Implications for liability of parent companies over subsidiaries (Okpabi v Royal Dutch Shell)

Commercial analysis: Christa Band, partner, and Stephen Lacey, senior PSL, at Linklaters LLP, analyse how the Court of Appeal determined the circumstances in which a parent company will be liable for the negligence of its subsidiaries. In particular, they look at the impact of group policies and identity in such determinations.
Okpabi v Royal Dutch Shell [2018] EWCA Civ 191

What is the case about?

Okpabi is the latest judgment in a series of recent cases relating to when a parent company may be held liable for the activities of its subsidiaries. It involved claims brought in the English courts against Royal Dutch Shell Plc (RDS) and a Shell Group company, Shell Petroleum Development Company of Nigeria Ltd (SPDC), by local communities affected by oil in the Niger Delta.

The claimants’ case in respect of RDS was that it owed them a duty of care in negligence for alleged acts/omissions committed by SPDC. This issue was before the court as part of a challenge to the court’s jurisdiction in which it had to assess whether the claim was at least arguable, and whether it should be allowed to proceed.

What did the Court of Appeal decide?

At first instance, the judge had held that the case against RDS was not strong enough to proceed. The Court of Appeal upheld this result by a two to one majority. The leading judgment was given by Simon LJ, with whom Vos LJ largely agreed. He identified proximity as the central issue in the case. In that respect, he looked at a number of centralised, or group level, control features by which the claimants sought to establish that RDS had control over SPDC’s operations. In his view, however, none of the evidence went far enough to show any exercise of actual control over SPDC’s operations by RDS that would be sufficient to establish a duty of care. He distinguished between a parent company which controls the material operations of a subsidiary with one which issues mandatory policies intended to apply throughout a group. In his view, that latter action cannot mean that a parent has taken control of the operations of a subsidiary so as to establish a duty of care.

Sales LJ (dissenting) agreed with the majority on the legal principles. However, he took a different view of the evidence. In short, he was prepared to accept that the group-wide infrastructure gave RDS a means for the projection of executive control over SPDC, and that on the facts of the case there were other indications that RDS would actually have been motivated to intervene in the management of SPDC’s affairs. He also thought that there was a real possibility that further documents relevant to this may emerge on disclosure. On this basis, he did not think the claimants’ case could be dismissed as unarguable

How does this clarify the law for multinational corporation (MNC) parent companies?

The Court of Appeal’s decision is consistent with previous understanding as to the existence of a duty of care on the part of a parent company for the activities of its subsidiaries, in particular the place of group policies/identity in such cases.

For example, the earlier Court of Appeal decisions in Chandler v Cape [2012] EWCA Civ 525[2012] All ER (D) 123 (Apr), and Thompson v The Renwick Group [2014] EWCA Civ 635[2014] All ER (D) 98 (May), both show that, although a fact-dependant enquiry, claimants relying on generalised evidence of a group identity, or generalised group links are likely to face an uphill battle (those cases, in contrast to Okpabi, dealt with substantive rulings on a duty of care, albeit in a domestic context).

It is, however, vital to understand that such cases will always turn on their particular facts. For example, in late 2017, in a jurisdiction challenge, the Court of Appeal permitted a negligence claim against an English parent company of a multi-national group to proceed on the basis that it was arguable. In that case, Lungowe and others v Vedanta Resources plc and another [2017] EWCA Civ 1528[2017] All ER (D) 102 (Oct), there were somewhat more material, direct, links between the parent and relevant subsidiary than in Okpabi.

Any other lessons for MNC parent companies, and what does this mean for them in practice?

Even where it may be felt that, on English law principles, a parent company may be at a low risk of being held liable for the activities of an overseas subsidiary, two further points need to be kept in mind.

First, the discussion above concerns English law. In both Okpabi and Lungowe, although other local law technically applied, English law was relevant in one way or another—or was agreed to be so—and the cases proceeded on that basis. However, in the international tort context, issues of applicable law will often arise and it may be that under a different law, a different approach or causes of action applies.

Second, the question of ultimate liability of a parent company is different from the question of pure litigation risk. The bar at the jurisdictional/strike out stage is not high and whether cases proceed to trial, as the difference in opinion in the Court of Appeal in Okpabi illustrates, depends on the view that judges take of the evidence. Furthermore, the English courts are currently obliged to take jurisdiction over English domiciled defendants in such cases. This combination, at least while the English courts remain under the influence of EU derived jurisdiction rules, will remain attractive to claimants looking for a place to sue such defendants.

Much of this, of course, will not be new to sophisticated corporate groups who will know that the risk of litigation against parent companies is the flipside to the commercial benefits that considered group strategies can bring. As ever, the lesson is not that such risks are a reason to stop this practice. Rather, that careful consideration needs to be given to the appropriate balance between active oversight and involvement in subsidiary affairs on the one hand, and minimising parent company exposure to litigation and liability risk on the other.

Interviewed by Emily Meller.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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