The UK Supreme Court has issued the latest in a series of landmark decisions on parent company liability under English law for claims alleging environmental damage and human rights abuses.
In a unanimous reversal of the Court of Appeal, the Supreme Court concluded that it was at least arguable, based on the degree of control and de facto management, that the parent company owed a duty of care to the claimant Nigerian citizens in respect of alleged environmental damage and human rights abuses by Shell's Nigerian subsidiary.1
The decision provides guidance on the circumstances in which a parent company may owe a duty of care to those affected by acts or omissions of its foreign subsidiary. The decision also rejects a strict approach to corporate separation, making clear that companies may not rely on corporate form alone to limit risks associated with the operations of corporate affiliates. The court again confirmed that there is no special test applicable to the responsibility in tort of a parent company.
This was a determination of the threshold for jurisdiction and not a decision on the merits of the claim. Nevertheless, the court's analysis highlights the growing importance of more active corporate governance, due diligence and internal controls for effectively managing significant human rights and environmental corporate risks.
Joint claims were brought by more than 40,000 citizens of two affected areas in the Niger Delta (the "Claimants")2 in the English courts against Royal Dutch Shell ("RDS") and one of its Nigerian subsidiaries, Shell Petroleum Development Company of Nigeria Ltd ("SPDC"). The Claimants alleged that oil spills and pollution from pipelines operated by SPDC caused substantial environmental damage, with the result that natural water sources cannot safely be used for drinking, fishing, agricultural, washing or recreational purposes.
The Claimants sought to hold the parent company, RDS, directly responsible for its subsidiary's actions, arguing that RDS owed them a duty of care, which it had breached by failing to prevent or remedy the extensive damage to their communities. They argued that RDS exerted significant control over SPDC and its operations and/or assumed responsibility for SPDC's operations including through RDS' group-wide mandatory policies, which they argued were relevant to the damage caused. The Claimants also brought (Nigerian) tort law and statutory claims against SPDC.
Before any court could deal with the question of the extent of any duty of care in a full trial, since SPDC was not domiciled in the UK, the Claimants first needed to establish the jurisdiction of the English courts, and prove they had an arguable claim against RDS (i.e., that it was arguable that RDS owed them a duty of care).
Background to the Appeal
Without an arguable case, the claims could not proceed to trial in the English courts. The High Court and Court of Appeal both found that the Claimants had failed to establish an arguable case that RDS owed a duty of care to the Claimants.
Following the Court of Appeal's ruling in Okpabi in 2018, the Supreme Court took a different approach in 2019 in Lungowe v Vedanta, which we considered here, on the question of liability for environmental damage allegedly caused by a subsidiary of Vedanta in Zambia. The Supreme Court cast some doubt on the Court of Appeal's approach in Okpabi, ruling that there was no "limiting principle" that a parent could never incur a duty of care in respect of the activities of a subsidiary merely by laying down group-wide policies.3 Such policies could arguably indicate that a duty of care existed if: (1) the parent took active steps to implement them; or (2) the parent held itself out as exercising the relevant level of control / supervision of the subsidiaries pursuant to such policies, irrespective of whether it in fact did so. To the extent that such policies applied to inherently dangerous activities, the Court confirmed that a parent might be held liable in respect of harm arising from systemic failures in those policies.
Following the decision in Vedanta, the Claimants on appeal to the Supreme Court in Okpabi, argued that the Court of Appeal had taken an excessively restrictive approach.
Supreme Court Decision
The Supreme Court unanimously granted the appeal, having found that the Court of Appeal had made the following errors in law:
- Arguable case standard vs mini-trial of substantive issues: the parties had "swamp[ed]" the Court of first instance4 with evidence, leading the Court of Appeal to be drawn into a mini-trial of substantive factual issues, which was not appropriate in an interlocutory application5. As a result, the Court of Appeal had failed to focus on the "arguability" of the factual assertions set out in the Particulars of Claim. The correct approach would have been to accept assertions supporting the claim as arguable, unless they were "demonstrably untrue or unsupportable".6
- Overall control vs de facto management of a function: the Court of Appeal had focussed inappropriately on the issue of control. Control, the Supreme Court stated, was just the "starting point" whereas the relevant enquiry was "the extent to which the parent did take over or share with the subsidiary the management of the relevant activity (here the pipeline operation)".7 The Court observed that "control of a company and de facto management of a part of its activities are two different things".8
- No "limiting principle": the Court of Appeal had been wrong to assert that the promulgation of group-wide policies could never in itself give rise to a duty of care: no such "limiting principle" existed.
- No presumption against parent liability: the Court of Appeal had erred in approaching the issue of parent liability in negligence with a generalised presumption that a parent company will not be liable for the acts of its subsidiaries. Following Vedanta, the Supreme Court confirmed no such presumption existed.
- No distinct category of liability: the Court of Appeal had been wrong to approach the issue of parent company liability in negligence as a special category of liability. Quoting Vedanta, the Supreme Court stated that normal principles of negligence applied in determining questions of parent liability for acts of a subsidiary. The Supreme Court treated the following factors as relevant but not exhaustive:
- Taking over the management or joint management of the relevant activity.
- Providing defective advice and/or promulgating defective group-wide policies.
- Taking steps to adopt and implement group-wide policies.
- Holding out that it exercises a particular degree of supervision and control of a subsidiary.9
Considering the proper question of arguability and applying general principles of negligence, the Supreme Court concluded that RDS had not shown that the Claimants' case was "demonstrably untrue or unsupportable".10 On the contrary, the Supreme Court was persuaded that there was a "real issue to be tried".11 It found particularly compelling the evidence that the Shell group is organised along business and functional lines, rather than according to corporate form (i.e. separate corporate entity).
Significance of the Decision
The Supreme Court's decision answers only a threshold question: whether the claim is arguable enough to proceed. In explaining how the lower courts had erred, the Supreme Court emphasised what a low bar this is for a Claimant to meet.
Acknowledging its formal limitation to the nature of the threshold for bringing a claim, the decision is still highly significant. Courts applying English law have typically adopted a strict approach to recognising the principle of corporate separation. However, the Supreme Court's unequivocal rejection of any ‘special' category of law to be applied to the facts in Okpabi seems to mark a more dynamic (and claimant-friendly) approach to the question of who owes a duty to whom within a corporate structure.
This is consistent with other recent decisions of the English Courts, not only in Vedanta, but also in AAA & Others v Unilever PLC & Another12 (considered here), and Kadie Kalma & Others v African Minerals Ltd & Others (considered here). The decision also aligns with the direction of travel in other jurisdictions, such as Canada, the US and New Zealand14. Although, notably, in Canada, the courts have recently gone further and been willing to hold parent companies liable for breaches of "customary international law" in respect of damage caused by their subsidiaries.15 Similarly, in Europe, the corporate veil may no long protect parent companies from liability for the acts of their affiliates. Just two weeks ago in the Netherlands, in a case brought by four Nigerian farmers and Friends of the Earth, the Court of Appeal of the Hague held Shell liable for certain damages suffered through oil spills in Nigeria (see Milieudefensie v Shell).16 There are cases pending in France under the duty of vigilance law (considered here). With an appeal pending in the African Minerals case and others, we anticipate that this area of English law will develop further.
Because of the more dynamic approach the Okpabi decision signals, it is conceptually possible that UK courts will consider claims to be "arguable" against a wider set of UK-based entities, than if, as the Court of Appeal had seemed to advocate, a ‘special' duty in this situation applied, tied to the presence of the shareholding relationship.
However, this decision is unlikely to mean that claims against parent companies can be brought carte blanche in the UK. In another recent English court decision, the Fundão dam case17, a group of more than 200,000 Brazilian citizens had brought a £5bn claim against mining group parent, BHP, in respect of damage they argued they had suffered following the collapse of an iron ore dam in Brazil, owned by a subsidiary. The English High Court rejected the claim because it viewed the claim as a "clear abuse of process"18. In particular, the English Court noted that, due to the duplication and parallels with pending Brazilian proceedings and the great number of different claimants, the English case would be "irredeemably unmanageable".19
The evolving landscape of corporate liability should inform the manner in which companies design, implement and report on their policies and procedures, and the due diligence they perform in their operations and on acquisitions. On the Supreme Court's analysis, formal control is not necessarily the determining factor for liability, and any entity that is involved with the management of a particular function risks being held responsible for any damage flowing from the discharge of that function. In theory, claims might extend, for instance, to entities involved in supply chain supervision, minority investors and JV partners, and not just the local entity and its parent. While promulgating group wide policies may be used to suggest involvement of a parent in the acts of a local entity, at the same time, a parent company should not ignore governance or fail to provide effective policies down the corporate chain (and there are other compelling incentives to ensure good governance, including for anti-bribery and anti-corruption compliance).
As a practical conclusion, the decision suggests that installing more active corporate governance and internal due diligence, and more effective controls and reporting will be more important than relying on corporate structure in managing certain types of serious corporate risk. Multinational corporate groups must have a clear hold on how, and to whom, responsibility for management functions is delegated throughout the group. That ongoing challenge will be brought into sharp focus for companies operating not only in the UK but also in the European Union, with a growing number of cases in which claimants are seeking to hold companies liable for human rights and environmental harms, and with the proposed EU legislation (discussed here) on mandatory due diligence on human rights, the environment and good governance throughout a value chain.
1 Okpabi & Others v Royal Dutch Shell Plc & Another  UKSC 3.
2 The Commission of Jurists and The Corporate Responsibility (CORE) Coalition Limited, acting as "interveners" in Okpabi, also submitted evidence alongside the Claimants of international and domestic standards and comparative law jurisprudence in relation to human rights and environmental protection.
3 Vedanta at para. 52 per Briggs JSC.
4 The Technology and Construction Court.
5 In particular, the Supreme Court found that the majority of the Court of Appeal incorrectly assumed that because the high level documentation provided by the appellants did not provide evidence of control, it followed that further documentation provided on disclosure would be unlikely to do so. "Operational control is most likely to be revealed by documentation relating to operational matters." Okpabi at para. 134 per Hamblen JSC.
6 Okpabi at para. 107 per Hamblen JSC.
7 Ibid, para. 147.
9 Ibid, paras. 26-27.
10 Ibid, para. 153.
12  EWCA Civ 1532.
13  EWCA Civ 144.
14 James Hardie Industries PLC v White  NZCA 580 and James Hardie Industries Plc v White  NZSC 39.
15 Nevsun Resources Ltd. v Araya & Others, 2020 SCC 5.
16 Milieudefensie & Others v Shell Petroleum NV & Others, [C /09/365498/HA ZA 10-1677] and [C /09/330891/HA ZA 09-0579]; [C / 09/337058 / HA ZA 09-1581] and [C / 09/365482 / HA ZA 10-1665], see https://www.rechtspraak.nl/Organisatie-en-contact/Organisatie/Gerechtshoven/Gerechtshof-Den-Haag/Nieuws/Paginas/Shell-Nigeria-liable-for-oil-spills-in-Nigeria.aspx. This case should be distinguished from a separate claim brought against Shell by Friends of the Earth, together with six other Dutch NGOs and 17,379 co-plaintiffs in The District Court of The Hague, in which the plaintiffs allege that Shell's contributions to climate change violate its duty of care under Dutch law and human rights obligations: Milieudefensie & Others v. Royal Dutch Shell plc [C/09/571932/HA ZA 19-379]. The District Court is expected to render its judgment within a few months.
17 Municipio de Mariana v BHP Group Plc & Others  EWHC 2930 (TCC).
18 Ibid, para. 141.
19 Ibid, para. 104. It is reported that the claimants intend to seek permission to appeal the decision.
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