In the last four months, the Court of Appeal has handed down judgment in two important cases relating to parent company liability and jurisdiction over extra-territorial human rights impacts.  In October, we wrote that the first of these cases (Lungowe and others v. Vedanta and KCM [2017] EWCA (Civ) 1528) created a “Catch 22” for English domiciled multinationals – by fulfilling the responsibility to respect and implementing group human rights policies, they risked increasing the likelihood of a duty of care arising which could be used to establish jurisdiction.  The judgment handed down last week in Okpabi and others v Royal Dutch Shell Plc and another [2018] EWCA Civ 191 goes some way to resolving this Catch 22 and provides some useful guidance on how responsibly to manage human rights risk without inadvertently increasing the risk of litigation.

Factual and legal background

In January 2017, the High Court decided in favour of Shell and its Nigerian subsidiary, upholding challenges to the jurisdiction of the English courts over claims by victims of oil leaks from pipelines in the Niger Delta.  Fraser J found that the claimants had failed to present a properly arguable case that Shell directly owed them a duty of care.  Absent proceedings against a UK-domiciled anchor defendant, the court found that there was no connection between the claims against the Nigerian subsidiary and the English courts.  The claimants appealed on the basis that Fraser J had erred in his analysis and asked the court to reconsider whether Shell owed a duty of care to those affected by the oil leaks.

Outcome of appeal

The appeal was dismissed.  A majority of the Court (Sales J dissenting) held that Fraser J had been correct to conclude that the claimants could not demonstrate a properly arguable case that Shell owed a direct duty of care to the claimants (albeit that they reached this conclusion on different grounds to the trial judge).  In reaching their judgments, the Court cited the formulation for establishing parent company liability adopted by the same Court in Vedanta:

“(1) The starting point is the three-part test of foreseeability, proximity and reasonableness. (2) A duty may be owed by a parent company to the employee of a subsidiary, or a party directly affected by the operations of that subsidiary, in certain circumstances. (3) Those circumstances may arise where the parent company (a) has taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim, or (b) controls the operations which give rise to the claim. (4) Chandler v. Cape Plc and Thompson v. The Renwick Group Plc describe some of the circumstances in which the three-part test may, or may not, be satisfied so as to impose on a parent company responsibility for the health and safety of a subsidiary’s employee. (5) The first of the four indicia in Chandler v. Cape Plc [80], requires not simply that the businesses of the parent and the subsidiary are in the relevant respect the same, but that the parent is well placed, because of its knowledge and expertise to protect the employees of the subsidiary. If both parent and subsidiary have similar knowledge and expertise and they jointly take decisions about mine safety, which the subsidiary implements, both companies may (depending on the circumstances) owe a duty of care to those affected by those decisions. (6) Such a duty may be owed in analogous situations, not only to employees of the subsidiary but to those affected by the operations of the subsidiary. (7) The evidence sufficient to establish the duty may not be available at the early stages of the case. Much will depend on whether, in the words of Wright J (in Connelly v. RTZ Corporation Plc [1999] C.C.C 533), the pleading represents the actuality.”

Neither party contested this formulation and it was applied without question in the judgment of the majority and in Sales LJ’s dissent.  As such, it now seems to be settled and, at least from the perspective of creating legal certainty, this is a welcome development.  The precise contours and practical significance of each of these propositions will likely be the subject of further litigation and debate.

Does adopting a group human rights policy increase the likelihood of a parent owing a direct duty of care?

The third proposition (that a parent might owe a duty to a third party directly affected by the operations of a subsidiary in circumstances where the “parent company has taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim or controls the operations which give rise to the claim”) had prompted concerns that English multinationals would be dissuaded from fulfilling their responsibility under the UN Guiding Principles on Business and Human Rights, including to devise, publish and implement group human rights policies.

Notably, the Court in Shell did not restrict the application of this proposition to “health and safety” policies, instead referring generally to “policies the adequacy of which is the subject of the claim” [88, 132] and considering evidence from Shell’s sustainability report (amongst other, non-health and safety specific, documents).  On this basis, there would be nothing to prevent an English court from considering a company’s human rights policy in determining whether a duty of care arises to prevent human rights violations which also give rise to a cause of action under the applicable law.

However, all three judges agreed that the mere existence of such policies does not create a duty of care.  Simon LJ held that:

“The issuing of mandatory policies plainly cannot mean that a parent has taken control of the operations of a subsidiary (and, necessarily, every subsidiary) such as to give rise to a duty of care in favour of any person or class of persons affected by the policies.” [89]

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 [125, 140].  Only in the case of the latter might a duty of care arise.

Agreeing with Simon LJ, the Chancellor held that:

“The detailed policies and practices do not seem to have been tailored specifically for SPDC. Rather, they all apply across the board to all RDS subsidiaries and joint ventures, without distinction. It has already been said that it would be surprising if an international parent were to owe duties to those affected by the operations of all its subsidiaries and that there needs to be something more specific for the necessary proximity to exist.” 

By way of example, he suggests that proximity between a parent and a third party affected by the operations of a subsidiary might exist where the third party is injured by a food product which is manufactured by a subsidiary according to a prescriptive recipe provided by its parent.  This raises two further, important points: first, any attempt to suggest that the existence of a group human rights policy which requires subsidiaries to respect human rights creates the necessary proximity to found a duty of care would strain this analogy; second, a policy may be more likely to evidence a duty of care where it is devised for a particular subsidiary as opposed to the corporate group as a whole [121, 195].

So, the short answer to the question posed above is “no”.  UK multinationals should not be deterred by these cases from adopting global human rights policies and frameworks.  However, in practice, they should ensure that:

1. the policy is applicable to all group companies rather than specific subsidiaries; and that
2. the responsibility for implementing these policies (including by carrying out due diligence) is at subsidiary level. As we have written previously, not only will this reduce the risk of a duty of care arising, it will likely be more effective in reducing the risk of an adverse human rights impact in the first place as operating companies will often understand the human rights risk in a particular context better than someone at HQ and be better placed to identify it and effectively mitigate against it.  This may require that resources are allocated to ensure that in country personnel are properly trained in human rights due diligence to ensure that they can effectively discharge this function.