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27 Apr 2021

Facing up to responsibility: Parent liability for overseas subsidiary actions in the English courts

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The Supreme Court's decision in Okpabi v Royal Dutch Shell Plc1 provides further insight into the circumstances in which English courts will accept jurisdiction to hear claims against UK parents for the harmful activities of overseas subsidiaries. In this article we focus on four key takeaway points from the decision and consider the question – is it now easier to sue a UK parent in the English courts for the actions of its overseas subsidiaries?

Summary of key points:

  • It now appears easier for claimants to cross the threshold of what constitutes an arguable claim, when trying to bring a claim in the English courts for the harmful activities of a UK parent company's overseas subsidiary.
  • In the tort of negligence, there is no special test or distinct category of liability for parent companies in relation to the activities of their subsidiaries.
  • In parent liability claims, control of the subsidiary is only a starting point. The key issue is the extent to which the parent takes over or shares management of the relevant activity, which may or may not be demonstrated by parental control. This analysis could arguably have wider implications for other entities who assume responsibility for subsidiary activities.
  • Parent companies need to balance carefully different considerations when it comes to disseminating and implementing group-wide policies or standards. Parents need to minimise the risk of duty of care claims for the activities of subsidiaries, while at the same time ensuring that various legal and regulatory requirements are met and they have an appropriate approach to group and subsidiary governance and risk.
  • The cases discussed here are jurisdictional challenges. The substantive question as to whether the UK parent owed a duty of care to the claimants remains to be decided at a full trial.

 

The Okpabi decision

In February 2021, the Supreme Court held that two communities in Nigeria can bring proceedings in the English courts against Royal Dutch Shell and a Nigerian operating subsidiary for negligence and that the Court of Appeal had been wrong in deciding that there was no real issue to be tried. The local communities claim that oil spills from the Nigerian subsidiary's operations caused widespread environmental damage and contaminated water sources. Now the claimants have shown an arguable case that Royal Dutch Shell, the UK domiciled parent company, owed them a common law duty of care, and that the Nigerian subsidiary is a necessary and proper party to the English proceedings, their claims can proceed to a full trial.

When claimants want to bring a claim in the English courts for the harmful activities of an overseas subsidiary of a UK parent company, the claimants have to demonstrate the existence of a real triable issue against the anchor defendant, the UK parent company. In this type of claim, there needs to be an arguable case that the UK parent owed a direct duty of care to the claimants. If that is established, the overseas subsidiary can then be joined under the "necessary or proper party" jurisdictional gateway2 to the English proceedings. Before Okpabi, there were two other similar jurisdictional challenges concerning parental responsibility before the Supreme Court in 2019, with differing outcomes.

Background: The 2019 decisions

In Vedanta v Lungowe3, proceedings were brought by farming communities in Zambia for negligence and breach of statutory duty, against English parent company Vedanta Resources plc and a Zambian operating subsidiary, Konkola Copper Mines Plc (KCM). KCM operated a copper mine which the claimants alleged had polluted their only water sources. The Supreme Court allowed the claims to proceed to trial, finding a triable issue in whether Vedanta sufficiently intervened in the management of the copper mine to have incurred a common law duty of care to the claimants or a fault-based liability under Zambian legislation. It is worth noting in Vedanta that England was not considered by the Supreme Court to be the proper place to bring the claims against Vedanta and KCM, but the claimants' lack of access to substantial justice in Zambia, including Zambian law not permitting conditional fee arrangements with lawyers, led the Supreme Court to accept the jurisdiction of the English courts. The Vedanta case clarified the law in this area and it is the principles and guidance set out in Vedanta that have now been reaffirmed in Okpabi, a case with similar substantive issues.

By contrast, in AAA v Unilever4, the Supreme Court refused the claimants' permission to appeal from the Court of Appeal's decision, upholding the English parent Unilever's jurisdictional challenge. This was decided shortly after Vedanta. In the aftermath of the Kenyan presidential elections in 2007, a tea plantation operated by a Kenyan subsidiary of Unilever was invaded by mobs, who subjected employees and visitors to horrendous violence. Those employees and visitors tried to bring proceedings against Unilever and its Kenyan subsidiary in the English courts, claiming that they should have foreseen the risk of violence and alleging a breach of duty of care to protect them by failing to have adequate crisis management plans in place. However, the claimants failed to establish a real issue to be tried against the anchor defendant Unilever and when permission to appeal was refused by the Supreme Court, their claims in the English courts ended there. This case demonstrates a point made in Vedanta, that whether a parent owes a direct duty of care to claimants is dependent on the facts of each case. The Supreme Court's decision does not mean that it would necessarily have reached the same conclusion as the lower courts on whether a duty of care existed, it means that the appeal did not raise an arguable point of law of general importance. Possibly, had the lower court had the benefit of the decision in Vedanta before hearing the case, it may have come to a different conclusion.

Some key takeaway points from Okpabi

So after the Supreme Court's decision in Vedanta and refusal of permission to appeal in Unilever, what can we take away from the more recent case of Okpabi? It should be noted that in Okpabi, the Supreme Court was hearing an appeal from a decision of the Court of Appeal decided before the Supreme Court's clarifications of this area of law in Vedanta.

The need to focus on the arguability of the claim and avoid mini-trials

The Supreme Court in Okpabi highlights the lack of focus of the inquiry of the lower courts, accusing the parties of "swamping" the court with evidence. The effect of this was to draw the courts into a mini-trial which was not the correct approach and led the Court of Appeal to materially err in law in its analysis of the procedure for determining the arguability of the claim. In conducting an evaluation and judgement based on the weight of the evidence, it failed to focus on the arguability of the claim and to wrongly discount the prospect of there being further relevant evidence on disclosure. In addition, the Supreme Court cautions against the danger of summarily determining issues in parent/subsidiary cases such as this, without the disclosure of internal documentation. 

As to what threshold constitutes an arguable case, the Supreme Court lays down the principle that the factual statements supporting the claim "should be accepted unless, exceptionally, they are demonstrably untrue or unsupportable". That would appear to be quite a low threshold to meet. It seems likely that the practical effect of this judgment will be to make it easier for claimants to cross the threshold of arguability (unless the pleaded case can be shown to be clearly untrue or unsupportable).

There's still nothing special about a parent's liability in negligence

The Supreme Court restates that in the tort of negligence there is no special test or distinct category of liability for parent companies in relation to the activities of their subsidiaries, which follows commentary in Vedanta and Unilever. Whether a parent has a duty of care to a harmed third party, comes down to ordinary, general tortious principles which would apply in the same way if asking whether any other third party owes a duty of care.

It's not all about control, de facto management is the issue

The Supreme Court also makes some interesting comments on the question of the importance of control, further expanding on its guidance in Vedanta. In Okpabi, it emphasises that parental control is only a starting point. Rather than focussing on control, the key issue is the extent to which the parent takes over or shares management of the relevant activity, which may or may not be demonstrated by parental control: "That control gives the parent the opportunity to get involved in management. But control of a company and de facto management of part of its activities are two different things." In Vedanta, Lord Briggs explained that a parent company may be in a position to take control of the management of the business or land owned by a subsidiary but there is not any duty upon the parent to do so. It all depends on the extent to which the parent uses the opportunity to take over, intervene in, control, supervise or advise the management of the subsidiary's operations.

In fact, the Supreme Court reiterates its view in Vedanta, that a duty of care may arise regardless of the exercise of control, with the example of a parent who can assume responsibility by publicly holding itself out as exercising a degree of supervision and control of its subsidiaries, even if it does not exercise it in practice.

The importance placed by the Supreme Court on the involvement in management rather than control through a shareholding, could have wider implications for entities other than parent companies. It is arguable this could catch those who fall into the Supreme Court's descriptions, for example any persons who take over, intervene in, control, supervise or advise the management of a subsidiary's operations for a particular activity or those asserting responsibility by holding themselves out publicly as performing supervision and control of it. So those assuming responsibility for the management of activities could face claims, as well as the parent and local subsidiary for any harm caused by those activities, although a direct duty of care to the claimants would need to be found to establish liability.

The Supreme Court also makes observations about the vertical organisational structure of the Shell group along business and functional lines, rather than legal entities and this was considered of significance. It was of the view that the dispute between the parties as to the organisational structure of the Shell group and the extent of delegated authority clearly raised triable issues, where proper disclosure would be of importance.

No limiting principle when it comes to group-wide policies

The Court of Appeal in Okpabi, had indicated that the fact a parent company disseminates group wide policies or standards could never in itself give rise to a duty of care. The Supreme Court disagrees, finding it inconsistent with Vedanta. It reiterates that there is no limiting principle that a parent company could never incur a duty of care in respect of the activities of a subsidiary merely by laying down group-wide policies and guidelines and expecting management of each subsidiary to comply with them. It quotes the example from Vedanta, of group guidelines containing systemic errors which then cause harm to third parties, when implemented by the subsidiary. So a parent company could be found to have a duty of care from promulgating group-wide policies or standards which have fundamental mistakes in them.

In Vedanta, Lord Briggs regarded the laying down and implementation by Vedanta of environmental control standards through training, monitoring and enforcement, as sufficient on their own to show an arguable case that a sufficient level of intervention by Vedanta in the mine's operations could be demonstrated at a full trial.

This arguably places parent companies in a difficult position when it comes to disseminating and implementing group-wide policies or standards. A balance needs to be found between minimising the risk of duty of care claims for the activities of subsidiaries but also ensuring that they meet various legal and regulatory requirements, avoid the risk of civil and criminal actions for breach of these (e.g. anti-bribery and corruption legislation) and have an appropriate approach to group and subsidiary governance and risk in general. This demonstrates the growing need for groups to review and consider their governance structures and policies, the ways in which they delegate functions and responsibilities through the group and other internal controls, with these possible implications in mind. They may also want to identify and reduce any relevant Environmental, Social and Governance risks in the first place.  

Is it now easier to sue a UK parent in the English courts?

There are many reasons why overseas claimants may want to sue an overseas subsidiary and its UK parent in the English courts. These can include the availability of more assets to meet compensation claims, wanting to hold parent companies to account for harmful activities or barriers to legal justice making compensation claims difficult or even impossible in some countries. If claimants fail to show an arguable case and lose at this jurisdictional hurdle, then they are left having to claim against the overseas subsidiary in the local courts where they suffered the harm, which may be very difficult or even impossible in some circumstances. So after the decisions in Vedanta and Okpabi, can it now be said that it is easier to bring parent company duty of care claims in the English courts?

Both Okpabi and Vedanta are decisions on the question of jurisdiction only, providing guidance on the approach of the English courts in deciding whether there is a real issue to be tried against UK parents. Although it could be said the threshold for what constitutes an arguable case in jurisdictional challenges is set quite low after Okpabi and so it is easier for overseas claimants to commence proceedings in the English courts, the question of whether a duty of care was in fact owed to the claimants by the UK parent in each case, would fall to be decided at the substantive trials, however Vedanta was settled earlier this year. AAA v Unilever is a reminder that these cases are fact specific.

The outcome of any substantive trial will be closely followed by campaigners, communities affected by environmental pollution or harmful or abusive activities and the multinational groups that could potentially face more litigation in the English courts.

1 Okpabi and others v Royal Dutch Shell Plc and another [2021] UKSC 3

2 Paragraph 3.1(3) of Practice Direction 3B to the Civil Procedure Rules

3 Vedanta Resources PLC and another v Lungowe and others [2019 ] UKSC 20

4 AAA and others v Unilever PLC and Unilever Tea Kenya Limited [2018] BCC 959

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