UKSC on Parent’s Liability for Environmental Violations of Foreign Subsidiaries

[Raghav Harini N is a final year student at ILS Law College, Pune]

In a recent landmark decision in Okpabi v Royal Dutch Shell Plc, the Supreme Court of United Kingdom (UK) has permitted a jurisdiction appeal against a UK-domiciled parent company for the environmental violations of its Nigerian subsidiary. This judgment makes a significant contribution to the fields of human rights, environmental law, and corporate law. The Court has overturned the decision of the Court of Appeal which held that the tort victims had failed to establish a good arguable case against the parent company for the subsidiary’s actions. While the Court’s decision is predominantly on the jurisdiction appeal and not on the determination of the duty of care per se, the analysis of the Court is important in understanding the role of a parent in the human rights or environmental violations of its subsidiaries.

Factual Matrix

Approximately 40,000 appellants who belong to the fishing and riverine communities of River State in Nigeria had alleged that several oil spills had taken place in their areas, which resulted in significant environmental damage affecting agriculture, fishing, and the cleanliness of the water. It was their case that the Shell Petroleum Development Company of Nigeria Ltd (SPDC) was responsible for the subpar construction of the pipelines and ancillary infrastructure that resulted in the oil spill. They further alleged that SPDC’s parent Royal Dutch Shell Plc (RDS), a company incorporated in the UK, owed a parental duty of care since it enjoyed material control and de facto management over its subsidiary. The appellants sought damages from both the parent and the subsidiary. The High Court and the majority decision in the Court of Appeal held that the appellants failed to establish that RDS owed duty of care towards SPDC. This case has garnered attention from commentators as well as the legal community on matters relating to the attribution of parental liabilities for ethical violations of its subsidiaries.

Arguments Raised

In making RDS the anchor-defendant of the case, the appellants established the following to prove that the parent assumed a dominant role in the management of the subsidiary: 

1. The parent had extensive knowledge about the oil spill in Niger Delta and the resultant environmental damage. top executives of the parent had regularly visited the Niger Delta and had known about third-party intrusions in the pipeline that exposed it to high risks.

2. It exercised rigid control over the subsidiary, including but not limited to, budgetary approval, binding corporate decisions, direct supervision of operations and security, implementation of auditory recommendations, and special status of SPDC over other subsidiaries in the top management due to the political and environmental fragility of Nigeria (at paras 32-35, 62, 67).

3. The parent required mandatory compliance of group and operating standards on health, safety, and environment aspects by the subsidiaries. These standards, the case describes, were “mandatory, detailed and prescriptive.” It further established extensive reporting and communication lines which enabled the parent to closely monitor and enforce the compliance of these standards (at paras 47, 48, 51, 52).

4. The extensive executive involvement of the parent assumed direct responsibility for the overall operational safety of the subsidiaries. They were also responsible for risk management, assessment of annual reviews and emergency response efforts of SPDC. The remuneration of these executives also depended on the overall performance of the subsidiary (at paras 30, 44, 55).

5. The appellants relied on two internal documents and a series of testimonies given by former employees of the parent which unfolded the economic structure of group and the dynamics of the parent-subsidiary relationship to establish the de facto management of the parent in the subsidiary (at paras 36, 60).

Analysis of the Court’s Decision

At the outset, the UK Supreme Court observed that, being jurisdictional in nature, the case did not require any rigour in analyzing the complex arguments. It was enough for the appellants to meet the minimum threshold as required to obtain a summary judgment; the parties or the courts did not have to engage in a mini-trial.

Reiterating its own ratio in Vedanta Resources PLC v. Lungowe , the Court identified four factors that helped in the delineation of RDS’ liability towards SPDC:

1. SPDC’s activities were managed (either singly or jointly) by RDS;

2. RDS promulgated faulty group-wide safety policies to be implemented by subsidiaries like SPDC;

3. In pursuance of such policies, RDS took active measures to ensure compliance by SPDC; and

4. RDS held out that it exerted control and supervision on SPDC.

The Court, however, warned that this is not an exhaustive list and is merely suggestive in nature. It alsoobserved that the parental duty of care to the subsidiary is not a distinct category of common law negligence, thereby calling for a case-to-case analysis of parental liability for subsidiary’s actions.  

The Court of Appeal’s decision drew a distinction between a company that materially controls the subsidiary and a company that issues mandatory policies throughout the group. It held that the latter did not give rise to any duty of care. Rebutting this rationale, the Supreme Court concurred with Vedanta,observing that enforcement of mandatory policies is an indicator of parental involvement in the subsidiary. When a faulty mandatory policy is implemented by a subsidiary, it may cause negative externalities. However, the parent is protected under the garb of limited liability despite the economic structure of the group which permits it to make profits from subsidiaries. The reasoning in this case is a step forward to bridge this asymmetry in liability-sharing between the parent and subsidiary.  

Most of the veil-piercing cases such as Adams v. Cape, Prest v. Petrodel , and Amoco Cadiz rely on indices of control to collapse limited liability; higher the control, greater the chances of imputing parental liability. Therefore, as a countervailing strategy, parent companies may refuse to exercise control over its subsidiary. For example, an infamous strategy in reducing corporate environmental liabilities is to establish a subsidiary that handles the waste disposal, without the parent directly auditing or supervising the waste disposal mechanism of the subsidiary. In the event that the subsidiary produces negative externalities, the parent would be exonerated of the liability under the veil-piercing standards for lack of active control. By consciously losing control and dodging hazardous activities to the subsidiary, the parent seeks to exonerate itself of any potential liability despite possessing knowledge and failing to exercise due diligence. The instant case recognises this limitation of control. It observes that control is just the tip of the iceberg in analysing parental liabilities. The true test rather lies in evaluating the de facto management of the parent; to what extent the parent has a hands-on approach in the day-to-day management of the subsidiary that it strips the latter of decisional autonomy. This approach also ensures that the parent complies with its due diligence duties of the parent without riding on corporate veil as a defence.

It is noteworthy to observe that the Court of Appeal in the instant case and in another case dismissed the claims by tort victims due to lack of documentary and testimonial evidence to establish parental duty and domination. One of the biggest obstacles in imputing parental liability is producing evidence to show that the parent had a dominating role in the subsidiary. Most of the documents that intricately detail the economic structure and dynamics of the parent-subsidiary relationships are confidential that are available to the enterprises alone. The Supreme Court also observed that the High Court judgment that relied on the public documents filed in fulfilment of listing obligations failed to bear any evidentiary relevance in the instant case. A fairer approach would be to introduce a rebuttable presumption that the parent did exercise hands-on intrusion on the day-to-day affairs of the subsidiary. By employing this presumption, the parent has to prove the autonomous conduct of the subsidiary rather than the tort victims having to prove the de facto management of the parent. This onus-shifting is more equitable considering the difficulty in gaining access to the internal documents.

Conclusion

The historical trend of restrictive veil-piercing such as Adams, Prest, and Amoco Cadiz is based on the strict legal recognition of separate legal existence of parent and subsidiary. This approach regards limited liability as sacrosanct and any attempt to collapse the same requires extremely high burden of proof and can only be availed as the remedy of last resort. However, the lopsidedness of limited liability and its cascading effects on the non-shareholding constituencies such as the tort victims manifests quite brazenly in flagrant violations such as the instant case. In the pursuit to achieve fairness for involuntary creditors, the judicial trend thus did away with the strict standard under veil-piercing cases. The resurrection of parental liability without veil-piercing is predominantly owed to the cases such as Chandler v. Cape, Vedanta, andnow Okpabi. These cases recognize that a parent owes duty of care to the subsidiary based on the assumption of responsibility rather than holding it liable vicariously.

A combined reading of Vedanta and Okpabi contribute greater certainty to the existing domain of parental liability for subsidiary’s actions. It moves away from a control-based assessment to an economic-structure-based assessment to impute liability. Secondly, by holding that compliance with mandatory group policies is indicative of de facto management, it recognizes how parents tend to closet behind the veil despite promulgating a policy which in itself or whose implementation might produce negative externalities. These cases bear undeniable relevance in protecting the rights of involuntary creditors in mass tort claims against companies.

Raghav Harini N

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