Posted: 16/06/2017
Since Saloman v Saloman & Co Limited [1896] UKHL 1, it has been a well-established principle that a company has its own legal personality that is separate to those of its shareholders, directors, parent and / or subsidiary companies. The court is usually unwilling to look beyond that separate personality to hold the shareholders responsible for the company's liability unless there are exceptional circumstances to justify the departure from policy.
One such exception arises when a person is under an existing legal obligation or liability which he deliberately evades, or whose enforcement he deliberately frustrates by interposing a company under his control. In these circumstances, the Supreme Court confirmed that it is prepared to ‘pierce the corporate veil’ in order to deprive the company or its controller of the advantage which they would have otherwise obtained by the company’s separate legal personality (Petrodel Resources Ltd v Prest [2013] UKSC 34). If there is another legal remedy available, however, piercing the corporate veil will not be necessary and will not be available. It remains a last resort. Those wronged by a company must therefore find other ways to hold the shareholder or a parent company liable.
It is equally well established in the law of tort that companies are liable for torts committed during the course of their business by their employees. Whilst a company will not be liable for the acts of its subsidiary by reason only of its shareholding, it may owe its own duty of care towards the employees of the subsidiaries. In these circumstances, the court does not pierce the corporate veil but instead identifies a free-standing duty of care owed by the parent company to the claimant arising out of the relationship between the parent and subsidiary companies. There has been a recent raft of English case law which explores whether a wronged party can pursue a parent company for the actions of its subsidiary in tort; a tool used by some to their advantage where the parent company is located in a more favourable jurisdiction.
The first case that confirmed that a parent company could owe a duty of care to the employees of subsidiaries was Ngcobo and others v Thor Chemicals Holdings Limited (CA 9 October 1995, unreported).
The Court of Appeal in 2012 subsequently confirmed in Chandler v Cape [2012] EWCA 525 that a parent company could owe a duty of care in negligence for the acts of a subsidiary, due to its ‘assumption of responsibility’. Arden LJ listed the following four factors, the presence of which bring a case more closely within the scope of a duty of care owed by a parent company:
In this case, the subsidiary, which manufactured incombustible asbestos, was wholly owned by its parent company. Mr Chandler discovered in 2007 that he had contracted asbestosis as a result of being exposed to asbestos dust whilst employed by the subsidiary. The subsidiary had been dissolved and no longer existed in 2007, however, so Mr Chandler brought a claim against the parent company in tort. The Court of Appeal held that the parent company had a duty of care to Mr Chandler, the subsidiary’s employee, on the basis of the common law concept of assumption of responsibility, as set out by the House of Lords in Hedley Byrne v Heller [1964] AC 465.
The Technology and Construction Court (TCC) recently considered whether Royal Dutch Shell plc (RDS), the ultimate holding company of the worldwide Shell Group, was liable for the acts and / or omissions of a Nigerian company in its group, Shell Petroleum Development Company of Nigeria Limited (SPDC) (His Royal Highness Emere Godwin Bebe Okpabi and others v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Limited [2017] EWHC 89 (TCC)).
In this case, two sets of proceedings were brought by around 42,500 individuals (including the King of the Ogale community in Nigeria) against RDS and SPDC as a result of various environmental issues, which were caused by oil spills from SPDC’s oil pipelines and affected large areas of land and the health and livelihood of many people around the Niger Delta in Nigeria. The claimants sought damages for clean-up and remediation costs, or alternatively injunctive relief.
The claimants sought to persuade the TCC that if the claims were pursued in Nigeria, they would be subject to delay; conversely, the claims had a much better prospect of success if they were undertaken in the English courts. They also relied on Lungowe v Vedanta Resources Plc [2016] EWHC 975 TCC to argue that the interests of justice required the claims to be tried in the UK. The defendants argued that the claims should proceed in Nigeria because they did not have a connection with the UK.
The question arose as to the correct and proper jurisdiction of the claim. As RDS is domiciled in the UK, Mr Justice Fraser followed and applied the decision of the Court of Justice of the European Union in Owusu v Jackson (C281-02), which prevents any consideration of the forum non conveniens principle when the defendant, or one of the defendants, is domiciled in the UK (following Article 4 of the Recast Brussels Regulation).
The court went on to consider whether there was a real issue between the claimants and RDS which it was reasonable for the court to try. Fraser J summarised the appropriate test, as having two limbs: “the first is whether the parent company is better placed than the subsidiary. The second is, if the finding is that the parent company is better placed, whether it is fair to infer that the subsidiary will rely upon the parent.”
Factual evidence before the court revealed that RDS had its headquarters and board meetings in the Netherlands. It had no employees and it engaged neither in operations nor the provision of services. Public statements made by RDS about its commitment to environmental issues had been made for the purposes of stock exchange listings and were not sufficient to establish a duty of care. It therefore followed that RDS and SPDC were two entirely separate entities and that it was not reasonably arguable that there was any duty of care on RDS for the acts and / or omissions of the operating subsidiary within SPDC.
It had been agreed that if RDS had no arguable duty of care under English law, then there would not be any cause of action in common law under the law of Nigeria. It was therefore held that there was no ‘real issue’ between the claimants and RDS which it was reasonable for the court to try. RDS was not therefore an ‘anchor defendant’ for the purpose of establishing jurisdiction. The claim consequently failed under English law and the defendants’ challenge as to jurisdiction was successful.
Around the same time that RDS was being considered in the TCC, the Queen’s Bench Division was considering a similar legal issue in AAA and Ors v Unilever Plc and Unilever Tea Kenya Limited [2017] EWHC 371 (QB). In this case, the 218 claimants were temporary or permanent employees at, or were living in, a 13,000 hectare tea plantation that was owned and operated by Unilever Tea Kenya Limited (Unilever Kenya) in the southern Rift Valley in Kenya. Following the presidential election in December 2007, there was a nationwide breakdown in law and order. Members of the Kalenjin and Luo ethnic groups invaded the plantation in bands of 100 to 300 people and committed murders, rapes, and other violent assaults and caused serious damage to property. The claimants claimed that the risk of such violence was foreseeable by the defendants, who had had a duty of care to protect them from it, which they had breached by failing to take adequate steps to prevent and/or stop the claimants' mistreatment. The court was therefore asked to consider the circumstances in which Unilever Plc, a UK registered company, may face liability for actions largely attributable to Unilever Kenya, a foreign-registered subsidiary.
Following the Caparo test, the court said that the first issue to consider was whether the loss and damage suffered by the claimants, which was caused by the post-election violence of that scale and ferocity, had been foreseeable. Based on the facts, it was held that there was no evidence that anything comparable had taken place on Unilever Kenya’s land before and that it was inconceivable that at trial a court would hold that Unilever Kenya, let alone Unilever, should have foreseen the loss. The second issue to be considered was whether there was a sufficient relationship of proximity between Unilever and visitors to Unilever Kenya’s property to impose a duty or an assumption of responsibility on Unilever, following Chandler v Cape. On the basis of the facts, it was held that there were no geographical links between the two defendants and Unilever did not appear to have control and superior knowledge. The claims against the defendants were therefore struck out on the basis that they were “bound to fail”, although it is understood that the claimants have appealed the decision.
While the court found that it was not reasonably foreseeable by Unilever (or Unilever Kenya) that violence of the type and with the results seen would be likely to occur, it found that Chandler v Cape could potentially apply in similar circumstances in order to give rise to a duty of care owed by a parent company for the actions of a subsidiary. This finding raises the prospect that such a claim against a UK-registered parent company, relating to the operations of a foreign subsidiary, could succeed on other facts. The success of any such proceedings will largely depend on the specific facts of the claim and, in relation to tortious claims, evidence will need to be provided to demonstrate the four factors described by Arden LJ in Chandler v Cape before a duty of care can be established.
These cases act as a useful reminder of the difficulties that claimants face when seeking to bring proceedings in the English courts against foreign-registered subsidiaries if there is no clear factual or legal nexus within England and Wales. That said, establishing a corporate entity outside of the UK will not necessarily prevent litigation from being brought in the English courts; although that position may yet change in our brave new Brexit world. In the meantime, UK-registered parent companies should adopt appropriate safeguards to prevent them from being held liable for the possible failings of foreign subsidiaries. In practical terms, the parent will need to provide evidence that the subsidiary is truly independent from the parent: ideally, running a different business, operating different systems (without interference or intervention), with separate and distinguishable boards, committees, policies and processes.
This article was published in New Law Journal in June 2017.
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