The Court of Appeal recently gave its eagerly awaited judgment in Okpabi and others v Royal Dutch Shell Plc and another [2018] EWCA Civ 191, upholding the previous judgment of Fraser J in the High Court that there was no arguable case against Royal Dutch Shell (RDS) and therefore the English courts did not have jurisdiction to hear claims against RDS’s Nigerian subsidiary (the Shell Petroleum Development Company of Nigeria) (SPDC). A majority of the Court of Appeal held that Fraser J had been correct in his conclusion and dismissed the appeal.

The judgment is significant in providing further guidance on whether multinational companies can face legal action in England & Wales for the acts of their foreign registered subsidiaries. The decision in Shell comes just months after the appeal was heard in the case of Lungowe and others v Vedanta Resources Plc & Konkola Copper Mines Plc [2017] EWCA Civ 1528, which was found to the contrary. The case of AAA and others v Unilever Plc [2017] EWHC 371 (QB), another case dealing with parent company liability, is currently on appeal (see previous post regarding Unilever here).

This area of law is far from settled and will continue to be the subject of intense examination. What is clear is that future decisions concerning whether there is jurisdiction for the English courts to hear similar “overseas tort” claims are likely to depend heavily on the relevant facts.

For a more detailed briefing on this topic, see the full article below:

Recap on the facts of the Shell case and grounds for appeal

The underlying claims brought by a group of Nigerian citizens in the High Court of England & Wales alleged that RDS and SPDC had profited from oil drilling operations in the Niger Delta without implementing adequate safeguards to protect the interests of those living in the vicinity. The claimants argued that RDS, as the parent company, owed a duty of care to the claimants who had been affected by environmental damage caused by leaks from oil pipelines and associated infrastructure operated by SPDC.

The claimants argued that RDS owed them a duty of care because it exerted control over SPDC’s operations. They also asserted that the English courts were the appropriate forum for these claims. Fraser J held at first instance that the claimants had failed to present a properly arguable case that RDS owed a duty of care and thus, without an anchor defendant registered in England & Wales, the English courts did not have jurisdiction to hear their case.

The claimants appealed this decision on the grounds that Fraser J was incorrect in his analysis, notably challenging Fraser J’s decision to: (i) exclude from consideration evidence relating to the structure and action of the Shell Group before 2005; (ii) treat the control functions exercised by the RDS Executive Committee on behalf of RDS as limited; and (iii) ignore statements in corporate literature which referred to the commitment of the Shell Group and RDS to environmental issues. The claimants asked the Court of Appeal to re-evaluate whether RDS owed a duty of care.

Decision of the Court of Appeal

A majority of the Court of Appeal (Sales LJ dissenting) held that Fraser J had been correct in his conclusion and dismissed the appeal. Although the decision was formulated on the basis of different grounds to Fraser J, it was concluded that the claimants could not demonstrate a properly arguable case against RDS.

No duty of care established against RDS

In both Shell and Vedanta, the Court used the same formulation for seeking to establish a parent company duty of care. The Court considered the circumstances identified in Chandler v Cape Plc [2012] EWCA Civ 525 and Thompson v The Renwick Group Plc [2014] EWCA Civ 635, in the context of the three-part test from Caparo Industries Plc v Dickman [1990] 2 AC 605 (foreseeability, proximity and, reasonableness).

Foreseeability: In the case of Shell, there was no disagreement between the parties regarding the foreseeability limb of the Caparo test. However, both the proximity and reasonableness limbs raised issues.

Proximity: Regarding proximity, the claimants argued that there were five factors which were indicative of RDS’s control of SPDC: (i) the issue of mandatory policies, standards and manuals which applied to SPDC; (ii) the imposition of mandatory design and engineering practices; (iii) the imposition of a system of supervision and oversight of the implementation of RDS’s standards which bore directly on the pleaded allegations of negligence; (iv) the imposition of financial control over SPDC; and (v) the high level of direction and oversight of SPDC’s operations.

However, it was held that none of the factors relied on by the claimants demonstrated a sufficient level of control by RDS over SPDC’s operations in Nigeria to warrant the imposition of a duty of care. It was noted that many of the documents relied on by the claimants were extracts from much larger documents, some of which were published for the purpose of informing shareholders and regulators about the Shell Group businesses. These statements should be read in their proper context. The Court also distinguished between a parent company which has an overall system of mandatory policies to ensure that there are proper controls in place and a parent company which directly seeks to exert control and influence over its subsidiaries. Only in the case of the latter would there be a potential duty of care.

Fair, just and reasonable: With regard to reasonableness, the claimants argued that it would be fair, just and reasonable to impose a duty of care on RDS. The Court rejected this argument on a number of grounds, one of which was that while it is important for multi-national parent companies to conduct themselves in line with international standards, including those regarding corporate social responsibility and oil production, this was a doubtful foundation for the imposition of a duty of care.

How does Shell differ from the Vedanta case?

The underlying claims in Vedanta concerned alleged harm to persons and damage to property caused by Konkola Copper Mines Plc (KCM)’s mining activities in Zambia (with the claimants attributing the damage to toxic effluent discharged into local waterways during KCM’s operations). At the relevant time, KCM was registered and carried out its primary activities in Zambia. Vedanta Resources Plc (VR), registered in England & Wales, ultimately held a majority stake in KCM, giving rise to a parent-subsidiary relationship. Both the court at first instance and the Court of Appeal held that the case could proceed in the English courts, as it was sufficiently arguable that the English parent company owed a duty of care to the overseas claimants.

On the simplest analysis, the key difference here was the greater foreseeability and proximity to VR of the damage that the claimants alleged. It appears that, while the degree of control that VR exercised over KCM might favour an “assumption of responsibility”, the facts in Shell suggested a more remote nexus between the parent and subsidiary.

In Shell it was made clear that the issuing of mandatory policies, standards and manuals which applied to SPDC were not sufficient to establish a duty of care in favour of any person or class of persons affected by those policies. These policies did not indicate control; that control remained with SPDC which was responsible for its own operations.

To establish proximity, there must be evidence to show that the parent company has taken control of the relevant operations in a much more direct and significant way. Proximity was found to be arguable in Vedanta, in which there were important factual distinctions to Shell. These distinctions included, for example, the fact that VR had a majority 80% shareholding in KCM, whereas SPDC operated its pipeline pursuant to a joint venture with the Nigeria National Petroleum Corporation (who held the majority shareholding) and two other parties – this meant that the Court found that SPDC (and, by extension, RDS) would have a much more limited capacity to avoid the breaches alleged by the claimants.

Additionally, in Vedanta, it was found there was substantial evidence that VR’s board was involved in the direct management of its subsidiaries, including KCM, a subsidiary into which VR had invested $3 billion.

These factors, which were not present to the same extent, if at all, in the Shell case, highlight that the courts will consider the individual factual scenarios in order to determine the degree of control exercised by a parent company.

Future decisions on parent company liability

This area of law is far from settled and will continue to be the subject of intense examination. The claimants in the Shell case have indicated they intend to seek permission to appeal to the Supreme Court. The impending appeal of the Unilever case will also be of interest.

Future decisions concerning whether there is jurisdiction for the English courts to hear similar “overseas tort” claims are likely to depend heavily on the relevant facts. Against this backdrop, the Court of Appeal’s warning of the need for appellant courts to exercise restraint in any challenge to first instance decisions (endorsing Lord Bingham’s observation in Lubbe & others v Cape Plc [2000] 1 WLR 1545 that “this is a field in which differing conclusions can be reached by different tribunals”) appears to be particularly noteworthy. While this raises the prospect of considerable uncertainty for prospective claimants and defendants alike, some significant trends do appear.

Practical implications

It remains important that businesses consider both the place of incorporation of local operating subsidiaries (recognising that incorporation in England & Wales will increase the likelihood that allegations of foreign damage will be justiciable before the English courts) and the degree of control exercised by an England & Wales domiciled parent company over its subsidiaries (since this could provide a further route to such claims against either the parent or a foreign subsidiary being tried in the English courts).

While group-level operating procedures and guidelines instigated by a group parent company may well be necessary and appropriate features of an effective and responsible business, these should be combined with regular “heat mapping” of potential environmental and human rights risks and the adoption of appropriate safeguards. Parent companies should ensure that such policies are applicable to all group companies, as opposed to specific subsidiaries. In addition, the responsibility for effecting these policies should be at subsidiary level. This will reduce the risk of a duty of care arising.