On February 21, the International Finance Corporation (IFC) is expected to release its long-delayed proposal on remedy and launch a public consultation, an effort it says is meant to “strengthen accountability throughout the project life cycle.” This is a critical test for an institution that has steadfastly refused to accept any responsibility for, let alone remedy, harms resulting from projects it has enabled.
As the private-sector lending arm of the World Bank Group, the IFC’s stated mission is to reduce poverty and promote development while doing “no harm” to people and the environment. But too often, IFC-financed projects have resulted in significant harm to individuals and communities. How IFC grapples with the right to remedy, and in particular, how it treats these past harms, or “legacy” cases, will be closely scrutinized. That is all the more true given IFC’s role as an industry standard-setter on “responsible” investment. Since other development and commercial banks typically adopt IFC policies and standards, its approach to remedial action could have global ramifications.
As advocates, communities, the public, and others prepare to review IFC’s proposal, it is worth looking back at IFC’s approach to the Tata Mundra communities’ struggle for justice in Jam v. IFC.
The Jam case
The IFC provided the funding necessary for the Tata Mundra Power Plant project to go forward, despite knowing that it would result in irreversible harm to people and the environment. And as the IFC predicted, the plant has destroyed the local environment that fishing and farming communities depend on for their livelihoods and polluted the air to dangerous levels. Far from lifting these communities out of poverty, as IFC’s financing is meant to do, it has left them worse off, and their search for remedies has come up empty at every turn.
After the communities filed a complaint, the Compliance Advisor Ombudsman (CAO), IFC’s internal grievance mechanism, issued a scathing report in 2013, finding IFC had failed to abide by its own policies and standards at virtually every stage. Although the CAO explicitly called for remedial action, IFC management chose to do nothing. Repeated calls for action in subsequent monitoring reports likewise went unaddressed.
With no other options, the communities filed suit against the IFC in Washington, D.C., in 2015. Rather than defend itself on the merits, IFC argued that it was entitled to “absolute immunity” from any lawsuit, no matter how much harm it may have caused. That issue went up to the U.S. Supreme Court, which in 2019 held, in a landmark decision, that international organizations like IFC are not entitled to such sweeping immunity but rather can be sued in the same circumstances as foreign governments. When the case returned to the trial court, IFC again advanced sweeping new arguments for immunity under the rules applicable to foreign states.
We highlight here a few notable takeaways from the way IFC sought to evade accountability in the Jam case, which should inform assessments of IFC’s approach to remedy, and whether it truly addresses existing barriers.
The IFC has never provided remedies in response to CAO findings of wrongdoing
The CAO provides a means for communities to voice grievances, and it has made a difference in some instances for some communities, particularly through dispute resolution. However, no CAO case has ever resulted in IFC directly providing remedies, such as compensation or restitution, to communities for serious harms, such as violations of human rights or environmental destruction, that have already occurred. And without some significant change, it never will. This isn’t a criticism of the CAO or its staff. IFC designed it to lack any power to compel IFC action. IFC management can do whatever it wants in response to the CAO’s recommendations – including nothing.
The Jam plaintiffs experienced precisely this and emphasized that without the ability to pursue claims in court, they would have no alternative avenue to seek redress. IFC responded by arguing both that the CAO has no power whatsoever to require remedial action and, at the same time, that this fact was irrelevant. The CAO’s mere existence, no matter how “fundamentally flawed” it was, argued IFC was enough of an “alternative” to justify complete immunity.
While recent reforms to the CAO have improved accessibility, among other things, it remains powerless to compel remedial action. It’s worth noting how the CAO compares to the system that hears employment-related grievances. Recognizing that justifying immunity from suit required creating a mechanism of dispute resolution for employees’ claims, in 1980, the World Bank created an independent claims tribunal. The Administrative Tribunal is an independent body, not an office within the IFC, with independent judges that have the power to issue orders that bind the IFC and World Bank, including payment of compensation, among other remedies. Whether or not the Tribunal is a perfect model, the stark difference in mechanisms for these two categories of claimants is revealing.
The problem isn’t leverage; it’s IFC’s failure to use it
Faced with calls for action, the IFC often suggests it lacks leverage over the borrower. But that is often factually false. The Loan Agreement for the Tata Mundra project, produced in the course of the Jam litigation, shows that the IFC not only has vast economic leverage but significant legal authority in its existing contracts to prevent, mitigate, and remedy harm. It simply fails to use it.
The Loan Agreement, which includes standard terms that are regularly included in IFC’s contracts and not just the Tata Mundra project, shows, for example, that the borrower is obligated to pay for potential remedies in connection with violations of environmental and social obligations, even after the loan is repaid. The IFC also has broad indemnification rights where it incurs any costs in connection with such violations, meaning it can recover full costs from the borrower. Other examples include the IFC’s authority to change the borrower’s board of directors and senior management, the right to perform an independent audit of environmental and social compliance at the borrower’s expense, and the power to compel corrective action, with failure to comply constituting grounds for default.
In the Jam case, the IFC produced the agreement to try to argue that the plaintiffs had no rights under it. IFC told the court that it had “various contractual enforcement options” available to address “any violation of the IFC’s E&S Standards” by the borrower and that it was “perfectly capable” of enforcing its own contracts, policies, and standards on its own without the plaintiffs. But it made clear that IFC is “not required…to do anything in response” to violations.
In other words, IFC management has plenty of leverage that it can use to prevent and mitigate harm, as well as to ensure that communities obtain remedies when they are harmed by IFC investments. It just chooses not to exercise it. Thus, while better contractual terms may have some value when it comes to things like the creation of designated funds, it will only matter from a practical perspective if paired with changes that enable communities to make the IFC enforce the terms that are meant to protect them and a shift in incentives and culture within IFC management. Likewise, IFC also cannot credibly place all remedial obligations on the borrower and suggest its own duties are satisfied with drafting contractual provisions. Where the IFC’s own conduct contributes to causing harm, both the borrower and the IFC are responsible for their respective roles in causing that harm.
Communities have no reason to trust IFC’s word
Ultimately, IFC’s position before the court was that its commitment to “do no harm” and its environmental and social standards are neither meant to benefit or protect communities nor enforceable. That was a bit shocking, given how frequently the IFC touts these key aspects of its mission. But in making such claims, the IFC has wholly undermined any trust communities might have in IFC’s word. It’s worth remembering that IFC is required to show “broad community support” before proceeding with major projects. But what community would trust IFC’s claims that a project will do no harm when IFC can go back on its word and leave them with no recourse?
Learning the wrong lessons
In urging the court to hold it was immune from suit, IFC repeatedly argued that allowing the case to proceed would “open the floodgates of litigation,” that communities everywhere would inundate the IFC with lawsuits, and it would no longer be able to function. That is a wildly unrealistic argument; it ignores the immense power, access, and economic imbalance between the IFC and project-affected communities, among other substantial barriers to litigation that such communities face. It also misses the far more obvious lesson that IFC could have learned from the Jam litigation: If management had simply listened to the CAO in this case and followed its recommendations, litigation would never have been necessary in the first place.
Instead, IFC argued it needs to be above the law, even asserting that having to follow the laws in each of the countries in which it operated would “chill” IFC’s “willingness to lend money to business entities in developing countries, which frequently struggle to conduct industrial activity in accordance with sound environmental practices.” Hmm.
IFC has long believed it is entirely above the law. And people and entities who believe they are above the law act like it. Only when the Jam case was accepted by the Supreme Court did IFC management start using words like “accountability” for seemingly the first time.
In 2022, the case was dismissed on the basis that the plaintiffs hadn’t satisfied the commercial activity exception to immunity in this specific instance. We believe that ruling – which only concerns U.S. law – got both the law and the facts wrong. But it would be a mistake for IFC management to view that decision as insulating it from future liability. The ruling left open more questions than it answered, and it does not bar different cases from going forward in U.S. courts. Perhaps even more significantly, it says nothing about suits in other countries with different laws, including in jurisdictions where the lack of access to alternative remedies is more likely to bar immunity.
Whether IFC management realizes it or not, legal liability is an ongoing risk. But contrary to its approach in Jam, the surest way to minimize that risk is to abide by its own policies and standards, to conduct robust due diligence, to actually listen to the CAO, and to take remedial action where harm occurs. This means getting remedy right with this process – doing right by communities who have been harmed and putting in place meaningful reforms that will prevent such harms going forward.
We’ll be watching next week to see whether the IFC uses this opportunity to learn the right lessons – or whether it’s more of the same.