Goodwin Insights 16 March 2021

UK Supreme Court Decision On Parent Company Liability For Actions Of Subsidiary

In February 2021, the UK Supreme Court handed down its judgment in Okpabi and others v Royal Dutch Shell Plc and another [2021] UKSC 3. The decision clarifies the position in relation to the liability of UK parent companies for the actions of their subsidiaries. It also serves as a reminder of the issues relevant to evaluating the risk profile of parent companies, including in the context of acquisitions and restructurings.

Background

The decision relates to proceedings commenced in 2015 by more than 40,000 individuals in Nigeria who live in areas that have been allegedly affected by leaks from oil pipelines. The oil pipelines were operated by a joint venture in which Shell Petroleum Development Company of Nigeria Limited (“SPDC”) had a 30% interest. The claimants’ position is that the oil spills were caused by the negligence of SPDC. SPDC is incorporated in Nigeria and is a subsidiary of the English incorporated Royal Dutch Shell Plc (“RDS”). 

The claimants allege that RDS owed them a duty of care because of: (i) its exercise of significant control over material aspects of SPDC’s operations; and/or (ii) because it had assumed a high degree of responsibility for SPDC’s operations, including in respect of health, safety, and environmental policies. The allegations concerning RDS’ involvement include the following: 

  • RDS’ CEO and Executive Committee had overall responsibility for implementing health, security, safety, and environmental standards and performance by its subsidiaries;
  • A CSR Committee (responsible for compliance by subsidiaries) reported to the RDS board;
  • There was day to day involvement in SPDC’s operations by individuals employed by RDS; and
  • RDS exercised control over all business and function lines in the Shell group such that RDS could direct, control, and intervene in the management of its subsidiaries operations.

RDS challenged the ability of the claimants to commence the claim on the basis that the English court did not have jurisdiction to determine the claims, or alternatively that they should not exercise jurisdiction because there was no arguable case that RDS owed a duty of care. RDS was the anchor defendant which prima facie permitted the proceedings to take place in the English courts; if the claimants were found not to have a properly arguable case (i.e. a reasonable prospect of success) against RDS then the claim would not be able to continue in the English courts.

The High Court considered the issue in 2017, finding in favour of RDS. This was upheld by the Court of Appeal in 2018. Before the proceedings reached the Supreme Court, in 2019 the Supreme Court gave judgment in another case that concerned issues of parent company liability (Lungowe v Vedanta [2019] UKSC 20). The application for permission to appeal to the Supreme Court in the Okpabi proceedings was deferred until after judgment in Vedanta. Whilst Vedanta had provided important clarification in relation to parent company liability, permission to appeal was nonetheless granted in Okpabi.

Scope of parent company liability

The Supreme Court reversed the decision of the Court of Appeal. The Supreme Court held that the Court of Appeal had made an error of law in relation to the procedure for determining the claim, that it had wrongly conducted a ‘mini-trial’ of the issues, and that there was a real issue to be tried. 

The Supreme Court did not determine whether there had been a material error of law on the question of parent company liability, but made the following observations:

  1. As set out in Vedanta, parent company liability in relation to the actions of their subsidiaries is not a distinct category of liability in common law negligence, and should be determined by reference to general principles in relation to duty of care.
  2. It was significant that the Shell group was organised along vertical Business and Functional lines, involving significant delegation. Whilst the issue of how the organisational structure worked in practice was in dispute, it was clear that there was a real issue to be tried. 
  3. There is no general rule that the adoption of group wide policies or standards by a parent company cannot give rise to a duty of care. To the contrary, there may be systematic errors which, when implemented by a subsidiary, may cause harm to a third party. 
  4. The Court of Appeal wrongly focused on the issue of exercise of control by the parent company. Instead, the key issue for consideration is the extent and manner in which the parent company did actually take over, intervene in, control, supervise, or advise on the operations of the subsidiary. Control of a subsidiary and management of its operations are two separate things.

Comments

The question of liability will now be referred back to the High Court to determine in the context of the main proceedings. It will be interesting to see how the issues identified in Okpabi and Vedanta will be applied, and what further evidence will be relied on. In the meantime, the comments from the Supreme Court should prompt UK parent companies to consider their potential exposure for claims made in relation to the actions of their subsidiaries, and the balance between the proper oversight of subsidiaries against potentially increasing exposure for the parent entity. Regard for the observations of the Supreme Court will be required in putting in place mitigation to deal with these risks. This issue is particularly important in the context of acquisitions and restructuring, where advisers will need to keep in mind that the risk of liability in relation to historic conduct by a subsidiary may encroach on corporate structures and that claims may be directed to the parent company.