Bringing responsibility home — what next for parent company liability?

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Speed read: The Supreme Court’s jurisdictional judgment in Lungowe v Vedanta holds that parent company liability is an unremarkable proposition in theory. Establishing it in practice, however, is a fact-specific exercise. The court rejected the companies’ multi-faceted challenges to the jurisdiction of the English courts; the result turned on factual findings made at first instance. The judgment makes it easier to anchor liability against UK parent companies in order to establish jurisdiction. However, the judgment includes a release valve in that if another jurisdiction would be the more natural forum to hear the dispute, the jurisdiction of the English courts will depend on whether substantial justice can be achieved in that other place. Against that background, this post makes two predictions. 

This Bulletin was selected for publication by the Groningen Journal of International Law’s Blog, ‘International Law Under Construction’. It is reproduced here with GroJIL’s kind permission.

Introduction

The dust is settling on the UK Supreme Court’s unanimous decision in Lungowe v Vedanta. [1] In a judgment laced with metaphors, Lord Briggs depicts the English court as having “one hand tied behind its back” since the European Court of Justice held in Owusu v Jackson that proceedings against a UK-domiciled defendant could not be stayed on forum non conveniens grounds. [2] His Lordship laments that the court’s other hand has been ‘effectively paralysed’ by prior cases wrongly treating the risk of irreconcilable foreign judgments as a ‘trump card’ to be deployed by claimants in favour of English jurisdiction. Meanwhile, the court is left ‘beating its head against a brick wall’ by repeated failures to keep jurisdictional litigation within proportionate bounds. This is vivid imagery woven into a thorough analysis of whether England really ought to be the place to litigate environmental harm from a Zambian mine.

Notwithstanding such colourful afflictions, the Supreme Court shed the ‘unnecessary straitjacket’ adopted by lower courts, namely the four factors identified in Chandler v Cape by Arden LJ, as she then was, as tending to indicate parent company liability towards those affected by a subsidiary’s operations (in that case, the subsidiary’s employees). [3] Rather, a parent company’s liability towards third parties is to be anchored in ordinary duty of care principles. And after ‘anxious consideration’, although Zambia was obviously the more natural forum, the English lower court’s finding of a ‘real risk’ that substantial justice will not be achieved in Zambia, despite appellate intervention from the Zambian government to argue the contrary, means that the English courts shall exercise jurisdiction over the Zambian subsidiary (the mine operator) in addition to the English parent company.

In other words, the companies’ challenges to the jurisdiction of the English courts failed, and the claims can proceed to a trial of the merits. This is an important judgment which has already been the subject of many insightful comments and intense discussions. This post tries not to rehash what has been said already. Rather, it looks to what future cases might hold by making two short points.

  1. Parent company liability is unremarkable in theory but fact-specific in practice

The Supreme Court resoundingly rejected the argument that parent company liability towards those affected by a subsidiary’s operations is a novel category of negligence. Rather, tortious liability of this kind is in keeping with prior cases of high authority which recognise the possible obligation upon one person to intervene and control another person’s conduct, in some circumstances at least. Lord Briggs rooted his reasoning in the famous case of Dorset Yacht Co Ltd v Home Office [1970] AC 1004, in which the government was liable in tort for its failure to supervise ‘Borstal boys’ sent to work on an island, where some of them escaped from a detention centre and damaged yachts moored in the vicinity. This is a somewhat exceptional basis for liability towards third parties, because English law does not recognise aiding and abetting as a tort, and the corporate veil is a foundational, some might say mythical, principle of English law.

Lord Briggs disavowed attempts to shoehorn cases on parent company liability into specific categories. His Lordship stressed, for instance, that modern multinational corporate groups adopt models of management and control that know no limits. Results in particular cases will therefore depend on many factors. The Supreme Court’s judgment is a welcome restatement of fundamental principles, but it leaves considerable uncertainty as to the circumstances in which a duty of care will be made out against parent companies. Indeed, some corporate groups might now prefer a statutory framework, if one could be created, which stipulates their obligations in a more predictable way. [4]

The point I would stress, however, is that Dorset Yacht is a striking common law anchor for parent company liability. The damage caused by the Borstal boys was deliberate, not negligent, yet the Home Office was still held to be responsible. It was a case about a failure to supervise in circumstances where, the House of Lords held, boys marauding in the marina was an obvious risk, indeed it was a risk created by the Home Office by sending the boys to the island in the first place. In future cases, provided the applicable substantive law is, for all intents and purposes, accepted to be English common law, claimant lawyers and, perhaps even more significantly, litigation funders, will be buoyed by the Supreme Court’s approach to liability in Lungowe v Vedanta.

Pending future statutory intervention, cases will fill in the details of the precise circumstances when a duty of care exists (as opposed to it merely being sufficiently arguable to survive a jurisdiction challenge). Further cases will have to elucidate precisely what the relevant standard of care requires of parent companies in practice, and the sources of law (including, for example, developing international standards and practices) which inform the relevant standard of reasonable care. This is an area ripe for further litigation and clarification.

  1. Concerns about perverse incentives are overstated

The judgment gives a handful of specific examples when parent company liability might be established. In my view, these are merely illustrative examples emerging from the particular facts, rather than prescriptive categories for future cases, but they have received considerable attention.

First, Lord Briggs notes, group-wide policies may contain systematic errors which, if implemented, cause harm to third parties. Secondly, even if group-wide policies on their own do not give rise to a duty of care towards third parties, they may do so if a parent company takes ‘active steps’ to implement them. Thirdly, and perhaps most attention-grabbing of all, if the parent company misleadingly holds itself out as exercising supervision and control over its subsidiaries, the “abdication of a responsibility which it has publicly undertaken” may give rise to a duty of care on the part of the parent company.

Several commentators and practitioners have expressed concerns that the examples identified by Lord Briggs might create perverse incentives for English parent companies to do little, and say even less, lest they be fixed with an unwanted duty of care towards those affected by the operations of their overseas subsidiaries.

One answer to such concerns is that the increasing number of obligations on corporates to report on a group-wide basis, for example, do not allow parent companies to maintain silence. Furthermore, the overlap with increasingly onerous obligations to be found in the criminal law, for example in the realm of bribery, corruption and anti-money laundering, preclude a hands-off approach. Another answer is that attempts by parent companies to portray themselves, or even to adopt, a more hands-off approach, are unlikely to work in practice. For a start, Lord Briggs observed, in certain cases, the boundaries of legal personality and ownership within the group can become irrelevant in terms of overall management. In the real world, business teams overlay corporate structures. Individual job functions span the globe. For parent companies to think, or to be advised, that they should try to navigate the contours of Supreme Court’s judgment in Lungowe v Vedanta, and degrade their legal responsibilities, would be dangerously unrealistic. Try as they might, action and inaction can speak louder than words.

This will especially be the case where foreign subsidiaries operate in legal systems with stricter liability provisions than those familiar to English common law. One possible reason why parent companies have escaped liability in the past is that, although the substantive laws of the countries in which their subsidiaries operate may look good on paper, claimants sometimes struggle to mount effective litigation in the host state. The Supreme Court’s judgment confirms that, even under English law duty of care principles, responsibility can be brought home to the parent company.

Writing in another context, Preet Bharara, the former US Attorney for the Southern District of New York, makes a similar point in his recent book Doing Justice: A Prosecutor’s Thoughts on Crime, Punishment, and the Rule of Law. Although he focuses on criminal law and practice, Mr Bharara stresses the dangers of corporate cultures which try to ‘walk the line’ of potential liability. Attempts to quantify ethics and obligations are, in his assessment, ‘off base’ and a corporate ‘culture of minimalism’ can be lethal in the long run. The same goes for UK parent companies should they think that they can re-write group policies, or adjust their involvement with foreign subsidiaries, in a crafty effort to avoid civil liability at home. As Suzanne Spears, a partner at Allen & Overy, recently put it,

“Now is the time to double down and put in strong policies on human rights and the environment.” [5]

Conclusions: Brexit and Beyond

The Supreme Court’s judgment in Lungowe v Vedanta promises to resonate beyond even a hard-Brexit and the current application of Article 4 of the Recast Brussels Regulation (Regulation (EU) 12/15/2012) on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters. Lord Briggs reasons that the assertion of automatic jurisdiction under EU law over an English anchor defendant is not sufficient to enable a party to proceed against a co-defendant domiciled outside the EU. It is for this reason that the Supreme Court and courts below were drawn into (sometimes uncomfortable) analyses of whether claimants will obtain substantial justice in Zambia.

This aspect of the analysis harks back to the pre-Brussels Regulation era, based on common law forum non-conveniens grounds. Succinctly Brexit-proofing the analysis, Lord Briggs put it as follows:

“If there is a real risk of the denial of substantial justice in a particular jurisdiction, then it seems to me obvious that it is unlikely to be a forum in which the case can be tried most suitably for the interests of the parties and the ends of justice.”

This poses obvious comity questions. On one view, it risks drawing the English courts further into patronising, possibly hypocritical, reviews of the adequacy of foreign judicial systems. Some might also question whether this should be a priority when the English legal system is hard-pressed enough. To the contrary, where it is appropriate on the facts of individual cases, the English courts can and should bring some measure of responsibility to a parent company’s doorstep. Maybe that’s what taking back control should really mean.

[1] [2019] UKSC 20.

[2] (Case C-281/02) [2005] QB 801.

[3] [2012] EWCA (Civ) 525.

[4] In April 2019, for example, numerous civil society organisations launched a campaign calling for an effective law to require companies and investors to take action to prevent human rights abuses, worker exploitation and environmental harm in their global operations, activities, products, services, investments and supply chains. See https://corporate-responsibility.org/wp-content/uploads/2019/04/190409_UK-mHRDD-campaign-statement_FINAL-with-logos.pdf.

[5] Quoted by Brooke Masters, “National courts have global companies in their sights: well-developed legal systems are being used to bring corporates to account,” Financial Times, 14 May 2019, available at: https://www.ft.com/content/22d0a06c-73d3-11e9-be7d-6d846537acab.