UK Supreme Court Provides Clarification on Jurisdiction Challenges and Parent Company Liability Regarding Damage by Subsidiaries

Case: Okpabi and others (Appellants) v Royal Dutch Shell Plc and another (Respondents) [2021] UKSC 3

The UK Supreme Court (the UKSC) has held that claims brought by thousands of Nigerian individuals in negligence against a UK-domiciled parent company, Royal Dutch Shell Plc (RDS), and its Nigerian subsidiary, Shell Petroleum Development Company of Nigeria Ltd (SPDC), can proceed in the English courts. The claimants seek compensation for alleged environmental damage caused by oil spills from pipelines operated by SPDC in Nigeria.

Okpabi highlights the risk that UK-domiciled parent companies face from claims for damages caused by the actions of foreign subsidiaries. It also emphasises that subsidiaries’ nonadherence to global policy frameworks set out by multinational parent companies may give rise to liability in tort in England, including for human rights violations or environmental damage.

Background

The claimants allege that they suffered damage from oil spills from pipelines negligently operated by SPDC in the Niger Delta. They argued that RDS also owed them a duty of care because of the significant control it exerted over SPDC’s operations and that it had breached this duty by failing to protect them from the risk of foreseeable harm arising from those operations.

The claimants served the claim on RDS in England on the basis that under the Recast Brussels Regulation, a EU-domiciled defendant should be sued in its home state. Using RDS as an anchor defendant, the claimants sought to serve the proceedings out of the jurisdiction on SPDC as a defendant on the basis that SPDC was a “necessary or proper party” to the proceedings. However, to obtain the Court’s permission to do so, the claimants had to establish that their claim against RDS raised a real issue to be tried and that RDS was itself a necessary or proper party to the claim.

At first instance, in January 2017, the High Court refused the claimants permission to serve SPDC out of the jurisdiction, holding that (1) it was not reasonably arguable that RDS owed them a duty of care, and accordingly, (2) the conditions for granting permission to serve SPDC out of the jurisdiction were not satisfied. The Court of Appeal reached the same conclusion in February 2018. The claimants appealed.

The Supreme Court Decision in Lungowe v Vedanta Resources plc

The claimants’ application for permission to appeal to the Supreme Court was stayed pending judgment in Vedanta, a case the Supreme Court considered to be “very relevant to both the procedural and substantive issues raised” in Okpabi.

In Vedanta, 1,826 Zambian citizens successfully established the jurisdiction of the English courts to try claims against KCM and its UK incorporated parent company, Vedanta Resources plc (Vedanta), for alleged acts of environmental damage caused by waste discharge from a mine operated by KCM.

The UKSC’s judgment in Vedanta is of particular importance because it clarified when a duty of care arises in a parent/subsidiary relationship. The UKSC held that whether a duty of care existed in a parent/subsidiary context depended on the degree of parent company intervention in the affairs of the subsidiary and the extent of the control and supervision exerted by the parent. In doing so, the Court found that there is nothing special about a parent/subsidiary relationship and that “a parent company will only be found to be subject to a duty of care in relation to an activity of its subsidiary if ordinary, general principles of the law of tort regarding the imposition of a duty of care on the part of the parent in favour of a claim are satisfied in the particular case.”

The Supreme Court Decision in Okpabi

The claimants asserted four “Vedanta routes” through which they claimed RDS had intervened in the management of SPDC and accordingly owed them a duty of care:

1. RDS took over the management/joint management of SPDC’s operations.
2. RDS provided defective advice and/or published defective groupwide environmental policy frameworks, in particular, RDS’s mandatory Control Framework and Health, Security, Safety and Environment Control Framework.
3. RDS took steps to ensure the implementation of these policy frameworks by SPDC by establishing, for example, a Corporate and Social Responsibility Committee to oversee all compliance policy frameworks and to report to the board of directors.
4. RDS held out that it exercised a degree of supervision and control of SPDC; it had centralized control over SPDC’s global oil spill response procedure and required SPDC to report on key performance indicators to RDS.

RDS contended that these matters did not demonstrate sufficient direction, control, and oversight to impose a duty of care on RDS for the actions of SPDC. RDS contended that SPDC had exclusive responsibility for its own operations and the implementation of groupwide standards and that SPDC is a major operating company in its own right with financial independence.

The UKSC unanimously allowed the claimants’ appeal. The UKSC warned against “generalised assumption[s] or presumption[s]” with regard to parent company liability and, in doing so, disagreed with the Court of Appeal’s apparent view that by maintaining groupwide policies and guidelines, a parent company could never incur a duty of care in respect of the activities of a subsidiary.

While the UKSC noted that the “Vedanta routes” did not constitute special or separate parent/subsidiary duty of care tests, it found the following:

1. When dealing with jurisdiction, the question of whether there is a triable claim against the defendant is whether the asserted cause of action has a real prospect of success.
2. The Court of Appeal wrongly conducted a “mini trial” involving lengthy submissions and disclosure of hundreds of internal corporate documents. Instead, it should have determined whether the claimants had a real prospect of success by reference to the facts alleged in the pleadings, which should be accepted unless they are “demonstrably untrue or unsupportable.”
3. The Court of Appeal erred in its determination that parent company liability for the activities of subsidiaries was a distinct form of negligence. Following Vedanta, the general principles of negligence should be applied to the parent-subsidiary relationship.
4. Nevertheless, the four Vedanta routes the claimants relied upon as examples of RDC’s intervention in the management of its subsidiary, can serve as a convenient guide to the factual areas that claimants may rely on in seeking to establish that a parent company owes a duty of care.

Impact

Both Vedanta, and now Okpabi, confirm that parent companies should consider carefully how management, supervision, advice, and policy are handled: Corporate global policy frameworks can give rise to liability in respect of their subsidiaries’ operations. However, with increasing pressure on parent companies to regulate their human rights and environmental impact, and more generally conduct good governance due diligence throughout their value chain, litigation of this nature is likely to become more frequent. The Court’s judgment therefore highlights the perennial difficulty facing global parent companies in establishing good governance, where group structures are often complex and subsidiaries operate with a substantial degree of independence. Where companies have established global policies including, for example, to conduct business in accordance with the United Nations Guiding Principles on Business and Human Rights, it is critical for such companies to ensure that they establish effective corporate governance over their subsidiaries and closely monitor the impact of their activities on the ground.

While Okpabi and Vedanta may result in increased numbers of international claims being made in the English courts and growing amounts of litigation funding for such claims, note that the English courts, particularly since Brexit, retain considerable discretion on whether England is the appropriate forum for international claims to be heard. This discretion is exercised very early in any proceedings. Although judges have been critical of the considerable resources deployed by parties in seeking to establish and challenge the jurisdiction of the English courts to hear international mass tort claims, the recent case of Município De Mariana & ors v BHP Group PLC & BHP Group Ltd [2020] EWHC 2930 (TCC) shows that the courts will dismiss abusive and inappropriate claims at an early stage. Therefore, despite Okpabi and Vedanta, the jurisdiction stage will remain an important strategic consideration for companies facing international mass tort claims in England.