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Parent company liability: Supreme Court clarifies approach to jurisdictional challenges

Posted: 01/06/2021


The Supreme Court has reinforced the jurisdictional gateway through which claimants may bring claims in negligence against the parent company of an overseas subsidiary. In the case of Okpabi & Others v Royal Dutch Shell Plc & Another [2021] UKSC 3, the Supreme Court considered the appellants’ claims as to whether they could establish jurisdiction under one or more of the four jurisdictional gateways set out by the Supreme Court in the previous case of Lungowe v Vedanta Resources [2019] UKSC 20 (Vedanta).

Background

The claim comprised two sets of proceedings, encompassing some 40,000 individuals from the Ogale Kingdom and 2,235 individuals from the Bille Kingdom, both communities in Rivers State in Nigeria. The claimants alleged widespread environmental damage, including serious water and ground contamination, caused by spills from oil pipelines and infrastructure operated near their communities. They alleged that due to the failure to remediate the contamination, the natural water sources in their communities could not safely be used for drinking, fishing, agriculture, washing or recreational purposes.

The claimants alleged that the oil spills were caused by the negligence of the pipeline operator, the Shell Petroleum Development Company of Nigeria Ltd (SPDC), as part of a joint venture. SPDC is a Nigerian registered company and a subsidiary of Royal Dutch Shell Plc (RDS), a UK domiciled company and the parent company of the multinational Shell group of companies.

The claimants obtained permission to serve the claim out of the jurisdiction on SPDC as a necessary or proper party to the claims against RDS, the ‘anchor’ defendant. RDS applied to contest jurisdiction and set aside the order for service.

At first instance, the judge hearing the applications decided that it was not reasonably arguable that there was any duty of care on RDS towards the claimants. The orders for service out of the jurisdiction were set aside and the claims against RDS struck out. SPDC appealed.

The Court of Appeal considered that the judge had erred in certain respects in his approach to considering the evidence, but having reconsidered the evidence itself, nonetheless dismissed the claimants’ appeal by a two to one majority (Lord Justice Sales dissenting). The majority held that there was no arguable case that RDS owed the claimants a common law duty of care to protect them against foreseeable harm caused by the operations of SPDC.

The Supreme Court

Appealing again, the claimants contended that the Court of Appeal had materially erred in law in its analysis of:

  • the principles of parent company liability in its consideration of the factors and circumstances which may give rise to a duty of care;
  • the procedure for determining what constitutes an arguable case at an interlocutory stage, and by its approach to both contested factual issues and to the relevance and significance of likely future disclosure; and/or
  • the overall analytical framework for determining whether a duty of care exists in cases of this type and its reliance on the threefold test in Caparo Industries plc v Dickman [1990] 2 AC 605.

How should a jurisdictional challenge be decided?
The Supreme Court focused on the second limb, as it appeared clear to the Supreme Court that the Court of Appeal had erred in the procedure it had followed for deciding whether there was a triable issue. The Court of Appeal was drawn into conducting a mini-trial and that had led it to adopt an inappropriate approach to contested factual issues and to the (voluminous) documentary evidence, leading to it making determinations that were not appropriate on an interlocutory application. The claimants’ appeal was therefore allowed.

In reaching this decision, the Supreme Court emphasised the importance of proportionality when determining jurisdictional issues. It reaffirmed the guidance in the case of Three Rivers District Council v Bank of England No 3 (2003) 2 AC 1 as to the scope of the inquiry where the court was assessing, at the interlocutory stage, whether the claim had no real prospect of succeeding at trial. For those purposes, the court should assume the facts are as set out in the particulars of claim unless they are shown to be ‘demonstrably untrue or unsupportable’.

The claimants had re-focused their legal argument before the Supreme Court in line with its prior decision in Vedanta. They alleged that RDS had a duty of care to them through Vedanta routes (1) to (4), namely:

(1) RDS taking over the management or joint management of the relevant activity of SPDC;

(2) RDS providing defective advice and/or promulgating defective group-wide safety/environmental policies, implemented as a matter of course by SPDC;

(3) RDS promulgating group-wide safety/environmental policies and taking active steps to ensure their implementation by SPDC; and/or

(4) RDS holding out that it exercises a particular degree of supervision and control of SPDC.

When might a duty of care arise?
As to whether a parent company owes a duty of care under English law, the Supreme Court stated that there was nothing special about the parent-subsidiary relationship - the issue had to be decided under general principles of tort law. The question was: to what extent had the parent taken over, controlled, supervised, advised or intervened in the management of the relevant subsidiary? In that regard, the case set out in the pleadings established that there was a triable issue on Vedanta grounds (1) and (3), and accordingly the appeal was allowed.

Comment

The judgment clarifies that challenges to jurisdiction should not involve a document heavy analysis of the evidence put before it by the court, but rather an assessment as to whether the facts set out in the particulars of claim show a real prospect of success. Those facts should be accepted at face value, unless unsupportable or demonstrably false.

The Vedanta and Okpabi decisions, while procedural in nature, do pose a conundrum for multinational corporations. Do they continue to take a major role in supervising compliance with standards applicable to the subsidiary/group or do they leave the subsidiaries to address this and risk prosecution under the ‘failure to prevent’ offences? Taking into account these decisions and the forthcoming European human rights due diligence legislation due to be enacted by June 2021, some factors to consider going forward will be:

  • Business functions: structuring group activities under vertical business or function lines accountable to the parent might erode the boundaries between separate legal entities, making it easier to bring claims against the parent;
  • ESG due diligence: identifying and assessing actual or potential adverse human rights and environmental impacts that a business may cause or contribute to (including legacy issues) through its operations, relationships, products or services, and taking appropriate preventative and remedial action (eg timely replacement of infrastructure, tracking the effectiveness of such measures and communicating this to all stakeholders) will be a prerequisite for selling into the European Union;
  • Compliance: promoting and enforcing group-wide environmental, regulatory compliance and health and safety policies may be necessary, but could open up the parent to claims alongside the subsidiary (thus making it vital that risk assessments are followed up by effective risk mitigation policies and action on the ground);
  • Ear to the ground: instilling a robust ‘speak up’ system and an effective and responsive complaints process to ensure warning signs are not missed;
  • Crisis management: ensuring the management of subsidiaries have the ability to respond swiftly to crises with an effective crisis management plan;
  • Delegation: training and empowering legal and compliance functions to address these issues in their jurisdictions, to avoid creating a puppet structure; and
  • Embrace change: is there a tangible benefit, in terms of brand, reputation and attracting talent and investment, to be derived from embracing environmental, social and governance metrics as key differentiators for a business, as opposed to treating these simply as compliance issues?

This article was published in Legal Era magazine in May 2021.


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