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Parent company liability for subsidiaries: all change or more of the same?

Posted: 15/06/2018

The Court of Appeal recently handed down its long awaited judgment in Okpabi and others v Royal Dutch Shell Plc and another [2018] EWCA Civ 191 in respect of an application contesting jurisdiction, following a three day hearing in November 2017 before Lord Justice Simon, Lord Justice Sales and Sir Geoffrey Vos, Chancellor of the High Court.

The Court of Appeal upheld the High Court decision that there was no arguable case against Royal Dutch Shell Plc (RDS) by a 2:1 majority, holding that the English courts did not have jurisdiction to hear claims against RDS’s Nigerian subsidiary, the Shell Petroleum Developments Company Limited (SPDC).

This judgment provides further guidance on whether multinational companies can face legal action in England and Wales for the acts of their foreign-registered subsidiaries. It comes just months after the appeal in Lungowe and others v Vedanta Resources Plc and Konkola Copper Mines Plc [2017] EWCA Civ 1528 (Vedanta) in which a jurisdictional challenge was dismissed, and before the awaited appeal in AAA and others v Unilever Plc [2017] EWHC 371 (QB).

This area of law remains uncertain and is likely to continue to be the subject of intense judicial examination as case law develops. It is clear however that any future decisions about whether parent companies are liable in this jurisdiction for acts or omissions of their foreign-registered subsidiaries will be largely fact specific. Multinational parent companies would therefore be well advised to take steps to maintain a level of separation from those operating and running their subsidiaries, in order to avoid assuming a duty of care to third parties.


High Court
There were in fact two claims and two appeals heard together. The communities represented by the claimants either own or occupy areas of land which, they say, were subject to pollution and environmental damage caused by leaks of oil from pipelines and associated infrastructure operated by SPDC.

The claims had been brought against RDS as well as SPDC, on the basis that RDS allegedly owed the claimants a duty of care because either: (i) it controlled the operation of pipelines and infrastructure in Nigeria from which leaks occurred; or (ii) it had assumed a direct responsibility to protect the claimants from the environmental damage caused by the leaks. The claimants submitted that RDS owed such a duty of care because it exerted control over SPDC’s operations. They also argued that the English courts were the appropriate forum for these claims, among other things because RDS constituted an 'anchor defendant' and because a claim in Nigeria could take in excess of 20 years.

Fraser J found at first instance that the claimants had failed to present a properly arguable case that RDS, as an anchor defendant, owed a duty of care to the claimants.  Consequently, he held that the English courts did not have jurisdiction to hear the claims.

Grounds of appeal
The claimants appealed on the basis that Fraser J had erred in: (i) excluding from consideration evidence regarding the structure and actions of the Shell Group before 2005; (ii) treating the control functions exercised by the RDS Executive Committee on behalf of RDS as limited; and (iii) ignoring statements in corporate literature which referred to the commitment of the Shell Group and RDS to environmental issues.

The appeal centred on whether the claimants had demonstrated to the standard required that they had a good arguable case that RDS owed them a duty of care in respect of the losses they alleged they had suffered due to the oil leaks.

Court of Appeal

A majority of the Court of Appeal upheld the High Court’s decision and dismissed the appeal, concluding that the claimants could not demonstrate a properly arguable claim against RDS.

The Court of Appeal found that RDS, as the parent company of SPDC, did not owe the claimants a duty of care (this being the three part test of foreseeability, proximity and reasonableness set out in Caparo Industries Plc v Dickman [1990] UKHL 2 and adopted in Chandler v Cape Plc [2012] EWCA Civ 525). This approach was also endorsed by the Court of Appeal in Vedanta.

  • Foreseeability
    Fraser J had found that the first limb of the three part test was satisfied and it was only the second and third limbs that were in dispute. The Court of Appeal agreed; there was said to be ’at least sufficient information in the documents about the frequency, location and scale of oil spills from the pipeline and infrastructure operated by SPDC… to establish the foreseeability of harm to the claimants’.

  • Proximity
    The claimants argued that RDS’s knowledge of and control over SPDC’s operations and their foreseeable effect on the environment and communities led to a relationship of proximity between RDS and the claimants.  However, the Court of Appeal did not agree.

    The claimants relied on five main factors to demonstrate RDS’s arguable control of SPDC’s operations:
  • the issue of mandatory policies, standards and manuals which applied to SPDC;
  • the imposition of mandatory design and engineering practices;
  • the imposition of a system of supervision and oversight of the implementation of RDS’s standards;
  • the imposition of financial control over SPDC in respect of spending; and
  • a high level of direction and oversight of SPDC’s operations.

The Court of Appeal made two general but key points in this regard. Firstly, these sorts of cases relate to potential duties owed to a particular person, or class of persons, which should be distinguished from the more abstract concepts of moral responsibility. Secondly, it is of similar importance (said Simon LJ) “to distinguish between a parent company which controls, or shares control of, the material operations on the one hand, and a parent company which issues mandatory policies and standards which are intended to apply throughout a group of companies in order to ensure conformity with particular standards. The issuing of mandatory policies plainly cannot mean that a parent has taken control of the operations of a subsidiary (and, necessarily, every subsidiary) such as to give rise to a duty of care in favour of any person or class of persons affected by the policies.”

On balance, the Court of Appeal ruled that there was insufficient evidence to establish the proximity necessary for there to be an arguable case that RDS controlled SPDC’s operations, or that it had direct responsibility for practices or failures that were the subject of the claim.  The five factors relied on by the claimants did not establish such proximity.

  • Fair, just and reasonable
    The Court of Appeal did not find any of the considerations raised by the claimants (including a public policy argument that multinational parent companies ought to conduct themselves consistently with international standards) to be persuasive to satisfy the third limb of this test. It was said in particular that the public policy point, while unobjectionable as an abstract principle, was a ’doubtful foundation for the imposition of a duty of care’.

Dissenting decision
Sales LJ dissenting stated that he would allow the appeal because he was satisfied that the claimants had demonstrated a good arguable case that RDS owed them a duty of care at the material times, and that it breached that duty, resulting in losses to the claimants of a kind in respect of which damages are recoverable. He thus concluded that the claimants were entitled to sue RDS in England and to treat it as an anchor defendant for the purposes of potentially also bringing a claim against SPDC in England.

With respect to proximity, Sales LJ said that, whilst RDS may ultimately be able to show that not all of the claimants are proximate sufferers of damage, it is strongly arguable that at least some of them are if RDS could be shown to have taken over practical control of the management of SPDC, or to have exercised joint control.

Sales LJ agreed with the majority that the setting of global standards (even those purported to be mandatory) to guide the conduct of operating subsidiaries would not in itself be sufficient to lead to the imposition of a duty of care on RDS, although he did consider that such global standards were significant in the context of the claimants’ case overall. He found that the existence of such standards was capable of providing a mechanism for the projection of real practical executive control by RDS over the affairs of SPDC, if RDS wished to. RDS could review how global standards were implemented in Nigeria and, as deemed necessary, could use them as the basis to impose operational measures.

Further, Sales LJ considered it plausible to infer that there may well have been particularly close monitoring and direction by RDS of the implementation of its mandatory instructions on the ground in the case of SPDC, even if the implementation of the mandatory instructions was not so enforced in the case of other, less troublesome subsidiaries.

Practical implications

The recent raft of case law explored in this article highlights the need for multinational businesses to carefully consider the place of incorporation of both its local, operating subsidiaries and its ultimate parent company. If the parent is located in England and Wales and the operating subsidiary abroad, there is a real possibility that claimants pursuing the parent’s registered subsidiaries may attempt to use the parent company as an anchor defendant in English proceedings, as a way to avoid pursuing the subsidiary in another, less favourable jurisdiction.

Multinationals must also carefully consider the tension between setting policies and guidelines to maintain industry and best practice standards among the whole group, and exercising what is effectively control and responsibility over individual subsidiaries, which could lead to a duty of care being imposed on the parent company.  The distinction can be a fine one.  While group-level operating policies, procedures and guidelines will not of themselves subject a parent company to owing a duty of care, these should be made applicable to all group companies, rather than specific subsidiaries, and the responsibility for implementing the policies should be at subsidiary level.

Further developments in this fast-moving area of law are expected over the next year or two: the Unilever appeal is underway, the claimants in this case have indicated that they intend to seek permission to appeal to the Supreme Court, and the defendants in Vedanta have now applied to the Supreme Court for permission to appeal. Multinationals should be watching developments closely.

This article was published in New Law Journal in May 2018.

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