UK Supreme Court clarifies issues on parent company liability in Okpabi and others v Royal Dutch Shell Plc

UK Supreme Court clarifies issues on parent company liability in Okpabi and others v Royal Dutch Shell Plc

Summary

This judgment from the UK Supreme Court provides clarification on the English courts’ treatment of jurisdictional challenges in the context of a claim brought against a UK domiciled parent company and its foreign domiciled subsidiary for alleged torts overseas. In so doing, the Court considered (without making any findings) the circumstances in which a parent company may owe a duty of care to claimants who allege harm caused by its subsidiary.

The decision follows the landmark judgment from the UK Supreme Court in Lungowe v Vedanta (Vedanta) in 2019 which similarly dealt with issues of parent company liability [Link to article on Vedanta SC judgment: https://www.regulationtomorrow.com/eu/uk-supreme-court-clarifies-issues-on-parent-company-liability-in-lungowe-v-vedanta/]. This judgment highlights again¹ that an English domiciled parent company may be liable in the English courts for claims brought by non-UK claimants, where the parent company can be shown to owe a duty of care towards the claimants for the acts of its subsidiary.

Background

Residents of the Niger Delta, Nigeria, brought two sets of proceedings in negligence against English-incorporated Royal Dutch Shell Plc (RDS) and its Nigerian operating subsidiary, Shell Petroleum Development Company of Nigeria Ltd (SPDC)², claiming that they had suffered harm as a result of oil spills from the pipelines operated by a joint venture in which SPDC had a 30% participating interest.

RDS applied for orders that the English courts had no jurisdiction to try the claims or, alternatively, that they should not exercise that jurisdiction as there was no arguable case that RDS owed the claimants a duty of care. The case could only proceed to a trial of the substantive issues if RDS could be established as the anchor defendant for the purpose of attracting the English courts’ jurisdiction over the claim, with the foreign subsidiary SPDC joined as a necessary and proper party. It was common ground that the applicable test was whether there was a real issue to be tried, meaning that the claimants’ claims had a real prospect of success (this is the summary judgment test).

In January 2017, the High Court decided in favour of the defendants on the basis that the claimants had failed to present a properly arguable case that RDS owed them a duty of care. This decision was upheld by the Court of Appeal in February 2018, which found that there was no arguable case that RDS owed the claimants a common law duty of care to protect them against foreseeable harm caused by the operation of SPDC. Sales LJ gave a dissenting judgment explaining why he considered there was a good arguable case that RDS did owe the appellants a duty of care.  Reversing these decisions, the Supreme Court unanimously allowed the appeal in favour of the claimants.

Issues for the Supreme Court

In considering the appeal, the Supreme Court addressed the following issues:

• Whether the majority of the Court of Appeal had made a material error in law.
• If so, whether there is a real issue to be tried in the substantive proceedings.

1. Material errors in law

The claimants contended that the Court of Appeal had materially erred in law in its analysis of:

• The principles of parent company liability in its consideration of the factors and circumstances which may give rise to a duty of care.
• The procedure for determining the arguability of the claim at the jurisdiction stage.
• The overall analytical framework for determining whether a duty of care exists and its reliance on the Caparo threefold test.

The “mini-trial”

The Supreme Court focused on the second issue and held that the Court of Appeal had materially erred in law with respect to the procedure for determining the arguability of the claim at an interlocutory stage, and by its approach to both contested factual issues and to the relevance and significance of likely future disclosure.

The Court of Appeal had taken an incorrect approach by conducting a mini-trial of the substantive issues. It had wrongly been drawn into considering the contested factual issues and the documentary evidence that had been disclosed in relation to such issues. This was inappropriate for the determination of a jurisdictional challenge, which is dependent upon whether the appeal satisfies the summary judgment test of real prospect of success at trial.

As in Vedanta, the Supreme Court was clear that the focus should be on the claimants’ pleaded case and whether, on the basis of that pleaded case, the claimants have an arguable claim. Where there are factual assertions in the pleaded case, they should be accepted unless they are demonstrably untrue or unsupportable. There should also be consideration as to whether there is a real prospect of relevant and significant disclosure being provided at trial.

Other errors in law

The Supreme Court then dealt with the two further errors in law alleged to have been made by the Court of Appeal in relation to parent company liability, although given its findings in relation to the ‘mini trial’ above, it did not make a ruling on whether these errors were material.

Noting that the approach of the Court of Appeal had to be considered in light of the later guidance given by the Supreme Court in Vedanta, the Court made the following key observations:

1. No general principle exists that the maintenance of group wide policies or standards by a parent company cannot give rise to a duty of care. As noted in Vedanta, group guidelines may contain “systemic errors” which, when implemented by a subsidiary, cause harm to third parties.
2. The Court of Appeal may be said to have focused inappropriately on the issue of control. Control is only the starting point when considering the extent to which a parent takes over, intervenes in, controls, supervises or advises the management of the relevant activity of the subsidiary. While a parent’s control over its subsidiary may give it the opportunity to get involved in management, the issue for liability is whether the parent actually did take over or share with the subsidiary the management of the relevant activity (here the pipeline operation). Indeed, a parent may owe a duty of care to third parties “regardless” of control, if – for example – it “holds itself out” in published materials “as exercising that degree of supervision and control” of its subsidiaries, whether or not it actually does so.
3. The liability of parent companies in relation to the activities of their subsidiaries is not, of itself, a distinct category of liability in common law negligence.
4. The threefold test for a duty of care set out in Caparo Industries plc v Dickman [1990] 2 AC 605³ is not applicable to this case as the general principles which determine parent company liability are not new. It raises no novel issues of law and is to be determined on ordinary, general principles of the law of tort regarding the imposition of a duty of care. In the context of a parent/subsidiary relationship, that depends on the extent to which, and the way in which, the parent intervened in, controlled, supervised or advised the management of the relevant operations of the subsidiary.
5. Real issue to be tried

The second issue for the Supreme Court to determine was whether the majority of the Court of Appeal was wrong to decide that there was no real issue to be tried.

The Supreme Court held that there was a real issue to be tried. The Supreme Court held that the factual assertions in the claimants’ particulars of claim should not be rejected as being demonstrably untrue or unsupportable such that the claimants had no arguable claim. This was supported by two corporate documents, the evidence of the claimants’ factual witnesses and the real prospect of relevant and significant future disclosure regarding, for example, the extent of RDS’s management or control of SPDC’s operations. The Court also referred to the vertical corporate structure of the group organised on business and functional lines (rather than according to corporate status) in support of its conclusions. These factual issues and the question of liability will only be determined at a later stage in these proceedings.⁴

Implications

Parent company liability

This Supreme Court judgment highlights again⁵ that an English domiciled parent company may be liable in the English courts for claims brought  by non-UK claimants, to the extent the parent company can be shown to owe a duty of care towards the claimants for the acts of its subsidiary.

Whilst these issues await determination on their substance, the comments from the Supreme Court (together with those in Vedanta) may guide corporates in reviewing how their organisational structures, corporate documents and disclosures may contribute to potential parent company risks.  These issues will need to be carefully considered taking into account countervailing imperatives including the expectations of investors, reputational risks, the group’s commercial realities and evolving legislation including ESG-related disclosure requirements and emerging mandatory human rights due diligence laws. [Hyperlink to article on proposed EU directive: https://www.nortonrosefulbright.com/en-gb/knowledge/publications/00dce527/first-steps-taken-towards-a-mandatory-human-rights-due-diligence-law-in-the-eu].

The key takeaway from these two decisions is that the bar for claimants commencing proceedings in the English courts against parent companies and their international subsidiaries for alleged harms caused in other jurisdictions is lower than previously thought and we will see more cases proceed to merits hearings (including the critical disclosure phase).

Proportionality

Reiterating previous statements the Supreme Court also emphasised the importance of proportionality with respect to the litigation of jurisdiction issues. When determining whether there is a real issue to be tried, the main consideration will be the claimant’s pleaded case, which means that factual evidence and disclosure can and should be kept to a minimum.

[1] Following Vedanta. Note that the claimants’ application for permission to appeal was deferred by the appeal panel of the Supreme Court until after judgment in Vedanta as it was acknowledged that the two cases raised very similar issuess

[2] The claimants also allege that SPDC is liable for damage caused by the oil spills under various Nigerian statutory and common law causes of action

[3] The test being: (i) whether there is sufficient proximity between the parties to impose a duty; (ii) whether the harm is reasonably foreseeable as a result of the defendant’s conduct; and (iii) whether it’s fair, just and reasonable to impose liability.

[4] There are also other jurisdictional challenges which RDS/SPDC may choose to pursue relating to the issue of appropriate forum and/or access to justice in Nigeria.

[5] Following Vedanta.