UK: Risk Management In Foreign Subsidiaries - The Impact Of Connelly V RTZ Corporation PLC And Another

Last Updated: 17 September 1997
Connelly v RTZ Corporation Plc and Another (Times Law Report 4.8.97)
Some press reports of a House of Lords decision in July 1997, suggested that any UK company with an overseas subsidiary could in future be sued in this country, on claims which should properly have been brought against the subsidiary in its local courts. In reality the decision did not go nearly that far. Its real relevance is in the management of risk within groups of companies with subsidiaries operating abroad particularly in developing countries.

The Law Lords ruled that a former employee of an African subsidiary of Rio Tinto Zinc (RTZ), the mining conglomerate, who claimed he was poisoned by uranium dust, had the right to sue for compensation in the English courts.

Edward Connolly, a Scottish maintenance engineer, developed throat cancer after working in a Namibian uranium mine owned by a subsidiary of RTZ, an English company, with its registered office in London. He brought a claim for compensation against RTZ in the English courts claiming that his cancer was as a result of inhaling silica uranium, and its radioactive decay products at the mine. His case against RTZ was that the parent company had devised the Namibian subsidiary's policy on health, safety and the environment. The lower English courts blocked his action on the basis that it should be heard in Namibia and not the English courts.

The House of Lords ruled that Mr Connolly, who was legally aided, could pursue his claim for compensation in the English courts even though Namibia was the appropriate place for the case to be heard because financial assistance was not available in Namibia. The lack of legal aid in Namibia meant that justice would not be served if the case was heard there. Lord Goff, who gave the main judgment, said that this could apply equally to a conditional fee agreement ("no win no fee") provided the interests of justice required this. In this case, the nature and the complexity of the case was such that it could not be tried without the benefit of financial assistance - Mr Connolly needed professional legal assistance and expert scientific witnesses to present his case.

Lord Hoffman, who dissented, said that to allow the case to proceed in England on this basis meant that the action of a rich plaintiff would be blocked while the action of a poor plaintiff would not. The more speculative or difficult the action, the more likely it would be allowed to proceed in the UK with the support of public funds. In his view, Mr Connolly had no legitimate expectation that the litigation would take place in England. His position was no different from that of a native Namibian apart from the fact that his employer formed part of a multi-national group of companies with headquarters in England. Other than this, the transaction had no connection with England. Lord Hoffman warned that if the presence of RTZ in the UK enabled it to be sued here "any multi-national with a parent company in England would be liable to be sued here in respect of its activities anywhere in the world".

Certainly, at first glance, the decision appears to broaden the responsibility of group companies to a surprising degree. However, the case must be seen in context:

1. The claimant has to devise some basis for asserting a claim against the parent company beyond the mere ownership of the subsidiary's shares - Mr Connolly's claim that the parent retained responsibility for health and safety issues was sufficient to achieve the immediate purpose of getting a claim off the ground in the English courts but might well not ultimately lead to a damages award against anyone other than the subsidiary;

2. It is likely that the courts will in future be reluctant to extend the principle beyond the special facts of the RTZ case i.e. claims by former employees of subsidiaries in developing countries. Counter-parties to commercial transactions will continue to seek some form of comfort or commitment from parent companies. The RTZ case serves to highlight the importance of resisting such pressure or at least having controls in place that enable the parents' risk under informal performance guarantees or comfort letters to be monitored and controlled. It does not, of itself, increase those risks.

3. Lord Goff warned that the availability of financial assistance in this country, coupled with its non-availability in the other competing jurisdiction would only be relevant if substantive justice would not be done if the claimant had to prove his case in the absence of financial assistance. If Mr Connolly had been seeking to take advantage of financial assistance available to him in this country to obtain a "Rolls Royce presentation" of the case as opposed to a more rudimentary presentation abroad, the courts would have taken a different view;

In order to protect themselves, English companies with overseas trading subsidiaries should

  • look carefully at the contracts of employment that their overseas subsidiaries have with employees to ensure that clauses to protect them are inserted in all such contracts.
  • keep under review the appropriate balance between the requirements of head office control and the independence of local subsidiaries (particularly those whose location or activity may give rise to particular risks in this area).
  • check insurance arrangements to ensure that "derivative" claims of this nature are covered and that group-wide coverage does not leave scope for disputes as to the scope of responsibility between different insurers.

This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

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