When can a company be liable for the actions of its subsidiary?

Publication | March 2018

The Court of Appeal’s decisions in the cases against Vedanta and Royal Dutch Shell highlight important points about parent company liability – Okpabi and others v Royal Dutch Shell Plc and another [2018] EWCA Civ 191; and Lungowe and others v Vedanta and KCM [2017] EWCA Civ 1528.

Summary

Two recent Court of Appeal cases have answered important questions about when a parent company can be liable alongside its non-UK subsidiary for harm occurring abroad, but left open the possibility that a parent company could be liable to communities affected by the operations of its subsidiary.

In October 2017, the Court of Appeal held that 1,826 Zambian villagers could bring a claim in the English courts against UK-based Vedanta Resources Plc (Vedanta) and its Zambian subsidiary Konkola Copper Mines Plc (KCM).

Separately, in February 2018, the majority of the Court of Appeal (Sales LJ dissenting) held in favour of English-incorporated Royal Dutch Shell Plc (RDS) and its Nigerian operating subsidiary, Shell Petroleum Development Company of Nigeria Ltd (SPDC), refusing residents of the Niger Delta region the ability to bring a claim in the UK on the basis that the claimants had failed to put forward a good arguable case that RDS owed them a duty of care.

Both cases are likely to be appealed to the Supreme Court.

Background

In Vedanta, residents of the Zambian city of Chingola brought civil proceedings against Vedanta, a UK incorporated parent company, and KCM, its Zambian subsidiary, claiming that waste discharged from the mine – owned and operated by KCM – had polluted the local waterways, causing personal injury to the local residents, as well as damage to property and loss of income. The claims were founded in negligence, although the allegations against the subsidiary also related to breaches of applicable Zambian environmental laws. Despite the fact that the alleged tort and harm occurred in Zambia, where both the claimants and KCM are domiciled, the High Court held that the claimants could bring their case in England. The defendants appealed this decision on the grounds that: (a) the English courts did not have jurisdiction to hear the claims against Vedanta; and (b) that the appropriate place to bring the claims against KCM was Zambia. However, in October 2017, the majority of the Court of Appeal dismissed the defendants’ appeal and held that the claimants’ case could proceed before the English courts.

In Okpabi, residents of the Niger Delta brought a claim in negligence against English-incorporated RDS and its Nigerian operating subsidiary SPDC, claiming that they had been victims of oil leaks from the pipelines operated by a joint venture which was owned in part by SPDC. In January 2017, the High Court decided in favour of the defendants on the basis that the claimants had failed to present a properly arguable case that RDS owed them a duty of care. On February 14, 2018, the majority of the Court of Appeal dismissed the appeal on the grounds that the claimants had not demonstrated a good arguable case that RDS owed them a duty of care.

A “real issue” between the claimants and the parent company

In both cases the Court of Appeal addressed whether it is possible for a duty of care to be found between the parent company and those affected by the actions of its subsidiary, such that there was a real issue to be tried between the claimants and the parent.

In answering this question, the Court of Appeal examined a number of cases which applied the classic three-part test for establishing a duty of care set out in Caparo Industries Plc v Dickman [1990] 2 AC 605 (the three stages being: (i) proximity; (ii) foreseeability; and (iii) reasonableness) and concluded that a parent company could owe a duty of care to those directly affected by its subsidiary if the claimant could demonstrate “additional circumstances”, for example, that the parent company took direct responsibility for drafting and devising the policies the adequacy of which was the subject of the claim; or the parent company controlled the operations which give rise to the claim. In both cases the Court cited

  • Chandler v Cape Plc [2012] EWCA (Civ) 525, in which the parent company was found to have assumed a duty of care towards the employees of its subsidiary (who had been exposed to asbestos) because of the parent company’s “state of knowledge” about the factory in which these employees worked and “its superior knowledge about the nature and management of asbestos risks” associated with its subsidiary’s operations.
  • Thompson v The Renwick Group Plc [2014] EWCA Civ 635, in which no duty of care was found between the parent company and the employees of its subsidiary, as there was no evidence that the parent carried on any business apart from holding shares in its subsidiaries, and so it was not “better placed because of its superior knowledge or expertise, to protect the employees of subsidiary companies”.

Vedanta

In Vedanta, although the parent argued it neither owned the mine licence nor controlled the “material operation” of the mine, it was held that the claimants’ case on duty of care was arguable on the basis that Vedanta had

  • Published a sustainability report which emphasised how the Board of the parent company had oversight over its subsidiaries.
  • Entered into a management and shareholders agreement under which it was obligated to provide various services to KCM, including employee training.
  • Provided health, safety and environmental training across its group companies.
  • Provided financial support to KCM.
  • Released various public statements emphasising its commitment to address environmental risks and technical shortcomings in KCM’s mining infrastructure.
  • Exercised control over KCM, as evidenced by the witness evidence of a former employee.

In Vedanta, the Court of Appeal stressed that it would not engage in a mini-trial on duty of care. This leaves open the possibility that during the trial on the substantive issues, the Court may find that Vedanta did not owe a duty of care to the claimants. Nonetheless, the case (which is still at an early stage) is an example of an English court finding that there is a real issue to be tried between non-UK claimants and a parent company at an early stage.

Okpabi

By contrast, in Okpabi the majority of the Court of Appeal held that the English court lacked jurisdiction to try the claims against SPDC because there was no real issue between the claimants and RDS. The majority held that none of the “Vedanta factors” (listed above) were present in Okpabi and that the evidence presented at this stage was insufficient to establish a good arguable case on duty of care against the “anchor” defendant (RDS). While Vedanta had a majority 80 per cent shareholding in KCM, the subsidiary that operated the mine which caused the damage, RDS was further removed from the pipeline from which the damage allegedly emanated. On the facts, the Okpabi pipeline is owned by a joint venture in which SPDC is only a minority stakeholder.

Majority decision of Simon LJ and Sir Geoffrey Vos

Although there was no dispute that the foreseeability limb of Caparo was likely to be satisfied, the majority of the Court of Appeal ruled that

  • The claimants had failed to demonstrate the necessary degree of proximity between themselves and RDS.
  • That it would not be fair, just and reasonable to impose a duty of care on RDS.

In relation to proximity, the claimants argued five main points to demonstrate RDS’s arguable control of SPDC’s operations

  • The issue of mandatory policies, standards and manuals which applied to SPDC.
  • The imposition of mandatory design and engineering practices.
  • The imposition of a system of supervision and oversight of the implementation of RDS’s standards which bore directly on the pleaded allegations of negligence.
  • The imposition of financial control over SPDC in respect of spending, which, again, was directly relevant to the allegations of negligence.
  • A high degree in the direction and oversight of SPDC’s operations. The Court of Appeal stressed that for a duty of care to arise it would be necessary to establish that the parent had taken control or joint control of the relevant operations: issuing mandatory policies and standards which are intended to apply throughout a group of companies was not in itself sufficient evidence of such control, particularly as there was no evidence that RDS sought to enforce these policies and standards and SPDC was left to operate the system of supervision and oversight that RDS had devised.

The Court also rejected the claimant’s argument that it would be fair, just and reasonable to impose a duty of care on RDS on the basis that it was unlikely that an international parent such as RDS would undertake a duty of care to all of those affected by the operations of all of its subsidiaries.

Dissenting opinion of Sales LJ

Sales LJ disagreed with the majority, and would have allowed the appeal. In the event that the Supreme Court accepts an appeal in Vedanta and Okpabi it is worth noting his reasons.

Sales LJ thought that the claimants had a good arguable case that RDS had assumed a material degree of responsibility in relation to the management of the pipeline and facilities and so could be found to owe the claimants a duty of care. He disagreed with the trial judge’s conclusions, stating that it is irrelevant that RDS did not own shares in SPDC and is not a member of the joint venture that holds the pipelines as it could still be shown to exercise material control over the conduct of SPDC in managing the pipeline. He also disagreed with the trial judge’s view that the recognition of a duty of care on the part of RDS would potentially impose “liability in an indeterminate amount, for an indeterminate time, to an indeterminate class”. Sales LJ posited instead that whether RDS owes a duty of care in relation to the operations of subsidiaries will depend upon whether the operations of those subsidiaries arise in the context of affecting a foreseeable and proximate class of claimants (such as neighbouring property owners affected by oil spills) and whether on the facts RDS has assumed a material degree of responsibility for how the relevant operations of any particular subsidiary are carried out.

Lessons

The judgments in Vedanta and Okpabi provide guidance to companies on when the English courts may be willing to accept jurisdiction for claims by non- UK claimants relating to the operations of non-UK subsidiaries.

Vedanta highlights the need for multinational companies to be aware of the possibility that non-UK claimants may be able to bring claims against them in the English courts arising from the operations of foreign subsidiaries, as well as the possibility that the scope of the potential class of claimants will be broad enough to include communities affected by the operations of a local subsidiary. Okpabi clarifies this point by demonstrating that the English court will only accept jurisdiction in cases where the parent anchor defendant can be said to have assumed a material degree of responsibility for the operations of its subsidiary. This requires more than just the issue of mandatory policies and standards across the group, but rather, active supervision and oversight of the enforcement of these policies and standards in the operations of the subsidiary. Both cases are likely to be appealed to the Supreme Court and so we can expect welcome authoritative precedent on these points.


Contacts

Ruth Cowley

Ruth Cowley

London
Stuart Neely

Stuart Neely

London
Maria Kennedy

Maria Kennedy

London