Does a company’s duty of care extend to the actions of its suppliers?

In Hamida Begum (on behalf of Mohammed Khalil Mollah) v Maran (UK) Limited [2021] EWCA Civ 326 the Court of Appeal considered that in certain circumstances a UK company could be liable for the actions of a third party in its supply chain.

In its decision, the Court found that the Claimant (who brought the claim on behalf of her deceased husband, Mr Mollah) was able to demonstrate an arguable case that the Defendant, a UK company, owed a duty of care to Mr Mollah, who was fatally injured by a third party in the Defendant's supply chain. 

What does this mean for UK companies?

• The Court of Appeal has extended (albeit on an arguable basis only) the duty of care owed by a UK company to include those injured by a third party in its supply chain.

• That duty of care will only be established in "relatively extreme" cases, with much turning on the specific facts.  However, the facts of the case are not unique, and could fuel the interest of litigation funders and claimant law firms, encouraging equivalent claims (throughout the supply chain, not just at asset end-of-life).

• That said, the attraction 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) duty of care is established, once this claim is considered on its merits.  But, before the claim can go to trial, the Claimant must first overcome the limitation arguments that will be brought against her at a preliminary issues hearing.  It may be that overseas claimants will have to wait for another test case.

• Nevertheless, the court's decision will add to the growing pressure on companies to manage risks effectively across their supply chains, both upstream and downstream.  A failure to mitigate these risks could create legal liability for companies, result in litigation and cause significant harm to their reputations and brands.  This is of particular note in the current ESG-focused climate (see our article here).

• The use of ESG-related obligations in supply chain agreements could be used to manage such risks; however, those obligations must have real force, which the company expects the third party to adhere to.  In order to strengthen any such obligation, companies should consider building in leverage, such as linking payment arrangements to the ESG-related obligation(s).

Background

Having made enquiries, obtained quotations and conducted negotiations, the Defendant, a UK company called Maran (UK) Limited (Maran), sold a ship that had reached the end of its service and needed to be demolished to Hsejar Maritime Inc (Hsejar) for USD $16m. 

For the purpose of the Defendant's summary judgment / strike out application (and therefore this appeal) it was assumed (and the Defendant conceded) that because the Defendant had chosen to sell the ship for such a high price, it knew that the buyer would send the ship to Bangladesh to be broken up (which the buyer did), where it would be disposed of using inherently dangerous working practices that would expose workers to a real risk of death or personal injury.   

On 30 March 2018, Mr Mollah, whilst working on the demolition of the ship without having been provided with a safety harness, fell from a considerable height and died from his injuries.

On 11 April 2019, Mr Mollah's widow, Hamida Begum, (represented by Leigh Day) brought a claim on his behalf against Maran in the English High Court.  Maran applied to strike out the claim and for summary judgment, which the High Court denied, leading Maran to appeal.

The Court of Appeal's decision

Extending the duty of care

In principle, a defendant is not liable for the harm caused by the acts of a third party.  However, there is a well-established exception to that principle, which applies when the defendant is responsible for creating a state of danger that results in the third party causing injury to the claimant.  In this case, the Court of Appeal extended that exception, albeit on an arguable basis only, to the acts of a third party in the Defendant's supply chain, whose negligence resulted in the death of Mr Mollah. 

In its decision, the Court of Appeal recognised that this was an unusual extension to that exception and noted that it will only be in "a relatively extreme case" that it will apply: "Much will turn on the precise nature and extent of the danger said to have been created."  In this case, the Court found that the Defendant arguably played an active role in sending the ship to Bangladesh, knowingly exposing workers such as Mr Mollah to the significant dangers that working on that ship in Bangladesh entailed.

This was the second route proposed by the Claimant to establish a duty of care owed by the Defendant to Mr Mollah.  The first sought to use typical Donoghue v Stevenson principles, which require proximity between Mr Mollah and the Defendant, in addition to foreseeability of harm. The Court found proximity to be a significant hurdle in this case, particularly given the third party acts of both Hsejar and the shipbreaking yard.  That said, the Court could not conclude that this route was so fanciful that it should be struck out.  

In its decision, the Court recognised that if a UK company was found to owe a duty of care for the actions of a third party in its supply chain, the ramifications might be extremely far-reaching.  However, it felt that those ramifications go to the consideration of whether, if that duty is found to fall outside any established category of duty of care, it would still be fair, just and reasonable to find the existence of the duty in the particular case.  At an interim stage like this, the Court cannot consider such an issue.  The Court also had sympathy for the Defendant's submission that it cannot be held to be the shipbreaking world's policeman.

Contractual terms

In the Memorandum of Agreement, Hsejar agreed that the sale was to be for demolition purposes only and that it would only sell the ship to a "ship breaker's yard that is competent and will perform the demolition and recycling of the vessel in an environmentally sound manner and in accordance with good health and safety working practices" (Clause 22).  In its submissions, the Defendant complained that it was wholly unclear what else it could have done, or should have done, to avoid the risks to Mr Mollah. 

The Court considered this to be the Defendant's weakest argument, stating that the Defendant "could, and should, have insisted on the sale to a so-called 'green' yard, where proper working practices were in place."  The evidence was that there were a number of such yards around the world where the ship could have safely been broken down and that both Hsejar and the Defendant knew that Clause 22 would be ignored.

In the Court's view, if the payment arrangements contained in the Memorandum of Agreement were linked to the delivery of the ship to an approved yard, then both Hsejar and the Defendant would have had a very real interest in ensuring that Clause 22 was more than words on a piece of paper.  Accordingly, the Court found that it was at least arguable that the Defendant could have acted differently and that, if it had done, it might have made a real difference to the outcome.

Corporate liability and ESG

Hamida Begum is the latest in a series of recent decisions broadening the reach of corporate accountability for third party acts.  See our articles on the earlier parent company liability cases of Vedanta and Okpabi here and here. 

Businesses are facing increasing environmental, social, governance (ESG) expectations from their shareholders/investors, consumers and regulators, including whether they are conducting their operations in a sustainable way, and without violating human rights.  See our ESG microsite for further details.  This includes in their supply chains, where we are seeing legislative pushes towards mandatory human rights and environmental due diligence requirements, including the UK's Modern Slavery Act 2015 and Environment Bill (see our article here).  In addition, many businesses have pledged to follow the voluntary UN Guiding Principles on Business and Human Rights in their day to day operations. 

In order to comply with these obligations and manage ESG-related risks across their supply chains, companies are increasingly relying on ESG-related obligations in their supply chain agreements.  However, companies should beware the Court's unwillingness in Hamida Begum, as described above, to allow a defendant to rely on such a clause where the evidence suggests that the parties to that agreement knew that it would not, or could not, be followed or enforced.  In order to strengthen any such obligation, companies should consider building in leverage such as linking payment arrangements to the ESG-related obligation.

What's next for this case?

The Court of Appeal held that it would be necessary to hold a short preliminary issues hearing to determine whether the claim is time barred under Bangladeshi law (which applies a one year, non-extendable limitation period for this type of claim). 

In its judgment, the Court rejected the Claimant's argument that the claim was one of environmental damage, which would have allowed for a three-year limitation period under English law (Article 7 of Rome II); however, it found that it was at least arguable the one-year limitation period under Bangladeshi law caused "undue hardship", making it incompatible with public policy (Article 26 of Rome II).