In its recent judgment in the case of Okpabi v Royal Dutch Shell plc, the Supreme Court has considered again the extent to which a UK-domiciled parent company may be responsible for the actions of one of its overseas subsidiaries.
Traditionally English law has recognised the strict separation of corporate entities, treating parent and subsidiary companies as distinct bodies with separate legal liabilities. However, this distinction has been under scrutiny recently. In 2019 the Supreme Court handed down a significant judgment in Lungowe v Vedanta Resources plc ruling there was an arguable case that a UK parent company could be liable for the actions of its overseas subsidiary. Similar issues came before the Supreme Court again in Okpabi. While a further hearing was necessary, the decision in Vedanta was highly relevant to the issues before the Supreme Court in Okpabi, and the Court was influenced by the previous guidance provided.
In a judgment available here, the Supreme Court held in Okpabi that there was at least an arguable case that the first defendant UK parent company owed a duty of care to the claimants in respect of the alleged actions of its Nigerian subsidiary company, the second defendant. Whilst the Supreme Court did not analyse the underlying merits of the case the decision has implications for multinational corporations as we set out further below.
Background
The proceedings arose from a claim brought by a group of over 40,000 inhabitants of communities in Rivers State, Nigeria. The claimants alleged that various oil spills had occurred from oil pipelines and associated infrastructure in the communities, causing widespread environmental damage, including serious water and ground contamination. The claimants’ case is that the oil spills were caused by the negligence of the pipeline operator, The Shell Petroleum Development Company of Nigeria Ltd (SPDC). SPDC is a subsidiary of Royal Dutch Shell plc, (RDS), a UK-domiciled company and the parent company of the multinational Shell group of companies.
The claimants claimed damages for negligence against both RDS and SPDC. In bringing proceedings against RDS in England, the claimants contended that RDS:
- Owed the claimants a duty of care because it exercised significant control over material aspects of SPDC’s operations
- It assumed responsibility for SPDC’s operations
In particular, the claimants relied on the promulgation and imposition by RDS of mandatory health, safety and environmental policies, standards and manuals which the claimants allege failed to protect them against the risk of foreseeable harm arising from SPDC’s operations.
Having issued proceedings in late 2015, the claimants served the claim on RDS in England and obtained permission to serve SPDC out of the jurisdiction. In obtaining permission to serve out, the claimants had to demonstrate the claim against RDS, as the anchor defendant, met the required procedural gateway i.e. the claim raised a real issue to be tried with a real prospect of success.
The defendants subsequently sought to challenge the English Court’s jurisdiction over the claim against RDS and the service of the claim forms against SPDC out of the jurisdiction.
High Court and Court of Appeal decisions
Following a three-day hearing in November 2016, Mr Justice Fraser held that while the Court had jurisdiction to try the claims against RDS (as a company incorporated in the UK), it was “not reasonably arguable that there [was] any duty of care upon RDS”. In light of this conclusion, the grounds for granting permission to serve the proceedings on SPDC, that there was a real issue to be tried against RDS, were also not made out. Therefore the High Court ordered that the claims against RDS be struck out and service of the claim forms on SPDC be set aside.
The claimants appealed against the High Court’s decision. By a majority decision, the Court of Appeal upheld the decision of Mr Justice Fraser, finding that there was “no arguable case that RDS owed the appellants a common law duty of care to protect them against foreseeable harm caused by the operations of SPDC”.
Supreme Court decision
The claimants appealed to the Supreme Court. The Supreme Court unanimously allowed the appeal, finding that the English Courts do have jurisdiction over the claim and that it was reasonably arguable that RDS owed a duty of care to the claimants. The Supreme Court’s decision will enable the claim to proceed on its merits in the High Court, subject to the resolution of certain other jurisdictional challenges which remain outstanding.
We consider some of the key points from the Supreme Court’s decision further below.
The Vedanta decision
Drawing heavily on the Vedanta decision, the Supreme Court considered the correct approach to determine whether a duty of care arises in the context of parent/subsidiary relationships. Rejecting the usual threshold test, the Supreme Court repeated that in these relationships such a duty of care “depends on the extent to which, and the way in which, the parent availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations (including land use) of the subsidiary”.
Following guidance in Vedanta, the claimants in Okpabi reframed the grounds on which they alleged a duty of care had arisen; specifically they argued that RDS had:
- Taken over/jointly managed the relevant activity of SPDC (in this case, the pipeline operation) (Route 1)
- Provided advice and/or promulgated defective group-wide safety/environmental policies which were implemented as of course by SPDC (Route 2)
- Circulated group-wide safety/environmental policies and taken active steps to ensure their implementation by SPDC (Route 3)
- Held out that it exercised a particular degree of supervision or control of SPDC (Route 4)
That said, in Okpabi, the Supreme Court emphasised there is no special test to determine whether a parent company is liable for the activities of its subsidiary nor is it appropriate to “shoehorn” all cases into specific categories; in other words, each case will turn on its own facts.
In particular the Okpabi claimants argued RDS exercised a high degree of control, direction and oversight in respect of SPDC’s pollution and environmental compliance and the operation of its oil infrastructure, and relied on a number of examples of the governance activity between RDS and SPDC in support of their argument. The defendants strongly disputed this, arguing that all relevant operational decisions were made by SPDC and there were no grounds to review the Court of Appeal’s decision.
Material error of law – jurisdiction
The resolution of the defendants’ jurisdictional challenge depended upon whether the claimants’ claim satisfied the test of demonstrating a “real prospect of success”. The Supreme Court held that, when determining this issue, the Court of Appeal had wrongly conducted a review of the evidential case rather than the arguability of the claim.
Delivering the leading judgment, Lord Hamblen stated, “the Court of Appeal was drawn into conducting a mini-trial and that led it to adopt an inappropriate approach to contested factual issues and to the documentary evidence”. The Supreme Court dismissed this approach, stating that the correct test is whether there was an arguable case. Further, in evaluating the weight of the evidence, the Court of Appeal had inappropriately made a determination of the documentary evidence available and discounted the relevance of future disclosure, such as internal corporate documents (which, in this case, could be highly relevant).
Principles of parent company ability
The Supreme Court disagreed with the findings of the Court of Appeal in its overall consideration of parent company liability and its conclusion. In allowing the claimants’ appeal, the Supreme Court ruled:
- The argument that the promulgation by a parent company of group-wide policies or standards can never in itself give rise to a duty of care is incorrect and therefore cannot be said to be any such “reliable limiting principle”.
- The Court of Appeal seemed to have focused inappropriately on the issue of control and not on the key issue of whether the parent company did take over or share management of the relevant activity – that may or may not be demonstrated by the parent company’s control.
- There is no special doctrine in the law of tort regarding the parent/subsidiary relationship conferring legal responsibility on the parent company for the activities of the subsidiaries in relation to those affected by the activities. Furthermore 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.
Whether there was a real issue to be tried
On the basis of the summary of the claimants’ case, the Supreme Court ruled that the claim should not be rejected as being demonstrably untrue or unsupportable and therefore there is a real issue to be tried. The court was further persuaded that the claimants’ witness evidence and the prospect of relevant disclosure being provided also supported this conclusion. In particular, the “vertical” corporate structure of the Shell group was considered relevant to the factual matrix. The Supreme Court considered the claimants’ case that the group’s corporate structure created a situation comparable to where group businesses are carried on as if they are a single commercial undertaking with boundaries to legal personality becoming irrelevant, while disputed by RDS, raised triable issues.
Comment
There are, without doubt, some limitations to the Supreme Court’s decision in Okpabi. First, while the Supreme Court considered the relevant principles of parent company liability, it also emphasised that there is no “one size fits all” test to determine whether a UK holding company will be liable for the activities of its overseas subsidiaries. The existence of "control" in the relationship will not be sufficient; all parent companies control subsidiaries to some degree. Second, while the threshold for establishing an arguable case for a duty of care on the part of a parent company may not be high, the Court did not comment on the merits of the Okpabi claimants’ claim and, indeed, confirmed a court should not engage in a “mini-trial” when dealing with such jurisdictional issues.
Therefore, it seems unlikely this decision will open the floodgates to claims against parent companies being brought in England or, in any event, being allowed without some level of scrutiny. Notwithstanding this, the decision, and the principles on which it was based, is nonetheless significant, both from a jurisdictional and corporate governance perspective. UK holding companies operating through overseas subsidiaries need to be aware of the possibility that third parties based outside of the UK may, in some circumstances, be able to bring tortious claims against them in the English Courts. In particular, as we have seen from the “Vedanta route” principles, the imposition of mandatory group-wide policies could give rise to a parent company duty of care and so this issue will or may require careful consideration. While implementation of group policies may be attractive, parent companies should think carefully about the delegation of management within their subsidiaries and how policies are implemented in other areas of the business.
Okpabi and others v Royal Dutch Shell plc and another [2021] UKSC 3
Lorna Sleave
Elizabeth Pistak