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Parental responsibility

01 November 2018 by Peter Hood

Parental responsibility

Do recent Court of Appeal decisions create a ‘Catch 22'?

Since 2017, the Court of Appeal has handed down judgment in three landmark cases, which involve cases brought against English multinationals by victims of human rights impacts, related to the operations of their overseas subsidiaries.

The cases bring in to sharp focus the question of a parent company’s liability for the acts and omissions of its subsidiaries. This article considers what this means for English domiciled companies and how they manage human rights related risk throughout their operations.

Three cases

In Vedanta (Lungowe and Ors. v Vedanta PLC and Anor. [2017] EWCA Civ 1528), a group of Zambian farmers brought claims against Vedanta Resources PLC and its Zambian subsidiary in relation to environmental damage allegedly caused by pollution from mines in northern Zambia. The Court of Appeal upheld the High Court’s decision to accept jurisdiction, rejecting Vedanta’s challenge and finding that there was a real issue to be tried against both parent and subsidiary.

In Shell (Okpabi and Ors. v Royal Dutch Shell PLC and Anor. [2018] EWCA Civ 191) and Unilever (AAA & Ors. v Unilever PLC and Tea Kenya Limited [2018] EWCA Civ 1532), the Court of Appeal reached a different conclusion, rejecting jurisdiction over claims brought by victims of alleged environmental damage in the Niger Delta and post-election violence in Kenya respectively. This was not due to some fundamental disagreement on the law. The Court assessed the cases within the same legal framework, albeit one which affords significant discretion to judges to determine whether or not a duty of care arises on a given set of facts.

The legal framework

Traditionally, English parent companies might have been insulated from liability in cases like Vedanta, Shell and Unilever. Strict adherence to the doctrine of separate legal personality prevented claimants affected by the acts or omissions of a subsidiary from bringing claims against its parent company. Further, an English court would not accept jurisdiction where England was ‘forum non-conveniens’ – that is, where it considered there to be another, more appropriate country in which the case should be heard.

However, the law has changed and so has the exposure of English parent companies (particularly those with overseas subsidiaries in weak governance zones). For some time, European law has required English courts to accept jurisdiction over an English company, irrespective of whether England is the appropriate forum. Vedanta is a case in point. The harm occurred in Zambia, the claims were brought pursuant to Zambian law and the claimants and most of the relevant witnesses were located in Zambia. However, because Vedanta PLC is domiciled in England, the English court considered itself bound to accept jurisdiction over it. Depending on the UK’s Brexit deal, this may not be the case forever. However, for the time being, the law on jurisdiction over an English parent company is clear – there is little, if any, scope for an English company to challenge the jurisdiction of an English court in which it is sued.

“The law creates a challenging landscape for governance professionals in which it can be difficult to chart a course that minimises legal, social and reputational risk”

Establishing jurisdiction over the foreign subsidiary is more complicated. The claimants must satisfy a number of tests set out in the Civil Procedure Rules, including by demonstrating that: England is the appropriate forum; that there is a real prospect of success against the subsidiary; and that there is real issue to be tried against the parent company. This means that the court is required to look into the substance of the claims at an interlocutory stage in order to establish whether it has jurisdiction to proceed to trial. It is in this context that the issue of parent company liability arose in the recent cases before the Court of Appeal.

What’s new?

The recent cases do not fundamentally change the law. In Shell, the Court was at pains to stress that there remains no special doctrine of parent company liability for persons affected by the acts of a subsidiary. Parent and subsidiary remain separate legal persons, each with responsibility for their own separate acts or omissions and a parent will only be subject to a duty of care if ordinary, general principles of tort law are satisfied in a given case. This requires that there is sufficient proximity, foreseeability and that it is fair just and reasonable to establish a duty. So far, so uncontroversial.

What is new, and has wide practical significance for governance professionals, is the range of circumstances in which the Court considered these ingredients to be satisfied so as to create a direct duty of care to persons affected by the operations of a subsidiary. Parent companies should now be alive to the possibility of direct liability in circumstance where they:

  • Assume responsibility for designing a material policy the adequacy of which is the subject of the claim, for example a group environmental, sustainability or human rights policy;
  • Control or take over the management of the activities which are the subject of the claim; or 
  • Provide advice to the subsidiary on how it should manage a particular risk.

In practice, this represents a significant expansion of the circumstances which will give rise to a parent company duty of care. Further, it is now clear that a duty may be owed to non-employees; and that it may arise with respect to both health and safety and other areas of risk. Where claimants can demonstrate that there is a ‘real issue’ to be tried with respect to the parent company, their chances of being able to anchor a case against parent and subsidiary in the English courts is vastly increased.

Lessons for governance professionals

The obvious takeaway for governance professionals is that English multinationals are exposed to an increased risk of legal liability arising out of the operations of their overseas subsidiaries. Attention should be paid not just to the risk posed to employees of a subsidiary but also to other community members affected by their operations. This is most apparent with respect to environmental damage but other risks (for example land rights, human rights risks associated with security for operations or the privacy rights of consumers) should also be considered.

There is a concern that these cases create a ‘Catch 22’ for English domiciled multinationals which has potentially undesirable policy consequences. The judgments make it clear that a duty of care will be more likely to arise where a parent company takes responsibility and seeks to intervene in the risk management and operations of its subsidiaries.

This cuts against the grain of ‘soft’ law such as the UN Guiding Principles and OECD Guidelines which encourage parent companies to do exactly that. Take the example of a parent company which seeks to fulfil its responsibility to respect human rights and honour commitments made in its Modern Slavery statement by adopting policies and carrying out due diligence on in its overseas subsidiaries and suppliers. By taking these steps, the business could be seen to assume responsibility for designing a material policy the adequacy of which is the subject of a claim, thereby increasing the likelihood of a duty of care arising and consequent legal action in the English courts.

The Shell judgment goes some way to addressing this Catch 22. The Court distinguished between a parent company which takes steps to ensure that there are proper controls in place by establishing an overall system of mandatory policies, processes and uniform practices on the one hand, and a parent company which actually seeks to exercise control on the other. Only in the latter case might a duty of care arise.

Further, a business may decide that the right thing to do as well as the best way to reduce legal liability and the public relations damage consequent on involvement in an adverse human rights impact is to identify the risk and take steps to prevent it arising in the first place, irrespective of whether this could create a duty of care. In any event, this due diligence work will often be most effective when it is carried out at a subsidiary level; where the personnel are more likely to understand the relevant context.

However, the wide discretion given to courts in determining whether a duty of care may arise and the contradictory, unsettled (all three cases are expected to go to the Supreme Court) nature of the law creates a challenging landscape for governance professionals in which it can be difficult to chart a course that minimises legal, social and reputational risk. Based on the recent cases, one such course might be for the parent to ensure that there is a robust system of mandatory policies, processes and practices in place which apply to all subsidiaries and suppliers while ensuring that the responsibility for implementing these policies lies at the subsidiary level. To enable this to happen, businesses may need to invest in building the capacity of subsidiary employees to identify and mitigate human rights risks as well as to deal with human rights impacts when they arise.

What is clear is that management of human rights risk is an issue with serious legal consequences. Wherever responsibility for human rights, sustainability and the environment lies in a business; it is important. to ensure a co-ordinated approach with the business’s lawyers and to work together to reduce the risk of adverse human rights impacts and associated legal risk.

Peter Hood is a consultant in the business and human rights practice at Hogan Lovells

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