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Parent company liability for the acts of its subsidiaries

It is important organisations are fully cognisant of ways in which a parent company can wittingly, or unwittingly, incur liability for the acts of its subsidiary.

It is a well-established principle of English law that, as a rule, a parent company is not liable for the acts of its subsidiaries. Parent and subsidiaries are separate entities, with separate legal liability for their acts and omissions. This rule has, however, come under increased judicial scrutiny in recent years, in particular as the result of a number of high-profile cases in the Supreme Court. This is a critical area for many clients. It is therefore important organisations are fully cognisant of ways in which a parent company can wittingly, or unwittingly, incur liability for the acts of its subsidiary. The purpose of this article is to review two leading cases in this area, whilst providing commentary on the guidance that has emerged.

The two cases to be considered are Vedanta Resources PLC and another –v- Lungowe & others [2019] and Okpabi and others v Royal Dutch Shell PLC [2021]. Notably, these cases have marked similarities as both involved a UK domiciled parent and foreign subsidiary, in circumstances where the claimants were seeking to establish the parent company’s liability for acts of its foreign-based subsidiaries. Both cases also involved jurisdictional challenges, with the defendants challenging the claimants’ right to bring the cases in England.

The Vedanta case

In the Vedanta case 1,826 Zambian residents brought proceedings in the English courts against Vedanta, a UK incorporated parent company, and its Zambian subsidiary, Konkola Copper Mines PLC (KCM). The claimants alleged that waste discharged from a copper mine owned and operated by KCM had polluted local waterways, causing personal injury, loss, and damage.

The court had to consider a number of preliminary issues, including whether in principle the parent company could owe a duty of care to the claimants in respect of the acts of its subsidiary. Whether such a duty was owed, was a factual question, dependent upon the degree of control exercised by the parent company over its subsidiary.

The claimants alleged Vedanta owed a duty of care because of the very high level of control and direction that it exerted, both over KCM’s mining operations and its compliance with applicable health, safety, and environmental standards. In support of their case, the claimants cited materials published by Vedanta in which it had asserted its responsibility for the maintenance of proper standards of environmental control over the activities of its subsidiaries, and for the implementation of those standards throughout its group by training, monitoring, and enforcement. This included a publicly available report entitled “Embedding Sustainability”, which stressed that the oversight of all of Vedanta’s subsidiaries rested with the Vedanta Board.

The Supreme Court found the documents cited by the claimants to be persuasive and concluded that they were sufficient to establish that there was a triable case against Vedanta. The case was remitted back to the lower court for a full trial to decide if there was a duty in all the circumstances and whether that duty was breached.

The Okpabi case

The key facts in the Okpabi case were materially similar to that of Vedanta. A group of Nigerian citizens inhabited an area allegedly affected by oil leaks from pipelines and associated infrastructure operated by the Shell Petroleum Development Company of Nigeria (SPDC). The claimants alleged that these spills had caused widespread environmental damage including serious water and ground contamination. Claims were brought, in negligence, against SPDC and its parent company, Royal Dutch Shell (RDS). The case against the parent, RDS, was brought on the basis that RDS owed the claimants a duty of care either because:

It exercised significant control over material aspects of SPDC’s operations; and/ or
That it assumed responsibility for SPDC’s operations.

Both at first instance and appeal - and notably prior to the Supreme Court decision in Vedanta - the courts held that the claimants had no arguable basis for the alleged duty of care by RDS. The claimants’ further appeal to the Supreme Court relied heavily upon the Vedanta decision.

To determine whether RDS owed a duty of care to the claimants, the Supreme Court had to consider the degree of control, if any, exerted by RDS over SPDC. In doing so they looked in some detail at the control exercised by RDS, the structure of the Shell group of companies, and the nature of their operations; specifically the mandatory policies, standards, and manuals utilised throughout the company. These included an RDS Control Framework which was described as “the single overall control framework” applied to all Shell companies.

The Supreme Court unanimously allowed the claimant’s appeal, overturning the judgments of the lower courts and enabling the claims against RDS and SPDC to proceed before the English Courts. Put simply, there was sufficient evidence of control exercised by RDS to SPDC to raise a triable issue to be considered at trial.

Practical implications of these rulings

A number of points arise from these judgments. One concern must be that as a result of the Supreme Court rulings it may be easier to establish a triable case as to the existence of a duty of care on the part of a parent company. This, arguably, more claimant-friendly approach may, in turn, attract greater interest from claimant law firms and litigation funders.

The second point is the potential exposure, which may arise in circumstances where a parent company assumes such a duty of care to third parties for the acts of its subsidiaries. Companies must bear in mind that, as in the Vedanta and Okpabi cases, this issue remains heavily fact and context specific, depending on the structure of the companies in question and the industries in which they operate. Some parent companies will accept that a duty of care may arise to third parties in respect of the actions of their subsidiaries and will do what they can to ensure that that duty is discharged appropriately. In other cases, parent companies may wish to avoid assuming a duty of care, if possible. This will require careful organisational planning.

With regard to D&O policy coverage there is, of course, coverage for subsidiaries (as defined) and any potential claim will be subject to policy terms and conditions in the usual way. That is not, however, the whole story because as well as the coverage implications there is also the potential inconvenience (time and possibly stress) of dealing with such claims. This is particularly so where they proceed in jurisdictions other than where the cause of action arose.

Finally, and given the complexity of this particular area, it may be prudent both to take specialist advice and to speak with your broker. Ultimately you will wish to ensure that the control exerted, and relevant organisational policies, procedures, and frameworks produced, accurately reflect the overall corporate policy and parent company’s stance on this issue.

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