knowledge 26 March 2021 |

Group Organisational Structure Raised Triable Issues Against Parent Company for Subsidiary’s Alleged Environmental Damage

In the recent case of Okpabi v Royal Dutch Shell plc,¹ the claimants commenced proceedings in England against Royal Dutch Shell plc and Shell Petroleum Development Company of Nigeria Ltd.  The former was the parent company of the Shell Group (the “parent”) and incorporated in England while the latter was its Nigerian subsidiary (the “subsidiary”).  It was alleged that this subsidiary was responsible for environmental damage in Nigeria. 

The parent was joined to the proceedings as the claimants alleged that it owed them a common law duty of care as it exercised significant control over material aspects of its subsidiary’s operations and/or assumed responsibility for those operations, including by the promulgation and imposition of mandatory health, safety and environmental policies, standards and manuals which allegedly failed to protect the claimants against the risk of foreseeable harm arising from the subsidiary’s operations. 

For its part, the parent argued that the English courts did not have jurisdiction to hear the claim.  The issue for decision was whether the claimants had an arguable case that the UK domiciled parent owed them a common law duty of care so as properly to found jurisdiction against the foreign subsidiary as a necessary and proper party to the proceedings.  It was accepted that to succeed the claimants had to establish that their claims against the parent, raised a real issue to be tried with a real prospect of success. (See our briefing on the issue of parent liability here.)

The claimants were unsuccessful at first instance and on appeal to the Court of Appeal, but were ultimately successful in a further appeal to the UK Supreme Court.

Decision of the court

In allowing the appeal, and applying the relevant test, the UK Supreme Court said that the claimants had a real prospect of success.  Cautioning against conducting a mini-trial at this stage of proceedings, it said that having regard to the pleadings and certain evidence, it was reasonably arguable that the parent owed the claimants a duty of care.  The Supreme Court then went on to make some additional points.

First, it said that in light of the Supreme Court’s recent decision in Vedanta,² the test for a duty of care set out in Caparo Industries plc v Dickman³ and, in particular, whether there was sufficient proximity and whether it would be fair, just and reasonable to impose a duty of care, was not the correct test to apply here.  This was because the liability of parent companies in relation to the activities of their subsidiaries was not, of itself, a distinct category of liability in common law negligence.  It raised no novel issues of law and was 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, whether a duty of care arose depended on:

• “…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 (including land use) of the subsidiary.”⁴

It added that the Court of Appeal had focused inappropriately on the issue of control.  Instead, the Supreme Court said that control was just a starting point.  The issue was the extent to which the parent did take over or share with the subsidiary the management of the relevant activity.  That might or might not be demonstrated by the parent controlling the subsidiary.  In a sense, all parents controlled their subsidiaries.  That control gave the parent the opportunity to get involved in management.  But control of a company and de facto management of part of its activities were two different things.  A subsidiary might maintain de jure control of its activities, but nonetheless delegate de facto management of part of them to emissaries of its parent.

The Supreme Court also said that to the extent that the Court of Appeal indicated that the promulgation by a parent company of group wide policies or standards could never in itself give rise to a duty of care, this was inconsistent with Vedanta.

Finally, the Supreme Court pointed to the vertical organisational structure of the Shell group which involved significant delegation.  This meant that while formal binding decisions were taken at corporate level, these were taken on the basis of prior advice and consent from the vertical business or functional line and organisational authority generally preceded corporate approval.

How this organisational structure worked in practice and the extent to which the delegated authority was involved and exercised in relation to subsidiary’s decisions was very much in dispute here and clearly raised triable issues.

Comment

The decision in this case is significant as it indicates how the UK courts will deal with jurisdictional challenges in proceedings where a parent company is joined as the anchor defendant, in respect of acts of a foreign subsidiary, alleging a duty of care by a parent company for the actions of that subsidiary.  That is particularly so post-Brexit.  It should be remembered that in respect of the application of the parent/foreign subsidiary liability, the Court was dealing with the facts in the context of a jurisdiction challenge where it could not reach final decisions, which is a matter for the full trial.   

The UK Supreme Court also made it clear that in the context of addressing those issues at the jurisdiction challenge stage, the analytical focus should be on the particulars of claim and whether, on the basis that the facts there alleged are true, the cause of action asserted has a real prospect of success.  Except where allegations of fact are demonstrably untrue or unsupportable, it will generally not be appropriate for a defendant to dispute the facts alleged through evidence of its own.  The court should not conduct a mini-trial at the jurisdiction challenge stage.