When can a parent company be liable for the acts of an international subsidiary? The question has hit the UK courts several times in recent years. Nick Lees offers some practical advice on the complex questions of jurisdiction and intra-group corporate liability.
Jurisdiction and liability
The question of whether a UK parent company's duty of care may extend to foreign subsidiaries has arisen in the long-running, high profile cases of Lungowe v Vedanta Resources (Supreme Court) 1 and Okpabi & Ors v Royal Dutch Shell plc & Ors (Court of Appeal) 2.
Each case concerned pollution and environmental damage allegedly caused by the international subsidiary (based in Zambia and Nigeria respectively) and centred on whether, and how, the claimants could make their pollution problem a case for the UK courts, and a liability for the UK parent company.
Walker Morris commentary on these earlier decisions is available via the links below.
The Supreme Court has recently held, in a procedural decision in the Okpabi v Shell case, that the Court of Appeal erred, in a number of ways, in its decision in the litigation. As a result, the Court of Appeal wrongly concluded that the claimants had no reasonable prospect of establishing that Shell owed a duty of care.
The Supreme Court's decision in Okpabi is consistent with its earlier decision in Vedanta. As such, both cases will now proceed to trial.
So, what practical advice follows for corporate groups with international operations?
For all practical purposes, corporate groups with international operations have a fine balance to strike. On one hand, businesses today place significant emphasis on environmental, social & governance issues and seek to protect brands, employees and customers by the imposition of standards and policies and by management oversight and control. On the other hand, parent companies generally go to the effort of establishing corporate structures, including the use of international subsidiaries, to control and limit risk, including the assumption of liability for business operations conducted overseas and sometimes in challenging environments.
The key for many UK multinationals is likely to be stating aspirational directions that group-wide policies are to be applicable across the group as a whole, but designating responsibility for enforcement of standards at the separate, subsidiary company level - by a reliable and effective management team.
The Supreme Court's decision, which seems to impose a lower jurisdictional threshold for claimants wishing to litigate against parent companies in the UK to overcome, may prompt a series of aggressive claims. It is worth remembering that: requiring any such case to be properly pleaded; and forcing claimants to critically assess, at an early stage, whether any negligence claimed was actually causative of the loss suffered, can help to 'weed' out unmeritorious claims.
Ultimately, whether liability will be established, and whether jurisdictional hurdles will be overcome in cases where there are no contractual links on which to base a claim, remains to be dealt with on a case-by-case basis. In relation to Vedanta and Okpabi, Walker Morris will report further when the substantive cases proceed to trial.
What did the Supreme Court say?
The Supreme Court held that the Court of Appeal had erred in its earlier decision because:
- It is beyond the proper scope of the court's role, at the point of determining jurisdiction, for the court to become drawn into a 'mini-trial' and to assess extensive evidence. Instead, the court should simply determine whether pleaded allegations are capable of founding the relevant cause of action, and establish that such allegations are not demonstrably baseless or untrue.
- It is not correct to proceed on the basis that the promulgation by a parent company of group-wide policies or standards can never, in itself, give rise to a duty of care.
- The question of control of a company and the management of its activities in practice are two different things. Consideration of the former is a starting point only and may not be relevant to the question of whether a duty of care is owed, whereas the latter will be key.
- The liability of parent companies in relation to the activities of their subsidiaries is not, of itself, a distinct category of liability in negligence. The Court of Appeal was therefore wrong to analyse the case by reference to the threefold test for a duty of care set out in Caparo Industries plc v Dickman 3. The principles which determine parent company liability are not new and such liability should be determined on ordinary, general tortious principles regarding the imposition of a duty of care.
The Court of Appeal's errors had led it to wrongly conclude that there was no reasonable prospect of the claimants establishing that Shell owed a duty of care. The claimant's case demonstrated that there was a real issue to be tried and Shell's evidence did not show that the claimant's allegations were baseless or untrue. The claimant's appeal was therefore allowed and the case was remitted for a full, substantive trial.
3.  2 AC 605
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.