Holding the Parent to Account – When will a Parent Company be Held Responsible for the Conduct of its Subsidiary?

Madeleine Harland and Tim Bost

Okpabi v Royal Dutch Shell Plc [2021] 1 WLR 1294 (Okpabi) was a jurisdiction appeal which raised the question of whether the claimants had an arguable case that a UK-domiciled parent company owed them a common law duty of care, so as to properly found jurisdiction against a foreign subsidiary company as a necessary and proper company to the proceedings.

Consistent with the earlier decision in Vedanta Resources Plc & Anor v Longowe & Ors [2020] AC 1045 (Vedanta), the Supreme Court found that the question of whether a parent company owed a duty of care in respect of the conduct of its subsidiary is not governed by any generalised assumption or presumption. Rather, this is a fact sensitive exercise undertaken by reference to the extent to which the parent took over, or shared with the subsidiary, the management of the relevant activity – which was something that control by the parent might demonstrate, but not necessarily.

Background

The claims were brought in the England and Wales High Court against two defendants: (1) Royal Dutch Shell plc (the parent company); and (2) Shell Petroleum Development Company of Nigeria Ltd (the subsidiary), for damages in negligence in respect of water and ground contamination caused by the oil pipelines and ancillary infrastructure operated by the subsidiary in the Niger Delta region of Nigeria.

Permission was granted to serve claim forms on the subsidiary out of the jurisdiction, pursuant to the jurisdictional gateway in para 3.1(3) of CPR PD 6B,[i] on the grounds that there was between the claimants and the parent company a legitimate claim to which the subsidiary was a necessary and proper party. The defendants challenged the English Court’s jurisdiction, contending that there was no arguable duty of care on the part of the parent company to the claimants, and, in the absence of any action against the parent company, there was no connection between England and the claims against the subsidiary on which to found the court’s jurisdiction over the subsidiary.

At first instance,[ii] it was held that although the court had jurisdiction to try the claims against the parent company, it was not reasonably arguable that there was any duty of care upon the subsidiary.[iii] An appeal to the Court of Appeal was dismissed.[iv]

UK Supreme Court

The claimants sought permission to appeal to the United Kingdom Supreme Court (UKSC). Consideration of the application for permission to appeal was deferred until after judgment in Vedanta which dealt with similar issues. In Vedanta, the UKSC had held that liability of parent companies in relation to the activities of their subsidiaries was not, of itself, a distinct category of common law negligence.

The appellants’ case and the legal arguments in the courts below had focused on the then understood threefold test for a duty of care set out in Caparo Industries plc v Dickman [1990] 2 AC 605 (Caparo). In particular, whether there was sufficient proximity and whether it would be fair, just and equitable to impose a duty of care. However, on permission to appeal to the UKSC, the appellants’ recast their case in light of Vedanta. In particular, it was contended that a duty of care arose by what was described as Vedanta routes (1) to (4), namely:[v]

  1. the parent taking over the management or joint management of the subsidiary;
  2. the parent providing defective advice and/or promulgating defective group-wide safety/environmental policies which were implemented as of course by the subsidiary;
  3. the parent promulgating group-wide safety/environmental policies and taking active steps to ensure their implementation by the subsidiary; and
  4. the parent holding out that it exercised a particular degree of supervision and control of the subsidiary.

In summary, the appellants alleged that the parent exercised a high degree of control, direction and oversight in respect of the subsidiary’s pollution and environmental compliance and the operation of its oil infrastructure, and had knowledge of widespread pollution relating to the subsidiary’s operations.

On 12 February 2021, the UKSC handed down judgment, allowing the appeal. Lord Hamblen JSC handed down the sole judgment, with which Lord Hodge DPSC, Lord Brigs JSC, and Lady Black agreed.

The primary issues for consideration were whether the Court of Appeal materially erred in law in its analysis of: (1) the procedure for determining the arguability of the claim at an interlocutory stage; (2) the principles of parent company liability in its consideration of the factors and circumstances which may give rise to a duty of care; and/or (3) the overall analytical framework for determining whether a duty of care exists in cases of this type and its reliance on the Caparo threefold test.

Arguability of the Claim

Lord Hamblen JSC proposed to focus on this issue as it was “clear” that it had been made out. In his Lordship’s view, the Court of Appeal was drawn into conducting a “mini-trial”,[vi] which led it to adopt an inappropriate approach to the guidance provided in the Three Rivers case.[vii]

The result was that instead of focusing on the pleaded case and whether it disclosed an arguable claim, the court was drawn into an evaluation of the evidence and the exercise of a judgment based on that evidence. That should not be a task for an interlocutory stage.

Lord Hamblen JSC noted that the majority appeared to have assumed that because high level documentation so far obtained by the appellants/claimants had not provided evidence of the exercise of control by the parent over the subsidiary, it followed that further documentation would be unlikely to do so. His Lordship noted that such a conclusion did not follow, and that operational control was most likely to be revealed by documentation relating to operational matters. The appellants/claimants had no such documents and there had been no disclosure relating to such matters.

Accordingly, Lord Hamblen JSC considered that the appellants/claimants had established a material error of law on the part of the Court of Appeal.

In light of the above findings, Lord Hamblen JSC noted it was not necessary to determine whether the other alleged material errors of law have been made out, but briefly commented on them regardless.

Duty of Care in a Parent/Subsidiary Relationship

First, his Lordship considered 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, which was inconsistent with Vedanta.

Second, his Lordship observed that the majority of the Court of Appeal focused inappropriately on the issue of control. His Lordship noted that in considering that question, control is just a starting point. The issue is the extent to which the parent did take over or share with the subsidiary the management of the relevant activity. That may or may not be demonstrated by the parent controlling the subsidiary. In a sense, all parents control their subsidiaries. That control gives the parent company the opportunity to get involved in management. But control of a company and de facto management of part of its activities are two different things. A subsidiary may maintain de jure control of its activities, but nonetheless delegate de facto management of part of them to emissaries of its parent.

Third, as Vedanta made clear, there is “no special doctrine in the law of tort of legal responsibility on the part of a parent company in relation to the activities of its subsidiary, vis-à-vis persons affected by those activities”.[viii] There is nothing special or conclusive about the bare parent/subsidiary relationship.

Fourth, it was apparent that the Court of Appeal was wrong to analyse the case by reference to the threefold test set out in Caparo. As stated in Vedanta, the liability of parent companies in relation to the activities of their subsidiaries is not, of itself, a distinct category in common law negligence. The general principles which determine such liability “are not novel at all” and such a case does not involve “the assertion, for the first time, of a novel and controversial new case for the recognition of a common law duty of care”.[ix]

In those respects, Lord Hamblen JSC accepted that there were errors of law in the approach of the Court of Appeal.

Serious Issue to be Tried

His Lordship considered that it had been established that there is a real issue to be tried under Vedanta routes (1) and (3). His Lordship was therefore satisfied that the majority of the Court of Appeal was wrong to decide that there was no issue to be tried and accordingly allowed the appeal.

Observations

Okpabi has provided clear guidance on the approach to be taken by parties seeking to challenge or respond to a challenge on jurisdiction. Notably, parties should not seek to conduct a mini-trial, but instead focus on the pleaded case and whether it discloses an arguable claim. It has also affirmed the decision in Vedanta, confirming that there is no special doctrine in the law of tort regarding the legal responsibility on the part of a parent company in relation to the activities of its subsidiary, vis-à-vis persons affected by those activities. The question of whether a parent company owed a duty of care in respect of the conduct of its subsidiary is a fact sensitive exercise undertaken by reference to the extent to which the parent took over, or shared with the subsidiary, the management of the relevant activity.

[i]  Para 3.1(3) of CPR PD 6B states: The claimant may serve a claim form out of the jurisdiction with the permission of the court under rule 6.36 where … (3) A claim is made against a person (‘the defendant’) on whom the claim form has been or will be served (otherwise than in reliance on this paragraph) and– (a) there is between the claimant and the defendant a real issue to which it is reasonable for the court to try; and (b) the claimant wishes to serve the claim form on another person who is a necessary and proper party to that claim.

[ii] [2017] EWHC 89 (TCC); [2017] Bus LR 1335.

[iii] [2017] Bus LR 1335, [122].

[iv] [2018] Bus LR 1022.

[v] At [27], Lord Hamblen JSC noted that for the purposes of the appeal, Vedanta routes (1) to (4) were convenient headings, but should not be understood as supporting any special or separate parent/subsidiary duty of care. His Lordship noted that “as Vedanta makes clear, there is no special test applicable to the tortious responsibility of a parent company for the activities of its subsidiary (paras 49 and 54), nor is it appropriate “to shoehorn all cases of the parent’s liability into specific categories” (para 51)”.

[vi] Ibid [102].

[vii] [2003] 2 AC 1.

[viii] Okpabi v Royal Dutch Shell Plc [2021] 1 WLR 1294 [149].

[ix] Ibid [151].

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