Supreme Court decision reaffirms Vedanta approach

In Okpabi and others v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd the Supreme Court reaffirmed its decision in Vedanta Resources PLC and another v Lungowe and others that UK parent companies can have liability for the overseas operations of their non-UK subsidiaries.

The Court found that the claimants were able to demonstrate an arguable case that the UK listed first defendant (RDS) owed a duty of care to third parties affected by its Nigerian subsidiary (SPDC).

What does this mean for multinational parent companies?

• The Supreme Court has reaffirmed its approach in Vedanta with regards to the circumstances in which a UK parent company could be said to owe a direct duty of care to third parties affected by the overseas operations of a non-UK subsidiary.  See our analysis of the Vedanta decision and its implications here.  However, it continues to refuse to set prescriptive principles or an exhaustive list of factors and circumstances in which an arguable parent company duty of care might arise, emphasising that the existence of parent company duties of care is a question of fact in each specific case. This will no doubt be of concern to multinationals wishing to understand in exactly what circumstances a parent company might attract liability for its subsidiaries' activities.

• Although the Vedanta and Okpabi decisions turn on the specific facts of those cases, those facts are by no means unique; we anticipate that this decision will fuel the interest of litigation funders and claimant law firms already piqued by Vedanta, encouraging equivalent claims.

• That said, the appeal of the English courts to overseas claimants is ultimately likely to depend on how their claims are treated, and whether an actual (rather than merely arguable) parent company duty of care is established, once this type of case is considered on its merits. Vedanta settled in January 2021.   The substantive trial of Okpabi is yet to be listed but will be an important milestone for these types of mass tort claim if the case does proceed to trial.

• Nevertheless, the Okpabi decision maintains the pressure already on multinationals to manage risks effectively across their corporate groups and supply chains. A failure to mitigate these risks could create legal liability for multinational parent companies, result in litigation and cause significant harm to the reputation and brand of the wider corporate group.  This is of particular note in the current ESG-focused climate.

• However, this is complicated by the Supreme Court's rejection of the Court of Appeal's suggestion of a general limiting principle that a parent company could never incur a duty of care for the activities of a subsidiary simply by establishing a group-wide policy or standard.  Whether such a policy or standard does incur that duty will be a question of fact in each specific case at trial.

• Multinationals should take note that at trial it is likely that sensitive, internal documents will be discussed, and senior executives cross-examined in order to address the issue of operational control.

Background

The Ogale and Bille communities are seeking damages and remedial works in respect of oil spills from SPDC-operated pipelines. The claimants argued that RDS owed a duty of care to the claimants which arose from the control which it purportedly exercised over SPDC's operations, such that RDS was a necessary and proper party to the claims.

RDS and SPDC applied to dispute the jurisdiction of the English court in respect of the claims. Fraser J at first instance rejected jurisdiction to hear the claims (see our article for more details). The claimants appealed.

In a majority decision (Sales LJ dissenting), the Court of Appeal found that the claimants were unable to demonstrate a properly arguable case that RDS owed a duty of care to third parties affected by the Nigerian operations of SPDC (see our article for more details).  The claimants appealed again.

Consideration of the claimants' application for permission to appeal was deferred by the appeal panel until after the Supreme Court's judgment in Vedanta.  Following that judgment, permission was granted with it being noted that it was "consider[ed] that the law has been adequately clarified in Vedanta, but that it would be unjust to refuse permission in circumstances where this case might equally have been treated as the lead case". 

The Supreme Court's decision in Okpabi

Establishing a duty of care

The Supreme Court reconfirmed that there was nothing legally novel about the parent/subsidiary relationship that requires a special test or set of factors for deciding parent company liability for the acts or omissions of a subsidiary. It is to be determined on ordinary, general principles of the law of tort regarding the imposition of a duty of care. In the context of parent/subsidiary relationships the key test is one of corporate control: did the parent company have superior knowledge and expertise regarding, and control over, the subsidiary's operations?

Mini-trial

As this was a jurisdictional challenge and not a full trial on the merits, the Supreme Court re-emphasised that the claimants needed only to show that a duty of care was 'arguable'. The Supreme Court found that the Court of Appeal had materially erred in law in its determination of the arguability of the claim, conducting a mini-trial that led it to adopt an inappropriate approach to contested factual issues and the documentary evidence contrary to the guidance provided in Three Rivers (No 3). Instead, the Court of Appeal ought to have referred to the pleaded case (accepting the facts as stated unless, exceptionally, they are demonstrably untrue or unsupportable) and determined whether that disclosed an arguable case.  This is the summary judgment test of real prospect of success, referred to in Vedanta.

The parties were criticised for swamping the Court of Appeal with evidence, particularly the claimants who had not updated their pleadings to reflect that evidence.  From a practical perspective, however, it is difficult to see who will police this prior to the hearing (or indeed at the hearing given the first instance and Court of Appeal decisions).  Perhaps the answer is to seek directions from the court at the outset, although there may be tactical reasons why a claimant might not seek to do so.

Group-wide policies or standards

The Supreme Court rejected the Court of Appeal's indication that the promulgation by a parent company of group wide policies or standards can never in itself give rise to a duty of care.  Whether it does or not will be a question of fact at trial.  In Vedanta, the Supreme Court noted that the question will be "the extent to which, and the way in which, the parent availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations... of the subsidiary."  In Okpabi, the Supreme Court went further, clarifying that "[i]n considering that question, control is just a starting point. The issue is the extent to which the parent did take over or share with the subsidiary the management of the relevant activity... That may or may not be demonstrated by the parent controlling the subsidiary. In a sense, all parents control their subsidiaries. That control gives the parent the opportunity to get involved in management. But control of a company and de facto management of part of its activities are two different things. A subsidiary may maintain de jure control of its activities, but nonetheless delegate de facto management of part of them to emissaries of its parent."

The case for establishing parental liability on Okpabi

By reference to the case as set out in the pleadings (having determined that the facts as pleaded should not be rejected as demonstrably untrue or unsupportable), the Supreme Court found that there is a real issue to be tried in relation to the following allegations:

• RDS taking over the management or joint management of the relevant activity of SPDC;

• RDS promulgating group wide safety/environmental policies and taking active steps to ensure their implementation by SPDC.

Evidencing operational control at trial

The Supreme Court highlighted the importance of internal corporate documents in the context of cases concerning the negligence liability of a parent company for the acts of its subsidiary, noting that "Operational control is most likely to be revealed by documentation relating to operational matters."  It also noted the importance of witness evidence in relation to how the parent/subsidiary organisational structure worked in practice.  Multinationals should take note that this issue, if disputed, is likely to result in sensitive, internal documents being discussed at trial and senior executives being questioned in the witness box.

Conflict between parental liability and ESG?

Businesses face increasing environmental, social, governance (ESG) expectations, including whether they are conducting their operations in a sustainable way, and without violating human rights. We have highlighted some key areas of focus for 2021 here. Further details can also be found on our ESG microsite.

Following Okpabi, some businesses may be deterred from taking steps to protect environmental and human rights through group-wide policies or standards because of a perceived risk of parent company liability.  Conversely,  one of the better solutions for avoiding parent company liability is to ensure that risks are effectively mitigated through appropriate on-going due diligence and parent company-level grievance mechanisms. Further, parent companies are increasingly expected by their shareholders/investors to demonstrate how ESG policies and standards are set, implemented and governed top down throughout the group. Ultimately, every corporate will need to consider how it balances these competing risks and we have already advised a number of corporates on precisely this issue.

As matters stand, a group-wide policy will not automatically establish parental liability over outcomes which are not within that parent company's control - whether it does or not will be a question of fact.  How the court approaches this issue in Okpabi at trial will be of significant interest to multinationals.

It would be a bitter irony if the English courts' willingness to hear claims against UK parent companies for the overseas operations of their non-UK subsidiaries indirectly led to reduced engagement by multinationals with human rights and environmental concerns.