Large international corporations may face a difficult choice between controlling the risks arising from far-flung subsidiaries and protecting the parent companies from liability, following a Court of Appeal judgment handed down on 14 February 2018. In this case, the parent company, Royal Dutch Shell Plc (RDS) was found not to be liable in relation to operations carried out by a group subsidiary, Shell Petroleum Development Company of Nigeria, Ltd (SPDC). But the judgment, which was not unanimous and may be appealed to the Supreme Court, highlighted the tensions that global corporations face in how they manage the risks faced across the business.

What was the dispute about?

The judgment concerns two sets of proceedings brought by a number of citizens of Nigeria. The claims related to alleged pollution and environmental damage caused by oil leaking from pipelines and related infrastructure in the Niger Delta. The claims were based on the tort of negligence under Nigerian common law, as well as breach of Nigerian statutory law in the case of SPDC.

The claimants wished to bring the proceedings in England & Wales, rather than Nigeria, for various reasons including a belief that delays in the litigation process in Nigeria would hamper their efforts to obtain effective remedies for their claims.

Establishing jurisdiction

For the claims to be brought in England, the claims needed to have a sufficient link with England and fall within one of the jurisdictional ‘gateways’ set out in the English Civil Procedure Rules (Practice Direction 6B). Given that the substance of the claims related to events in Nigeria, the claimants relied on the fact that they named RDS (which is domiciled in England) as a defendant.

The claims against RDS could be brought in England on the basis of the EU Recast Brussels Regulation, which provides that (subject to exceptions), a defendant based in an EU Member State should be sued in that jurisdiction (Article 4). RDS was then relied upon as the “anchor defendant”, to enable the claims to be brought against SPDC, as well.

This approach is permissible provided the court is satisfied that there is a “real issue” that it is reasonable for the court to try against the UK domiciled “anchor defendant” (in this case, RDS).

It was therefore fundamental to the pursuit of the claim in the English courts for the claimants to establish that the claim against RDS had a realistic prospect of success.

Was there a real issue to be tried against RDS?

The “real issue” test was equated with the test for disposing of a claim at summary judgment – whether the claimants have a realistic prospect of succeeding on the claim. The parties’ experts agreed that claim against RDS under Nigerian law was similar to English law (or at least, an essential component would follow the English law, Nigeria being a similar common law jurisdiction). The upshot of this was that if the claimants had no real prospect of succeeding with a claim under the English law on negligence, the entirety of the claims against both RDS and SPDC would fall away.

The fundamental question for the court was whether RDS, the global parent company, owed a duty of care towards the claimants in relation to the alleged pollution and environmental damage in Nigeria.

What did the court decide?

The High Court had found that RDS did not owe a duty of care towards the claimants, since: i) the claimants had not established a sufficient degree of proximity between RDS and the claimants; and ii) it was not ‘just, fair and reasonable’ to impose a duty of care on RDS. The claimants appealed this decision.

On appeal, the claimants argued that RDS owed a duty of care, not simply by virtue of its relationship with SPDC, but on the basis that it had “both (a) assumed responsibility for, and (b) taken control of, pipeline integrity, security and remediation in Nigeria.” In support of that assertion, the claimants pointed towards a number of factors, including: mandatory policies, standards and practices imposed by RDS on group companies (including SPDC); the imposition of a system of supervision and oversight; the imposition of financial controls; and an alleged high level of direction and oversight of SPDC’s operations. The claimants argued that RDS was more than a mere holding company, relying on evidence of the structuring of the group along business functions, rather than simply by corporate structure, and an Executive Committee that the claimants said showed a level of control by ‘group’ over the activities of SPDC. The claimants also pointed to various public statements by the group, made in corporate literature, regarding Shell’s commitment to environmental issues,

The majority decision

By a majority of two to one, the Court of Appeal rejected the claimants’ arguments. Lord Justice Simon found, in essence, that although the group had a centralised system of mandatory standards and policies that were intended to apply to each of the subsidiaries, including SPDC, this did not amount to RDS taking control over the operations of SPDC. Simon LJ found that it did assist the claimants case that the groups was organised both through legal entities and along business lines, but the claimants had not shown that any centralised involvement came close to establishing the level of proximity between RDS and the claimants that would give rise to a duty of care. He was also not persuaded by the claimants arguments that it was “fair, just and reasonable” in the circumstances to impose a duty of care.

Sir Geoffrey Vos agreed With Simon LJ, although his reasons differed slightly. He emphasised that “it would be surprising if a parent company were to go to the trouble of establishing a network of overseas subsidiaries if it intended to assume responsibility for those subsidiaries.” Although the claimants had provided evidence of a centralised system of practices, “There was no real evidence to show that these practices were imposed even if they were described as mandatory. There would have needed to be evidence that RDS took upon itself the enforcement of standards, which it plainly did not.

The dissenting judgment

In a detailed dissenting judgment, Lord Justice Sales agreed that “simply setting global standards (even those which purport to be mandatory) to guide the conduct of operating subsidiaries would not be sufficient to lead to the imposition of a duty of care.” However, he found that those standards were still significant, in that they provided “a mechanism for the projection of real practical executive control” by the parent company and Executive Committee.

The real point of difference was in Sales LJ’s evaluation of the evidence. He found that the witness evidence that the claimants put forward, which included various ex-employees of the Shell group, was sufficient to demonstrate a case that was more than “wholly speculative”. He also found that the claimants had shown that there was a very real possibility that further documents would emerge on disclosure that would provide substantial support for their case.

What does this mean for businesses?

The courts have previously found that in certain circumstances, a parent company can owe a duty of care towards employees of a subsidiary. Had the claimants succeeded in this case (and it could still be appealed further to the Supreme Court), this would have widened the scope of potential liability for parent companies.

This decision therefore provides welcome clarity for global businesses. It is also helpful that the judges all agreed that having a system of mandatory standards and policies is not enough to impose a duty of care towards those who may be affected by the actions of a subsidiary. The important point was whether, in fact, the parent company had gone further to actively asserting control and enforcing those standards and policies.

This does, however, give rise to a real tension for global corporations. On the one hand, there is an increasing emphasis – from both a regulatory and a reputational point of view – on the need for businesses to be “good global citizens”. Effective programmes for complying with legislation such as the UK Bribery Act and Modern Slavery Act require businesses to have a level of oversight and control over their subsidiaries; and businesses may either be required, or choose, to put out the sort of statement referred to in this case in relation to the group’s environmental policies.

However, this case illustrates that where the central group functions become actively involved in managing those risks (for example, for particularly problematic regions or subsidiaries), there is a real risk that this could be enough to impose a duty of care by the ultimate parent company towards third parties affected by the actions of a subsidiary. The serious consequence of there being a direct duty of care from the holding company in respect of actions of a subsidiary is that the holding company can become directly liable for the liabilities of the subsidiary. In substance (if not in form), this pierces the corporate veil preventing tortious liabilities from being ring-fenced in a subsidiary.

This requires global groups to tread a careful line, and at times make difficult decisions, between maintaining boundaries to preserve corporate separation of liabilities, and taking a more active role in order to manage risks that could affect the wider group.