UK: Responsible Parenting: UK Supreme Court Rules That Parent Company Can Be Sued For The Actions Of Its Foreign Subsidiary

Last Updated: 17 May 2019
Article by Jonathan Cohen, Miles Robinson, Sam Eastwood and Thomas Ajose

The Supreme Court has handed down judgment in a procedural appeal in the case Vedanta Resources PLC and another v Lungowe and others1, concerning whether or not the English courts have jurisdiction in relation to a group tort claim.

Although the judgment made no substantive findings on the facts of the dispute, the jurisdiction dispute raised important issues with regard to the circumstances in which a parent company will be held liable for the actions of its subsidiary. In particular, the judgment considered the impact of the implementation of the parent company's policies towards its subsidiary and whether or not that made it more likely that a parent would be held liable for the actions of its subsidiary.

This judgment follows (amongst other judgments) the Court of Appeal's decision last year in Okpabi and others v Royal Dutch Shell Plc and another2 – our alert for this earlier judgment can be found here.

Background to the appeal
Vedanta Resources PLC (the first appellant) ("Vedanta") is the UK parent of Zambian mining subsidiary – Konkola Copper Mines Plc ("KCM") (the second appellant). The respondents (being the claimants in the substantive action) are 1,826 Zambian villagers (the "Respondents") who claimed that waste discharged from the Nchanga copper 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 claim was originally issued in July 2015 and subsequently served on Vedanta and KCM, following which the defendants applied (unsuccessfully) to challenge jurisdiction.  The Court of Appeal upheld the dismissal of the jurisdiction challenge, resulting in the appeal being brought before the Supreme Court.

Although the appeal raised a number of technical jurisdictional points, the focus of this alert is the extent to which there was a "real issue as against Vedanta", as the so-called "anchor defendant" in the proceedings – such that the substantive claim could legitimately proceed against the Vedanta and KCM in the English courts.

Supreme Court's decision
The Supreme Court unanimously dismissed the appeal. 

Lord Briggs (who delivered the judgment on behalf of the Supreme Court) held that the critical question to be addressed was whether Vedanta sufficiently intervened in the management of the mine owned by KCM to have incurred, itself (rather than by vicarious liability) a common law duty of care to the Respondents or a 'fault-based liability' under Zambian law in connection with the escape of toxic materials from the mine alleged to have caused the relevant harm.3 

The level of intervention in the management of the mine requisite to give rise to a duty of care upon Vedanta was a matter of Zambian law, but the question of whether that level of intervention occurred was a simple question of fact. 

In that regard, the Supreme Court considered material published by Vedanta in which it asserted its responsibility for the establishment of appropriate group-wide environmental control and sustainability standards, for their implementation throughout the group by training, and for their monitoring for enforcement.4  In particular, the Supreme Court found that Vedanta had:

"asserted its own assumption of responsibility for the maintenance of proper standards of environmental control over the activities of its subsidiaries, and in particular the operations at the Mine, and not merely...laid down but also implemented those standards by training, monitoring and enforcement".  5

The Supreme Court held that these actions demonstrated a sufficient level of intervention by Vedanta in the conduct of operations at the mine, and that consequently Vedanta owed a direct duty of care to the Respondents.

Interestingly, it was also held that where a parent holds itself out in public materials as exercising a degree of supervision and control of its subsidiaries (perhaps to reassure investors that strict corporate group standards will be maintained across the group), the issue of whether or not supervision and control is actually exercised (as a matter of fact) may not be relevant.  It was held that in such circumstances "its very omission may constitute the abdication of a responsibility which it has publically undertaken".6

Comment
The judgment serves to highlight that parent companies may be found to be liable for the actions of their subsidiaries, in circumstances where they either exercise (or at least purport to exercise) a degree of control and assume responsibility for the operations of that subsidiary – including the implementation of internal policies and, by extension, a group compliance programme.

There is a tension for UK-based multinational corporations with respect to the management of their foreign subsidiaries, specifically in relation to the implementation and monitoring of group compliance programmes which are assuming increased importance in light of emerging legislation on anti-corruption, tax evasion and human rights (by way of example).

On the one hand, as illustrated by this judgment, if the parent company is seen to be actively involved in the establishment and monitoring of its subsidiary compliance programme, it could ultimately risk being an "anchor defendant" for a local action relating to the activities of its subsidiary – thereby establishing a gateway for such action to be brought before the English courts (rather than the local courts).  Conversely, if the parent company does not ensure that its compliance programme is properly implemented by its subsidiaries,  it runs the risk of civil litigation for such failures and criminal prosecution under the "failure to prevent" type offences – as well as the adverse publicity that may arise from the consequences of having inadequate procedures in place.

Corporations will therefore need to think carefully with regard to how they approach group-wide policy implementation, particularly in circumstances where group action litigation is a popular way to highlight perceived corporate injustices in the context of a global environment where news stories can quickly "go viral" and consumers generally are increasingly sensitive to issues surrounding corporate social responsibility.

Ultimately, the most effective way of addressing the risks that arise from this judgment is by having an effective group compliance programme in place which is properly implemented and audited by the parent company, thereby reducing the likelihood of events occurring which could give rise to large-scale group actions.

Footnotes

1 [2019] UKSC 20 

2 [2018] EWCA Civ 191

3 At paragraph 44

4 At paragraph 55

5 [2019] UKSC 20 at 61

6 At paragraph 53

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