⁰ The Mui community raised various concerns about the impact of the mining project on them and their environment.¹¹ The citizens claimed that the contract was unfair, in part because it was signed in a hurry and denied the locals the benefits proposed in local mining legislation.¹² The locals' representatives made a raft of recommendations, which were eventually left out of the Benefits Sharing Agreement that was presumably signed for their benefit.¹³ Suits against the government and several petitions in the case were filed, as recently as February 2014.¹⁴ To the extent that the representatives could not sue on the contract between the government of Kenya and Fenzi Mining of Kenya, this case demonstrates citizens' need for third party beneficiary rights.¹⁵

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This Article proposes recognizing and applying the Third Party Beneficiary Principle in contracts between low-income, resource rich countries and natural resource investors. A major impetus for this project is the increasing recognition of the need to build on the available set of remedial regimes for violations of human rights by business actors. This project therefore supplements initiatives put in motion by the U.N. Guiding Principles on Human Rights to consider human rights risks and to find ways of addressing them in contract negotiations.¹⁶

In both common and civil law countries, third parties have standing to sue on a contract under certain circumstances. In the United States, the Second Restatement of Contracts recognizes third party beneficiary standing as a general principle and specifies certain categories of individuals as having standing to sue as third party beneficiaries.¹⁷ In many jurisdictions, there is a complex maze of approaches aimed at overcoming the privity doctrine. Stated most simply, the Third Party Beneficiary Principle is recognized where a contract is made for the benefit of a third party and allows such third party a right to enforce the contract by filing suit.¹⁸

The Third Party Beneficiary Principle is not intended to circumvent the will of the parties to a contract, but rather to effectuate the parties' intentions, especially where their contract was intended to benefit a third party.¹⁹ In addition, the Third Party Beneficiary Principle exists as a matter of justice and morality. Thus, third parties such as subsequent tenants or purchasers are often allowed to sue an engineer or a contractor for the performance of defective works or the failure to exercise due care and skill in construction

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contracts.²⁰ The remedies available in a suit by a third party beneficiary are contractual performance or damages for non-performance, specific performance or injunctive relief—the same remedies available upon breach to parties to a contract. In other words, third party beneficiaries have a cause of action for breach.

The recognition of third party beneficiary rights would supplement existing approaches to resolving problems in extractive industry operations, including contract and revenue transparency, codes of conduct, and the U.N. Norms on Business and Human Rights. A major weakness of these approaches is that they are not legally enforceable, because voluntary and non-binding approaches do not give rise to enforceable legal claims. This in turn reduces their transformative potential for those that suffer the unfortunate consequences of resource extraction and therefore would benefit most from having this principle.

In my view, adding Third Party Beneficiary law to existing approaches to resolving extractive industries problems would be an important supplement to the available toolkit. The Third Party Beneficiary Principle has the potential to tilt the incentives for investors and governments to pay more attention to vulnerable communities and peoples in resource extraction scenarios because contracts—unlike voluntary and non-binding codes—create enforceable obligations at the front-end. In fact, as I have argued elsewhere, the absence of a binding legal regime for accountability in the violent extraction of mineral resources is facilitated by weak states lacking effective control over their territory and by the extremely lucrative trading of natural resources.²¹

My argument is premised on rejecting the compartmentalization of public and private law in addressing resource extraction problems. By that I mean that the current framework for addressing problems, or externalities as economists would call them, that arise from private law dealings—such as contract law—are thought to be primarily resolved through public rather than private law. Thus, we see that many of the responses to the resource extraction problem are conceived in the public law arena, such as the "Ruggie Framework,"²² or in non-binding corporate codes of conduct.

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These are all important ways of addressing the resource extraction problem. However, private law approaches, like the Third Party Beneficiary Principle, would powerfully complement these current approaches. The...