Shearman And Sterling

Oil pipelines

February 18, 2021

UK Supreme Court Gives Further Guidance on Parent Company Liability for Subsidiaries in Environmental and Other Mass Tort Claims

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UK SUPREME COURT GIVES FURTHER GUIDANCE ON PARENT COMPANY LIABILITY FOR SUBSIDIARIES IN ENVIRONMENTAL AND OTHER MASS TORT CLAIMS

The Speed Read

The UK Supreme Court has handed down judgment in Okpabi v Royal Dutch Shell Plc [2021] UKSC 3. The judgment concerned a challenge to the jurisdiction of the English courts in an environmental tort claim against a UK-domiciled parent company in connection with the acts of its foreign subsidiary. It will therefore be of interest to all UK-domiciled companies (particularly in the extractive sectors) with foreign subsidiaries performing activities that potentially give rise to environmental or other tortious liability.

The claim concerns damage caused by oil spills along the Nigerian coast. The Claimants, Nigerian citizens impacted by the spill, claim damages against Royal Dutch Shell Plc (RDS) and its foreign subsidiary, the Shell Petroleum Development Company of Nigeria Ltd (SPDC).

As to the issues of parent company liability, the Supreme Court applied its recent decision in Lungowe v Vedanta Resources plc [2019] UKSC 20 by confirming that (i) there is no special category of negligence liability for establishing whether a parent company is liable for the activities of its subsidiary and (ii) the existence of a duty of care in this context will depend on the extent to which the parent took over, intervened in, controlled, supervised or advised the management of the relevant operations of the subsidiary. Both judgments therefore confirm that parent company liability in this area will turn on the facts of each case, which ultimately leaves a degree of uncertainty for parent companies, depending on their corporate structure, group-wide policies and the extent of their involvement in the activities of their subsidiaries.

The judgment re-highlights (following Vedanta) the point that parent company liability for the activities of its subsidiaries is capable of arising in a number of ways. However, it appears from the case that corporate groups which operate vertically and by business unit, rather than horizontally by distinct corporate entities, may be more likely to be found to exercise relevant control over, and therefore be held responsible for, the actions or omissions of subsidiaries. In particular, UK-based parent companies may have liability imposed on them where they take over the management of the relevant activities of the subsidiary and/or promulgate (and seek to implement) group-wide safety or environmental policies.

Parent companies may therefore wish to consider carefully their group-wide policies in light of these recent Supreme Court judgments. They will, like us, no doubt wish to continue to follow the two cases closely to see how the English courts approach parent company liability in environmental and other mass tort cases, if and when they reach trial. In that regard, the decisions in Vedanta and Okpabi ought not to deter parent companies from implementing group-wide policies and standards and having such policies and standards will not necessarily mean that negligence liability for the actions of their subsidiaries is imposed on a parent company. That being said, Okpabi may provide renewed impetus for Corporate groups to closely examine the way in which the parent implements those policies across the group and is involved in its subsidiaries’ activities.

It is interesting in this context to note that the European Commission highlighted the potential need to require companies to undertake environmental, social and governance due diligence in their supply chains in its 2018 sustainable finance action plan. The Commission more recently published a state of play report on this subject in February 2020 and has announced that it expects to issue a directive in due course, launching a public consultation last October towards making such corporate due diligence mandatory. Public companies will need to consider their disclosure obligations and in particular their environmental disclosure obligations in any event.

As to the jurisdiction challenge itself, the Claimants sought to bring SPDC within the jurisdiction of the English Courts as a “necessary or proper party” to the claim against RDS. To do so the claimants had to show that there is a good arguable case against the “anchor” defendant (i.e. that there were real issues to be tried as against RDS).

The Supreme Court overturned the decisions of the Courts below, concluding that there were real issues to be tried against RDS. In particular, the Courts below had erred in law by conducting a “mini-trial” in respect of the available (and voluminous) evidence.  Instead, they should have merely determined whether the Claimants’ pleaded case and supporting evidence (which are for this purpose to be accepted as true unless demonstrably untrue or unsupportable) disclosed a real issue to be tried. Therefore, the jurisdiction challenge failed.

The Okpabi judgment provides a reminder that the threshold for the relevant jurisdictional test applied by English Courts is not high. Therefore, parent companies (and their subsidiaries) may have more difficulty challenging the English court's jurisdiction, where claimants are able to plead a case implicating the parent company that is arguable on its face. On the same basis, it may also be more difficult for a defendant to knock out a claim at the summary judgment stage. Time will tell whether this is part of a broader trend of European courts more generally entertaining claims against European headquartered companies for environmental damage suffered in developing economies. For example, SPDC was recently unsuccessful in the Dutch courts in defending a different claim for oil spill damage.

Background

The Okpabi judgment concerns two sets of proceedings, the Ogale proceedings and the Bille proceedings, each of which involve allegations that a number of oil spills have occurred from oil pipelines and associated infrastructure operated in the vicinity of the Claimants' communities in Nigeria, causing widespread environmental damage including serious water and ground contamination.

The Claimants allege that the oil spills were caused by the negligence of SPDC which operates the pipeline and infrastructure under a joint venture with a number of other parties. RDS, a UK domiciled company, is the parent company of the multinational Shell group, within which SPDC sits.

Supreme Court Decision

It was common ground that the Claimants must establish that their claims against RDS raise a real issue to be tried, which means that they must have a “real prospect of success” at trial.

Against this background, there were two issues for the Supreme Court to determine on appeal:

  1. Whether the majority of the Court of Appeal materially erred in law in its approach to deciding the jurisdiction issue; and
  2. If so, whether the majority was wrong to decide that there was no real issue to be tried, i.e., whether, applying Vedanta, there was a real prospect that RDS would be held liable in negligence for the activities of SPDC at trial.

Material Errors of Law

The Court of Appeal had materially erred in law in its approach to applying the “real issue to be tried” test at an interlocutory stage. In particular:

  • The Courts below should have, but did not, focus on the pleaded case (and evidence) in determining whether, on their face, they disclosed a real issue to be tried. Instead, the Courts below were drawn into evaluating the weight of the evidence and exercising their judgement based on it, which was not their task at an interlocutory stage.
  • The lower Courts had also gone beyond merely assessing whether the pleadings and evidence disclosed a “real issue to be tried” and conducted a “mini-trial” and made “findings” in relation to the evidence. Further, RDS’s evidence and that of its witnesses had been accepted and preferred without the opportunity for disclosure or cross-examination. This approach necessarily implied that the prospect of there being further relevant evidence on disclosure should be discounted. Again, this was inappropriate at an interlocutory stage. The Court only needed to decide whether there were reasonable grounds for believing that disclosure might materially add to or alter the evidence relevant to whether the claim had a real prospect of success.  The likely importance of internal corporate documents is clear in cases of parent company liability and, in this case, it was clear there were a substantial number of documents not yet disclosed that could be material.

The Supreme Court confirmed that the analytical focus should be on the particulars of claim and whether, on the assumption the facts there alleged are true, the claim asserted demonstrates a serious issue to be tried. Save in cases where allegations of fact are demonstrably untrue or unsupportable, it is generally not appropriate for the Court to evaluate and determine any disputed factual issues. Indeed, if it is called on by the parties to do so, that may itself tend to show that there is a serious issue to be tried.

The Court of Appeal’s judgment was also inconsistent in several respects with Vedanta:

  • The Court of Appeal held that a parent company’s promulgation of group-wide policies or standards could never in itself give rise to a duty of care. The Supreme Court had rejected that “limiting principle” in Vedanta (and again did so here).
  • The Court of Appeal appeared to focus too much on the issue of the parent’s control of the subsidiary. Control was merely a starting point in the analysis, as the more pertinent issue is whether the parent did in fact 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.
  • There is no special category of duty of care for establishing whether a parent company is liable in negligence for the activities of its subsidiary. However, the Court of Appeal appeared to consider that there was such a special category. In this regard, the Supreme Court noted that it would be wrong to make assumptions (as the Court of Appeal had) about any particular corporate group or management structure given that there are no limits to the models of management and control that may be put in place within a multinational group of companies. The parent may be a passive investor or, at the other extreme, may carry on management of the group vertically as one commercial undertaking, with legal personality becoming irrelevant.
  • As the liability of parent companies for the activities of their subsidiaries is not a novel category of case, it is to be determined on ordinary, general principles of the law of tort regarding the imposition of a duty of care. Therefore, following Vedanta, whether a duty of care arises will depend on the extent to 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.

Real Issue to be Tried

The evidence did not demonstrate that the allegations in the particulars of claim should be rejected as demonstrably untrue or unsupportable. Having reached that conclusion, the Supreme Court held that the Claimants’ pleaded case, together with evidence of two particular corporate policies, established that there was a real issue to be tried, and this was supported by their witness evidence. This was held by the Court on the basis of two principles drawn from Vedanta, namely that there were real issues to be tried in relation to:

  • RDS taking over the management or joint management of the relevant activity of SPDC; and
  • RDS promulgating group-wide safety/environmental policies and taking active steps to ensure their implementation by SPDC.

Of significance in this regard was the fact that the Shell group’s vertical corporate structure, organized along business lines, rather than simply according to corporate status, was such that organizational approval generally preceded corporate approval and that allowed for significant delegation, including in relation to safety issues and environmentally responsible operations. In other words, group businesses “were carried on as if they were a single commercial undertaking, with boundaries of legal personality and ownership within the group becoming irrelevant.” How that organizational structure, and the extent of involvement of RDS’s delegated authority in relation to SPDC’s decision-making, worked in practice were in dispute and clearly raised triable issues.

Authors and Contributors

Jonathan Swil

Partner

Litigation

+44 20 7655 5725

+44 20 7655 5725

London

Garreth Wong

Partner

International Arbitration

+44 20 7655 5879

+44 20 7655 5879

London

Mehran Massih

Counsel

Real Estate

+44 20 7655 5603

+44 20 7655 5603

+1 212 848 7377

+1 212 848 7377

London

Margaret Clare Ryan

Counsel

International Arbitration

+44 20 7655 5130

+44 20 7655 5130

London

James Matthews

Associate

Litigation

+44 20 7655 5819

+44 20 7655 5819

London