Parental Guidance from the Supreme Court: When may a UK domiciled parent company owe a duty of care to individuals affected by the acts of its foreign subsidiary?
We discuss a significant Supreme Court decision on parent company liability under English law, Okpabi and others v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd.
This decision on jurisdiction provides helpful guidance on the circumstances in which a UK domiciled parent company may owe a common law duty of care in respect of the actions of a foreign subsidiary company.
Background to the Dispute
The claimants, comprising a group of 42,355 individuals from the Niger Delta region, brought a claim in negligence against Royal Dutch Shell Plc (RDS), incorporated in England, and one of its Nigerian subsidiaries, Shell Petroleum Development Company of Nigeria Ltd (SPDC).
In summary, the claimants alleged that they had suffered substantial environmental damage as a result of oil spills and pollution from pipelines operated by SPDC in Nigeria such that natural water sources used for drinking water, fishing, agricultural, washing or recreational purposes, were no longer safe to use. The claimants argued that RDS owed them a common law duty of care on the basis that it exercised a significant degree of control over material aspects of SPDC's operations, as well as assuming responsibility for SPDC's operations through RDS group-wide policies (and those policies had failed to protect the claimants from the risk of foreseeable harm arising from SPDC's operations).
The claimants served the proceedings on RDS within the jurisdiction, relying on RDS’s English domicile. The claimants obtained permission ex parte to serve SPDC out of the jurisdiction on the basis that it was a "necessary and proper party" for the purposes of the jurisdictional "gateway" set out in paragraph 3.1(3) of Practice Direction 6B.
The defendants brought applications to challenge the jurisdiction of the English court and set aside the service of the claim out of the jurisdiction.
The Decision of the Lower Courts
At first instance, Fraser J concluded that although the court had jurisdiction to try the claims against RDS on the basis that it is incorporated in the UK, it was "not reasonably arguable" that RDS owed any duty of care to the claimants as limbs 2 (proximity) and 3 (reasonableness) of the Caparo v Dickman(2) test were not made out. Fraser J therefore held that the claimants had failed to satisfy the conditions set out in paragraph 3.1(3) of Practice Direction 6B in respect of RDS, as the anchor defendant, and the court therefore declined jurisdiction over the claim against SPDC.
The claimants appealed and, in a majority decision, the Court of Appeal upheld the first instance decision.
The Supreme Court Decision
Following the Court of Appeal's decision, the Supreme Court handed down the much anticipated judgment in Vedanta Resources PLC and another v Lungowe and others(3) (Vedanta), in which the Court confirmed that a duty of care can exist between a parent company and those affected by the operations of its subsidiaries.
Unsurprisingly, the claimants placed significant reliance on the decision in Vedanta in their appeal to the Supreme Court.
The Supreme Court was required to consider two issues in this appeal. The first was whether the Court of Appeal had erred in law. Here, the Supreme Court held that:
- The Court of Appeal materially erred in law by conducting a mini-trial of substantive factual issues; the relevance of likely future disclosure was inappropriate in an interlocutory application. It had therefore failed to focus on the pleaded case and whether that showed the claimants had an arguable claim;
- In relation to the question of control, the court should have examined "the extent to which the parent did take over or share with the subsidiary the management of the relevant activity [in this case, the operation of the pipeline]." The Court further noted that the "control of a company and de facto management of a part of its activities are two different things";
- The Court of Appeal erred when it held that the promulgation of group-wide policies or standards could never in itself give rise to a duty of care;
- The Court of Appeal had further erred when it had applied a general presumption that parent companies will not be liable for their subsidiaries as the Supreme Court in Vedanta had confirmed that no such presumption exists; and
- The Court of Appeal had also erred when it approached the issue of parent company liability in negligence as a special category of liability. Again citing Vedanta, the Supreme Court noted that normal principles of negligence applied when determining questions of parent liability for the actions of a subsidiary.
On the basis of its findings in relation to the first issue, the second issue for the Supreme Court to determine was whether the Court of Appeal was wrong to decide that there was no real issue to be tried. Again, the Supreme Court disagreed with the Court of Appeal and held that there was a real issue to be tried, and it was reasonably arguable that RDS owed the claimants a duty of care, based on the case set out in the pleadings, factual witness evidence and the real prospect of relevant and significant future disclosure. Two internal RDS documents, (the "RDS Control Framework "and the "RDS HSSE Control Framework"), gave weight to the claimants' case; the RDS Control Framework showed that the Shell Group was organised along "Business and Functional lines, rather than simply according to corporate status".
These two RDS internal documents showed that the Shell Group has a vertical organisational structure involving significant delegation, such that whilst formal decisions are taken at subsidiary corporate level, these decisions are generally taken on the basis of prior advice and consent from the vertical organisational authority. Therefore, how this organisational structure worked in practice, and the extent to which RDS was involved in relation to the operations of SPDC, raise triable issues for which proper disclosure is needed.
On this basis, the Supreme Court decided unanimously that the claimants' appeal should be allowed.
It is important to note that this is an interlocutory decision on jurisdiction, so these issues have not yet properly been tested in the courts. However, when read alongside the Supreme Court decision in Vedanta, this decision is potentially of real importance to UK domiciled holding companies, particularly those who may be at risk of claims alleging a duty of care in relation to the actions of their foreign subsidiaries or branches. It is unlikely to open the floodgates for claims against parent companies in the English courts at this stage, but it does provide helpful clarification on the potential liability of English domiciled parent companies. It further highlights the importance of giving careful consideration to the way in which parent companies exercise (or purport to exercise) control over the actions of their subsidiaries, for example by way of reference to management structures, policies and practices. Whilst there remains uncertainty as to the precise circumstances in which a parent company will be deemed to hold a duty of care (which will be addressed when this case and Vedanta proceed to trial), with each case being examined on its own facts, this Supreme Court judgment suggests that we will certainly see more cases proceed to trial.