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Subsidiary conduct: when to blame the parent?

The question of when a parent company will be held liable for the actions of its subsidiary was considered recently by the UK Court of Appeal. The court examined a key consideration, namely the extent to which the subsidiary was implementing group policies set by the parent and, if it was, whether that created a potential liability of the parent to a third party that was injured by the subsidiary. The court concluded that a requirement on the subsidiary to implement group policies would not, in itself, be sufficient to establish a duty of care between the parent and those affected by the subsidiary’s actions. This briefing looks at some of the issues considered.

Background

In the High Court, the claimants sought damages arising from environmental damage caused by oil spills from the defendants’ pipelines. The first defendant was the holding company of the Shell Group (the parent) and the second defendant (the subsidiary) was responsible for Shell oil operations in Nigeria. It was argued that the parent owed a duty of care to the claimants to ensure that the subsidiary’s operations did not cause environmental damage because, it was claimed, the parent exerted control over those operations. The High Court held that there was no basis for the claim and that the English court had no jurisdiction to hear the claims against the subsidiary. The claimants appealed the decision.

Judgement

Group-wide Policies
The claimants said that the main factors demonstrating the parent’s control of the subsidiary’s operations were:

  • the issue of mandatory policies, standards and manuals which applied to the subsidiary and the direction and oversight of the subsidiary’s operations; and
  • the imposition of mandatory design and engineering practices, a system of supervision, oversight of the parent’s standards and financial control over the subsidiary, all of which, it was argued, pointed to negligence. 

The court distinguished between a parent company that controls the material operations of a subsidiary and a parent company that merely issues mandatory policies as group-wide operating guidelines for its subsidiaries. Such guidelines would be similar to published industry standards and inform a company how it should be carrying out its relevant operations. However, the control of those operations and responsibility for their proper implementation remained the responsibility of the company itself. For a duty of care to arise, it would be necessary to establish that the parent had taken control of the relevant operations in a much more direct and substantial way.

The Duty of Care
On the question of whether a duty was owed by a parent company to those affected by the operations of the subsidiary, the court applied the standard three-part test of foreseeability, proximity and reasonableness. It was accepted that the claimants had established foreseeability but had not passed the tests of proximity and reasonableness. The group-wide policies, by themselves, did not create sufficient proximity to create that duty of care which would make the parent potentially liable.

Liability to Persons Affected by Operations
A duty could be owed by a parent company to a party directly affected by the operations of the subsidiary in certain circumstances where the parent:

  • has taken direct responsibility for devising a material health and safety policy, the adequacy of which is the subject of the claim; or
  • controls the operations which give rise to the claim. 

Business of Parent and Subsidiary
The claimants needed to show that a duty of care had been assumed, or that a sufficient degree of control had been exercised, at a high level within the Shell Group towards the claimants. It was highlighted that control of the pipeline vested in the subsidiary under a joint venture agreement (of which the parent was not a member). It was emphasised that the parent company was a holding and not an operational company and did not involve itself in the operational activities of its many hundreds of subsidiaries; the court explained that the parent company did not have the capacity or expertise to do so. It was accepted that each operating company in the Shell Group was autonomous, with its own board of directors, its own management, its own business purpose and its own assets and employees for that purpose. Also, the subsidiary held the necessary regulatory licence.

The Outcome

The court held that the issuing of mandatory policies could not mean that a parent company had taken material control of the relevant operations of a subsidiary so as to create a duty of care in favour of any class of persons affected by the policies. Rather, the court held that:

  • crucially, the extracts from the policies relied on revealed a centralised system based on industry standards and the Shell Group’s own developed industry practice – to the extent that they established mandatory requirements, they were mandatory across all Shell Group companies; and
  • there was insufficient evidence of centralised assistance to the subsidiary on the basis of which the court might find a duty of care to exist in favour of the claimants.

So, the claimants did not demonstrate a properly arguable case that the parent owed the claimants a duty of care on the basis either of an assumed responsibility for devising a material policy – the adequacy of which was the subject of the claim – or on the basis that it controlled the operations which were the subject of the claim.

Conclusion

Effective management of subsidiaries is essential for risk management and compliance. One of the means by which a parent company should manage risk is to impose group-level guidance and policies on subsidiaries. However, in striking that difficult balance between control and autonomy, it is important that any such group-wide policies are applicable to all of the group companies and that the onus for implementing those policies is on the subsidiaries which, with the essential local knowledge, are best placed to do so.