Parent company liability — where are we headed?

Speed read: On 15-16 January 2019, the Supreme Court will hear an appeal on the civil liability of a UK-domiciled parent company towards persons affected by the operations of its overseas subsidiary.

The appeal in Lungowe and others v (1) Vedanta Resources Plc; and (2) Konkola Copper Mines Plc [2017] EWCA 1528 is one of a trilogy of tort cases making their way through the English courts. On 20 November 2018, Russell Hopkins and Jonathan Fisher QC hosted a breakfast briefing at the Walbrook Club in the City of London, to discuss the issues involved and offer some thoughts on how the Supreme Court might approach the appeal in Vedanta. This BLL Bulletin summarises some of the issues that Russell and Jonathan discussed.

A trilogy of cases on parent company liability

Lungowe and others v (1) Vedanta Resources Plc; and (2) Konkola Copper Mines Plc [2017] EWCA Civ 1528

The claim in Vedanta is brought by approximately 1,800 Zambian villagers following pollution from a copper mine owned and operated by KCM — a Zambian company in which Vedanta Plc has a majority interest via another subsidiary. As is common in extractive industries, the host state (in this case Zambia) requires mining licences to be locally owned.

The companies challenged the jurisdiction of the English court. Vedanta’s defence was, in essence, that the claim against the parent company was a device used to bring Zambian events before an English court. However, the claimants identify various factors which, on their case, reveal the existence of a duty of care owed by the parent company to those affected by the subsidiary’s operations, including: (1) group level sustainability reports; (2) a management and shareholders’ agreement; (3) group-wide health and safety training; (4) extensive financial support in the region of $3 billion; (5) public statements about Vedanta’s commitments; and (6) evidence from a company whistleblower describing the degree of control exercised by the parent company.

The trial judge (Coulson J) rejected the companies’ jurisdictional challenges. This was confirmed by a unanimous Court of Appeal, which held that there was an arguable case against Vedanta Plc such that the claims should proceed to trial in England.

Simon LJ summarised two situations when a parent company might owe a duty of care: (1) when the parent company has taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim; or (2) when the parent company controls the operations which give rise to the claim. He noted Vedanta’s submission that, in no case to date, had such an expansive duty towards those affected by subsidiaries’ operations been found; but continued as follows:

“That may be true, but it does not render such a claim unarguable. If it were otherwise the law would never change.”

This is stirring language for claimant lawyers.

Okpabi and others v (1) Royal Dutch Shell Plc; and (2) Shell Petroleum Development Company of Nigeria Ltd [2018] EWCA Civ 191

The claim in Shell relates to oil pollution in the Niger Delta, said to be caused by poor maintenance of pipelines and repeated failures to tackle illegal bunkering or siphoning of oil which, left unchecked, leads to devastating pollution. There are claims by two communities who neighbour pipelines operated by Shell’s Nigerian subsidiary (SPDC) — which is a minority partner in a joint venture with Nigeria’s national oil company and other companies.

By way of brief background, in 2015 Shell had settled a claim brought by another community in the Bodo case for £55 million. In this earlier case, SPDC submitted to English jurisdiction on the basis that the claim against the parent company was stayed. Since the settlement, chastened by its earlier experience, Shell has challenged the jurisdiction of English courts to hear further cases.

At trial, Fraser J identified factors which, in his view, distinguished the case from Vedanta. He concluded that there was no arguable duty owed by the parent company towards the claimants.

The Court of Appeal split, but it upheld the finding of no arguable duty on a different basis to the trial judge. The majority comprised Simon LJ and Sir Geoffrey Vos – the Chancellor of the High Court. (Whereas Simon LJ found in favour of jurisdiction in Vedanta; he reached the opposite conclusion in Shell.) The majority went to some length to downplay the relevance of group-wide reports and procedures; and distinguished the situation of a parent company which controls, or shares control, of ‘material operations’, compared with a parent company which simply issues policies (albeit supposedly mandatory ones). Simon LJ characterised Shell’s policies as being “to ensure that there were proper controls and not to exercise control”. Sir Geoffrey Vos emphasised that the parent company was just a minority shareholder, and said that the evidence fell short of Shell “assuming responsibility for, or controlling the day-to-day operations of SPDC.”

Sales LJ (soon to be Lord Sales) gave a detailed dissent, identifying numerous evidential features which, in his view, made it arguable that the parent company indeed owed a duty towards the claimants.

AAA and others v (1) Unilever Plc; and (2) Unilever Tea Kenya Limited [2018] EWCA Civ 1532

The Unilever case differs from the other two in that it is not about pollution. It concerns violence at a tea plantation in Kenya’s Rift Valley after the 2007 election. The 218 claimants were employees, or are the estates of deceased employees, and they are all of Kisii ethnic origin. Importantly, the plantation was located in what the judgement describes to be a Kalenjin tribal area.

After the election result was declared, some of those who supported the losing candidate went on a violent criminal rampage. The claimants essentially contend that they were sitting ducks in a rival area — put there by Unilever — in a situation of widespread breakdown of law and order.

The trial judge (Elisabeth Laing) found that the damage was simply not foreseeable by either the Kenyan subsidiary, or by Unilever Plc in the UK. The claims therefore failed to pass the first limb of Caparo Industries PLC v Dickman [1990] UKHL 2. On the questions of proximity and whether it was fair, just or reasonable to impose liability, the trial judge discussed these features together and found the matter to be finely balanced. However, the trial judge distinguished Unilever’s corporate structure from that of Shell and Vedanta. The judge concluded that there was no arguable claim against Unilever Plc and therefore no English jurisdiction to hear the claims.

On appeal, the Court of Appeal confirmed there was no English jurisdiction. However, it took a different route to reach that conclusion. Sales LJ wrote the only judgment and focused on a lack of proximity between the claimants and the parent company. He identified additional evidential factors which, in his assessment, showed that all risk management matters were undertaken in Kenya; and to the extent that anything went higher up to the UK parent company, it was generic and not particular to the tea plantation in question.

Five observations on how the Supreme Court might approach the appeal

Point one: the need for clarity and a possible starting point

  • The various judgments in the trilogy are not always clear or consistent when they identify features relevant to deciding whether a parent company owes a duty of care. Trial judges have sometimes struggled to apply previous authorities; and the Court of Appeal has frequently taken a different approach to the evidence, even when upholding the overall result. Greater clarity is needed in this area.
  • As to where the Supreme Court could start its analysis, it may be helpful to dispel any notion that these cases might pierce the corporate veil. Rather, they concern the direct liability of the parent company towards those persons affected by a subsidiary’s operations.
  • There is a danger that judges’ entirely understandable concerns to respect the separate legal personality of companies might lead to imposing much too high a bar for any duty of care to arise. For example, some of the judgments below focus on whether the parent company actively controlled the subsidiary’s day-to-day operations. A test based on such an absolute level of control finds little support in the authorities.

Point two: a threshold test at the jurisdiction stage

  • An important issue in the trilogy of cases is the margin of jurisdictional openness which an English court should allow when a case raises difficult and contested points. Lord Collins in AK Investment CJSC and others v Kyrgyz Mobil Tel Ltd and others [2011] UKPC 7 confirmed that courts should be slow to decide difficult questions of law in a developing area at a summary stage of proceedings — without all the relevant facts. Some of the judgments in the trilogy suggest that this raises a paradox: the more difficult the issue, the easier it would be to establish jurisdiction.
  • Another view is that there is no paradox. Lord Collins made a more straightforward and uncontroversial (binary) point: if there is a difficult and contested legal issue, then the court needs the facts. Lord Hope took a similar approach in Smith & others v The Ministry of Defence [2013] UKSC 41, when he emphasised the need in that case for the decision on tortious liability to be deferred until there had been a trial.
  • It is also significant that these parent company cases arise in the context of a mandatory jurisdictional provision under EU law. As interpreted by the CJEU, the Brussels Regulation (Recast) 1215/2012 looks to the domicile of the defendant and gives home court advantage to the UK parent company — even if it would prefer not to be sued in this jurisdiction.
  • It is therefore possible that the Supreme Court will weigh: (1) the mandatory jurisdictional provision; (2) the need to have clearly established facts (perhaps even after a trial of a preliminary issue); and/or (3) emphasise the deference to be shown to evaluative judgements made by the courts below, in particular the trial judge.

Point three: the weight to be ascribed to corporate intention(s)

  • Some judgments in the trilogy emphasise that the ‘corporate structure itself tends to militate against the requisite proximity’ needed for a duty of care to arise (see Sir Geoffrey Vos in Shell). It may be questioned whether a principled basis exists for what appears to be a presumption based on the way that groups organise their corporate structure on paper. One might further question whether such a presumption detaches the common law from modern corporate realities: complex structures across multiple jurisdictions, often overlaid with business teams and individuals working in various capacities. It is suggested that parent company liability cases should instead turn on the overall reality of a situation, rather than attaching any unwarranted legal presumption.
  • An analogy might be drawn with the famous case of Donoghue v Stevenson [1932] UKHL 100. Mr Stevenson — the manufacturer of the ginger beer — owed a direct duty towards Mrs Donoghue drinking it in a café in Paisley, despite the absence of any contractual relationship between them. The attribution of legal responsibility did not depend exclusively on (the lack of) any clear mutual agreement between the parties. The court instead looked to the overall context and, in an era before extensive consumer protection laws, found that liability should attach to the manufacturer. The links between a subsidiary and its parent company could, depending on the facts, be just as strong as the link between Mrs Donoghue and Mr Stevenson. Indeed, some of the judgements in the trilogy of cases include obiter comments that parent company liability can arise in cases when products are manufactured according to a uniform formula set across the corporate group.

Point four: floodgates concerns

  • A number of the judgments have raised floodgates concerns. It is suggested, however, that Sales LJ’s dissent in Shell is to be preferred on this aspect. It remains clear who the prospective claimants would be – those persons neighbouring the pipelines in that case. There is no risk of imposing an indeterminate liability towards an indeterminate number.
  • It is further suggested that the cases on parent company liability cases do not imply the imposition of responsibility on a parent company for absolutely everything done (or not done) by its subsidiary. The trilogy of cases concern claims of particular damage and seek to identify particular bases on which liability should be attributed to the parent company. Claimants do not need to go so far as to resurrect the notion of the ‘single economic entity’ — a notion from which the common law has retreated in recent decades, even while statutory provisions increasingly impose group-wide approaches, e.g. in relation to reporting requirements.

Point five: to which line of authority should the Supreme Court look?

  • One key battleground at the hearing will be the factors to which the Supreme Court should point when fleshing out the existence (or not, as the case may be) of a duty of care – bearing in mind the summary stage of proceedings.
  • In Chandler v Cape [2012] EWCA Civ 525, a case about asbestos in Uxbridge and the parent company’s liability towards a subsidiary’s employees, Arden LJ (now Lady Arden) identified four indicia based on which claimants have diligently crafted their pleadings in subsequent cases:
    1. The companies’ businesses are the same in a relevant respect;
    2. The parent company has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry;
    3. The subsidiary’s system of work is unsafe — as the parent company knew or ought to have known; and
    4. The parent company knew, or ought to have foreseen, that the subsidiary would rely on its superior knowledge.
  • Although these indicia are obviously not legislative criteria to be applied in a mechanistic manner, in so-holding Arden LJ helpfully identified that courts should look to the principles underlying cases where one person is held liable for the tort of a third party. One such example is Home Office v Dorset Yacht [1970] AC 1004, where the House of Lords held that the Home Office owed a duty of care when borstal boys, who had been taken to an island, destroyed boats in the marina and officials did not intervene to stop them. The court reasoned that the boys were under the officers’ control and the damage that occurred was the very thing likely to happen. It is to be noted that the emphasis on the officers’ control arose because the damage stemmed from the boys’ very deliberate acts. This case further shows that omissions can lead to liability in negligence. The Supreme Court might look to this line of cases when articulating more detailed guidance on the assessment a parent company’s duty of care.
  • In his judgment in Unilever, Sales LJ identified two categories of cases where a parent company should indeed owe a duty of care: (1) where the parent company has in substance taken over the management of the relevant activity; or (2) the parent company has given relevant advice to the subsidiary about how it should manage a particular risk. This is certainly one possible form of guidance to trial judges, and it could be a workable categorisation for the Supreme Court to develop. As with Simon LJ’s approach in Vedanta (see above), it represents a lower threshold than claimants having to establish that the parent company ran all of the subsidiary’s ‘day to day operations’.
  • Even a test articulated on such a (lower) basis, however, may not capture the complexity of modern corporate structures. A further possibility to be considered would be to articulate clearer rules of attribution to the parent company based on the acts and omissions (with relevant knowledge of a risk of harm) by relevant individuals.

While predictions are difficult, it may be thought unlikely that the Supreme Court will entirely close off the possibility of parent company liability claims — whatever the result on the particular facts in Vedanta. The appellant companies appear to have an uphill task.

A broader question is: why should parent companies not be fixed with a duty of care to ensure that they take reasonable steps to avoid serious harm to third parties who are affected by their subsidiaries’ operations? The precise circumstances when such a duty arises, its nature, and whether it was breached, will differ from case to case. This is a developing area of the civil law and it is difficult to overstate the importance of the issues at stake.