United Kingdom – Cross-border guide to parent company liability for foreign subsidiaries

How and when can a parent company be liable for conduct of its (foreign) subsidiaries?

Corporate separateness, a key principle of English law, provides that each entity in a corporate group has a separate legal personality.¹ English courts are generally reluctant to ‘pierce the corporate veil’ to find liability higher up the corporate chain and will only do so in limited circumstances. However, recent case law confirms that, applying general principles of tort law, a parent may itself owe third parties a duty of care in respect of the operations of its subsidiaries, including where:

• the parent company manages or jointly manages the relevant activity;
• the parent company gives defective advice to the subsidiary or promulgates defective group wide policies which are implemented by the subsidiary;
• the parent company issues group wide compliance policies and is involved in their implementation; or
• the parent company holds itself out as supervising or controlling a subsidiary.

This is not a matter of piercing the corporate veil but rather establishing that a parent company owes a direct duty of care, separate from that owed by its subsidiary.

Jurisdiction gateway considerations

When can you bring a claim in the English courts?

Most of the recent cases and developments in the area of parent company liability globally have been initially fought on jurisdiction grounds and relate to harms suffered overseas.

For claimants wishing to bring a claim in the English courts against an English domiciled parent company and its overseas subsidiary for harms suffered in the claimants’ home state, the claimants must establish that the English courts have jurisdiction to hear the claim given the harm occurred in another jurisdiction and one of the defendants is an overseas company.

English civil procedure rules only permit a claimant to serve a claim form on a defendant ‘out of the jurisdiction’ where:

• there is an anchor English domiciled defendant (i.e. the parent); and
• there is a real issue to be tried between the claimant and the anchor defendant; and
• the foreign defendant (i.e. the overseas subsidiary) is a necessary or proper party to that claim.²

A foreign defendant will be deemed a necessary or proper party to English proceedings where:

• there is a real issue to be tried between the claimant and the anchor defendant and it is reasonable for the English courts to try the issue; and
• the claim against the foreign defendant has a real prospect of success; and
• England is the proper place to bring the claim or there is a real risk that the claimant will otherwise be unable to access substantial justice.³

The key elements that are usually contested are whether (i) there is a real issue to be tried between the claimant and the parent company and/or (ii) England is the proper place to bring the claim / the claimant will otherwise be unable to access substantial justice.

Key recent cases and developments

Is there a real issue to be tried?

In recent years, there has been a series of important test cases in the appellate courts where the claimants have sought to attribute liability in tort to parent companies in respect of harms allegedly caused by their overseas subsidiaries.⁴ These claims have been challenged at the jurisdictional stage on the ground (amongst others) that there is not a “real issue to be tried” between the claimants and the parent company and therefore the English courts do not have jurisdiction. Most of these claims are yet to advance to trial on merits so we still await final guidance from the courts on the question of tortious liability.

First, it is necessary to understand the basis for the assertions that the parent company owed the claimants a duty of care in tort for the activities of their subsidiaries. In 2012 the Court of Appeal in Chandler v Cape⁵held that Cape, as parent company, owed a duty of care to an employee of one its subsidiaries to protect him from workplace injuries. The Court of Appeal reached this conclusion in light of the following evidence:

• The overlap between the businesses of the parent company and subsidiary;
• The parent having superior knowledge on the relevant health and safety issue;
• The parent company knowing or having constructive knowledge that the subsidiary’s system of work was unsafe; and
• The parent company knowing (or having ought to known) that the subsidiary would rely upon its superior knowledge.

The Court of Appeal was careful to note that it was not establishing any general principle that a parent company will owe a duty of care to parties impacted by a subsidiary’s operations simply by being a parent company; it will depend on the degree of the parent company’s involvement with the relevant activity. Subsequent cases have confirmed that the above factors do not constitute a formulaic test, but are merely indicia of when a duty of care might arise.

Fast-forwarding to 2019, the Supreme Court heard the appeal in Vedanta Resources Plc v Lungowe⁶. In that case, over 1800 Zambian villagers issued proceedings against Vedanta Resources PLC, a UK mining company, and its Zambian subsidiary, for alleged discharge of toxic effluent from a mine operated by the local entity into waterways used for drinking and irrigation. Vedanta argued that there was not a real issue to be tried as it was a general principle of English law that a parent company could never incur a duty of care in respect of the activities of a subsidiary simply because it issued group-wide policies and guidelines to its subsidiaries.

The Supreme Court disagreed that there was any principle of English law to this effect, finding instead that the critical question to be addressed, applying usual rules of tort law⁷, was whether Vedanta had sufficiently intervened in the management of the relevant activities of the subsidiary to have incurred, itself, a common law duty of care to the claimants⁸. The Court observed that there is no exhaustive list of the types of management that may give rise to a duty of care, as there are no limits to the models of management and control that can exist within multinational organisations.⁹ In each case a careful analysis of the facts will be required. In Vedanta the Supreme Court reached its conclusion that there was a real issue to be tried on the basis of material published by Vedanta in which Vedanta asserted responsibility for the establishment of group-wide environmental and sustainability standards, for implementing those standards through group training and for monitoring compliance. It further noted that:

• Simply issuing group wide policies may be sufficient to give rise to a parental duty of care if those policies contain systemic errors that when implemented by the subsidiary give rise to harm to third parties.¹⁰
• If a parent company holds itself out, in published materials, to have management over the activities of its subsidiaries, this in itself can be sufficient to give rise to a duty of care in relation to the activities of said subsidiaries, as the parent has publically undertaken to perform this responsibility, even if it does not actually do so.¹¹

Is England the proper place?

The final limb of the test for serving proceedings out of the jurisdiction is whether England is the proper place to bring a claim, or whether the claimants will otherwise be unable to access justice if the English courts do not hear the claim. The court must identify the forum in which the case can be suitably tried for the interests of the parties and for the ends of justice. It will consider the connecting factors between the case and the different jurisdictions in which it could be litigated, looking at factors including (a) the location of the claimants and witnesses, and potentially documents; (b) the availability of a common language so as to minimise translation distortions; (c) the location of the alleged damage and (d) whether any foreign laws will be relied upon and hence whether a foreign court is better placed to deal with the dispute.

Historically, the avoidance of irreconcilable judgments through concurrent local and English proceedings (e.g. a local court claim against the foreign subsidiary as well as the English court claim against the parent) had been an important factor for the courts when determining whether England is the proper place for both claims to be heard. However, in Vedanta, the Supreme Court observed that any risk of contradictory judgments “mainly concerns claimants”, as claimants voluntarily take on this risk and that accordingly this should no longer be used as a trump card to deem England the proper place to bring a claim.¹²

Even if the court concludes that somewhere other than England is the proper place for the case to be tried, it can nonetheless permit service out of the jurisdiction where there is a real risk the claimants will be unable to access justice in their home courts. In Vedanta the Supreme Court acknowledged that most reasonable observers would conclude that Zambia would, in the ordinary course, be the proper place for the proceedings, given the location of the claimants, the alleged damage, the evidence and the local entity’s personnel. The Zambian courts were also equipped to interpret the Zambian laws which would be applied in the case. However, the Supreme Court found that the claimants would nonetheless be denied access to justice if they were not permitted to serve English proceedings out of jurisdiction for two reasons. First, the claimants were living in poverty and could not obtain legal aid and would be prohibited from entering into conditional fee agreements under Zambian law. Secondly, the claimants would be unable to procure the services of a legal team in Zambia with sufficient experience to effectively manage litigation of this scale and complexity.

Brexit

From 1 January 2021, the Brussels Regulation Recast¹³ (which regulates jurisdiction and the recognition and enforcement of judgments between EU member states) ceased to apply in the UK, and the English courts are no longer bound to apply the judgments of the Court of Justice for the EU (CJEU). This is likely to have an impact on how the English courts approach parent company liability cases commenced after 1 January 2021. Importantly, the CJEU ruling in Owusu v Jackson¹⁴ that the courts of EU member states cannot decline jurisdiction on the basis that another jurisdiction is the more suitable forum for a dispute no longer applies. Going forward, the English courts therefore have greater discretion to apply the forum non conveniens doctrine, meaning that English domiciled companies sued in the English courts will have more scope to argue that another jurisdiction is the more appropriate forum (e.g. the place where the harm occurred). The issue of whether the claimants would have substantial access to justice in the other jurisdiction will remain a key consideration.

However, it is worth noting that the UK has applied to accede to the Lugano Convention.¹⁵ If the state parties to this treaty agree to its accession,¹⁶ the English courts will become bound to “pay due account” to the judgments of the CJEU,¹⁷ including Owusu. This may restrict the willingness of the English courts to entertain forum non conveniens arguments.

Practical implications and key takeaways from the English law approach

Vedanta (like other recent cases) was a jurisdictional challenge. Further analysis from the courts on the substantive issue of when a parent company will assume a duty of care to those affected by the operations of a subsidiary is awaited. In the meantime, it is anticipated that more cases will proceed on the merits as this robust judgment from the Supreme Court has made it more difficult for parent companies to resist this type of claim on jurisdictional grounds.

These recent decisions 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.

With thanks to London trainees Aman Tandon, Christabel Ekundayo and Hafsah Waheed for their contributions to this guide.