Parent’s Duty of Care in Relation to a Subsidiary: India and Beyond

[Radhika Ghosh and Yatin Gaur are 3rd year B.A. L.L.B (Hons.) students at Hidayatullah National Law University in Raipur.]

The English Supreme Court has yet again in the recent decision of Okpabi v Royal Dutch Shell considered the question of the jurisdictional challenges associated with claims being brought in England against a UK domiciled parent for the actions of its foreign subsidiary. The Court held that the claims can proceed to a full trial if there exists a good triable case against the parent. The judgement was pronounced on the lines of principles laid down in the Vedanta Resources Plc v Lungowe in which it was held that the existence of a duty of care in the parent-subsidiary context depends on the extent to which the parent controlled or supervised the subsidiary’s operations.

Unfortunately, such cases of multinational corporations (MNCs) committing human rights abuses and environmental damages through their cross border subsidiaries are not novel and had been a cause of concern since decades. As demonstrated by the “Report on Dirty Profits Exposed”, the operations of various companies have left a negative impact on a range of human rights issues (such as discrimination, health and safety, freedom of association, privacy, poverty, subsistence, education, and housing) and are continuing to do so. Certain Indian headquartered companies too have been accused of poor environmental, health, safety, and human rights performance in relation to their overseas operations.

A combined reading of the rulings made in Okpabi and Vedanta echoes the sentiments that the corporate veil may no longer shield parent companies from incurring liability under the tort law for the acts or omissions of their foreign subsidiaries. However, there is no precedent in India to determine the liability of the parent company towards its foreign subsidiary.

Binding legislation to regulate corporate activities by MNCs, mainly in the spheres of human and labour rights, environmental standards, and anti-corruption, is also absent. This creates a gap and results in unsustainable business practises and contributes to human rights violations and environmental destruction in under-developed and low-income countries. Therefore, this post aims to study the relevance of the ratio laid down in the Okpabi and Vedanta with respect to the Indian context, especially in cases of transnational tort litigation.

Principle of Legal Separation and Duty of Care in India

The Companies Act in India has statutorily recognised subsidiary companies as a separate legal entity. In Vodafone International Holdings BV v. UOI, the Supreme Court of India held that the legal relationship between a holding company and its subsidiary is that they are two distinct legal persons, and the holding company does not own the assets of the subsidiary. Further, in law, subsidiaries are allowed to have decentralised management.

However, by placing reliance on Hackbridge-Hewittic & Easun v. G.E.C Distribution, it is submitted that although a subsidiary is a distinct legal personality, it may not be deemed to have a separate legal personality of its own when it essentially carries out the instructions given to it by the parent company. In State of U.P v. Renusagar Power Company Ltd., it was held that when subsidiaries are bound hand and foot to the parent company and must do what the parent company says, then the general tendency in law is to look at them as a group entity. Further, wherever public interest demands, the court must lift the corporate veil in the interests of justice.

However, in Balwant Rai Saluja v. Air India Ltd., the Supreme Court, despite recognising some degree of control that Air India exercised over its wholly owned subsidiary, held that such association was not bad in law and would not impose any liability on Air India. Similar ratios were also pronounced in the Haldia case and NALCO cases.

However, it is pertinent to note that the rule postulated in the aforesaid decisions do not find universal applicability as not only the nature and degree of the parental control exercised was different, but none of these cases was a mass tort litigation involving human rights abuse or environmental damage. Therefore, the ratio laid down in these cases can hardly be employed in adjudging cases of transnational tort litigation.

Duty of Care Test by UK and Canadian Courts

Although the UK and Canadian Courts still follow the principle enshrined in Salomon v. Salomon , we witness recent cases where even though the corporate veil has not been lifted, a duty of care has been established upon the parent company towards its subsidiaries. The common law generally does not make the third party liable for injury. However, understanding proximity between the parent company and its subsidiary is important as it helps in determining the extent of control the parent exercised on its subsidiary company in terms of its operations or in devising policies. In Caparo Industries Plc v. Dickman, it was held that the three elements required to establish a duty of care between the parent and its subsidiary are foreseeability, proximity and fairness.

However, later in Cape v. Lubez, it was held that there are no special doctrines in tort law on the basis of which the liability can be foisted on the parent company for the acts of its subsidiary; rather, it has to be adjudged wholly on the common tort law principles. It was held that ‘complete control’ is not an essential ingredient to prove the duty of care, rather if the parent company evidently has a high degree of control and supervision constituting ‘effective control’ over its subsidiary, a duty of care can be implied. Further, a duty of care towards its subsidiary can be established in a closely interrelated business matrix that requires the parent to handle the needs and interests of the subsidiary’s employees directly. Additionally, it has been held that when a parent company assumes the responsibility for drafting the policies on health and safety, the former may incur an absolute duty of care towards the latter.

Point of Developing Jurisprudence: An International Overview

The ‘UN Draft Norms on the Responsibilities of Transnational Corporations with Regard to Human Rights’ legally obligate all transnational corporations to protect the basic human rights of all its employees. Furthermore, the first pillar of the UN Guiding Principle states that it comes well within the duty of the state to protect individuals against human right violations occurring within its territory. This, therefore, implies that the exploitation of human rights by third parties like business entities must be protected by both the host and the home State.

Similarly, Principles 1 and 2 of the UN Global Impact, which find their basis from the Universal Declaration of Human Rights, urge business entities to support and foster respect for human rights, and not to be involved in any kind of human right abuses. Principle 4 of the UN Global Compact further urges business entities to abolish all forms of forced labour.

In the case of Barcelona Traction, it was argued that the lifting of the corporate veil must be recognised at an international level when the parent company’s control over its subsidiary becomes evident. Similarly, in Nevsun Resources Ltd. v. Araya, the Canadian Supreme Court, while dealing with the issue of liability of private corporations for the breach of public international law, held that it must not be restricted to centre-state relations. The human rights at individual level are protected not just against the State, but against non-state actors too. The latter includes private corporations; therefore, they cannot claim defence of exclusion of liability under international law.

The Way Forward: The Need for Socially Aware Policies

By placing reliance upon the courts’ decisions in the United Kingdom and Canada, and the evolving international jurisprudence regarding the parent-subsidiary relationship, it can certainly be argued that no longer are parent companies able to shield themselves from transnational tort litigations arising out of the unlawful conduct of their subsidiaries. This section, hence, tries to formulate the ways in which a parent company can be saved, to the extent possible, from transnational litigation arising out of the duty of care towards its subsidiary.

First, a parent company may promulgate and balance such policies that extend to the entire group of itself and its subsidiary, including that of health and safety, risk management and environment protection. The parent must leave no room for error in these commercial group-wide policies, and ensure that the various legal and regulatory requirements have been complied with and a suitable approach to group and subsidiary management risk has been adopted.

Second, even though it is often the parent company that directs and strategizes its subsidiary’s decisions, the parent company would do well not to administer those policies on behalf of its subsidiary.

Third, a parent company’s policies must draw a clear line in making the subsidiary company responsible for managing and supervising its own affairs. It must not take over its subsidiaries’ operational and functional control.

Fourth, it is probable that the parent company will foster help when a subsidiary needs the same in the field where the parent specializes. In such a scenario, the parent company must be extra careful in extending advice to its subsidiary to avoid encroaching upon the decision-making process.

Conclusion

The success of proceedings against the parent for the act of its subsidiary company depends on the level of effective control the parent exercises. Moreover, the place of operation of such a subsidiary may be a good reason to institute a suit in the home state, especially in the case of unavailability of substantial justice in the host state. Additionally if wordings in policies reflect, mistakenly or otherwise, an acceptance of responsibility for the subsidiary’s behaviour, the parent company may incur liability.

Although there is no such duty of care principle recognised in India, yet considering the foreign jurisprudence and the international obligations, the Indian MNCs working abroad and foreign headquartered MNCs operating in India must adopt a socially responsible approach to avoid possibilities of any future conflict arising from such transnational tort litigation. Further if such a case were to be brought up in future, the overseas decisions discussed herein may play an important role in determining the approach of the Indian courts.

– Radhika Ghosh and Yatin Gaur