The recent Court of Appeal decision in Ogale Community & Ors v Royal Dutch Shell Plc (“RDS”) and Shell Petroleum Development Company of Nigeria Ltd (“SPDC”) [2018] EWCA Civ 191 has confirmed that a claim against an English-domiciled parent of a foreign oil and gas company may not proceed in the English Courts if the claimants are unable to prove that the parent owed them a duty of care.

In reaching its majority decision (Sales LJ dissenting), the Court of Appeal departed from the reasoning of the TCC at first instance. That decision had placed more emphasis on the nature of and relationship between RDS and SPDC as legal entities, than on the factual evidence as to how this worked in practice. Although ultimately dismissing the claim as the TCC had done, the Court of Appeal gave far greater scrutiny to the Shell Group’s policies and procedures.

The decision highlights that while, generally, “corporate structure itself tends to militate against the requisite proximity” required for a duty of care, the Court will nevertheless look closely at the influence of group policies, and the extent of practical or shared control the parent has over the operations that are the subject of a claim.

Background

The facts of the case are set out in more detail in our earlier Law-Now (Oil and Gas: In defence of corporate structure). In summary, members of the Ogale community in Nigeria commenced proceedings in the High Court for damages against parent company RDS and operating subsidiary SPDC, alleging serious ongoing pollution and environmental damage caused by oil spills from SPDC’s pipelines.

The claim against Nigerian-domiciled SPDC could only proceed in England, however, if jurisdiction could be established with English-domiciled RDS qualifying as an ‘anchor defendant’. The Claimants therefore had to prove that there was ‘a real issue’ between the Claimants and RDS ‘which it is reasonable for the court to try’. To do so, they had to prove an arguable duty of care owed by RDS to the Claimants.

At first instance, Fraser J held that there was no such duty of care owed by RDS. The Claimants had not satisfied the tripartite Caparo test of reasonably foreseeable damage, proximity, and reasonableness (failing on the second and third limbs).

The key issue was the second Caparo limb, proximity. Fraser J applied the decision in Chandler v Cape Plc [2012] EWCA Civ 525, that merely holding shares in a subsidiary will not, by itself, give rise to a duty of care. Whilst there may be circumstances where a duty of care could arise, they did not apply in this case. Firstly, RDS did not conduct operations itself, in Nigeria or anywhere else; nor, in Nigeria, was it permitted to do so. It was not a party to the relevant joint venture agreement. Secondly, decisions taken by the Executive Committee (“ExCo”) of the Shell Group were not decisions taken by RDS; the Shell Group and RDS were not the same legal entity and the executive officers of RDS who sat on the ExCo were in a minority. In dismissing the relevance of public statements relied on by the claimants, Fraser J found that the statements had been made in relation to the Shell Group generally, and did not weigh heavily when considering whether a duty of care existed. Policies merely starting with “all Shell companies must” were insufficient to prove a duty of care.

Decision

Could the Court of Appeal reconsider the TCC’s decision?

The Court of Appeal decided that it was appropriate to reconsider the decision at first instance. Fraser J had made certain errors of principle in failing to consider factual evidence presented by the Claimants. He was also incorrect in his assessment of ExCo; there was an arguable case that the actions of ExCo were attributable to RDS.

The central question: proximity

The Court of Appeal agreed with the TCC, however, on the central question at issue. For the second Caparo limb of proximity to be met, it was necessary to establish that RDS had control (or joint control) over SPDC’s operations.

The Claimants pointed to five factors, which they argued demonstrated such control by RDS:

  1. mandatory policies, standard and manuals issued by RDS;
  2. mandatory design and engineering practices imposed on SPDC;
  3. a system of supervision and oversight of the implementation of RDS's standards;
  4. financial control by RDS over SPDC in respect of spending; and
  5. a high level of centralised direction and oversight of SPDC's operations.

Did RDS exercise a substantial degree of control (or joint control) over SPDC’s operations?

As a preliminary matter, all three judges agreed that the Claimants could not simply point to the existence of policies and standards issued by RDS, intended to apply throughout the Shell company group, in order to establish a duty of care. Instead, a more substantial degree of control by RDS of SPDC’s operations was needed.

By a majority of two to one, the Court of Appeal decided that the Claimants had failed to prove that the five factors identified amounted (together or separately) to a sufficient degree of control to establish the necessary degree of proximity.

Simon LJ found that the various policies, practices, and public statements relied on by the Claimants merely revealed “a centralised system based on industry standards and the Shell Group's own developed best practice” which applied to all Shell Companies. Such standardisation and sharing of best practice was to be expected in the context of a business operating internationally, and did not evidence a substantial degree of control over SPDC specifically. Whilst other evidence suggested that there were specific concerns about SPDC’s operations in Nigeria, these were high-level business concerns. At its highest, RDS ensured that controls were in place, to be implemented by SPDC; it did not exercise control over SPDC’s operations.

Sir Geoffrey Vos C was of the view that that the documents relied upon by the Claimants were of the sort to be expected, from a commercial perspective, in an international business. They were general ones, not ‘tailored’ specifically for SPDC. Such group standards were not enough to prove an “imposition” of mandatory practices, especially where there was no evidence that RDS “took upon itself the enforcement of the standards”. Similarly, RDS wanting to be kept abreast of “significant issues” with operations by SPDC in Nigeria, a particularly risky region, was not the same as RDS assuming responsibility for, or controlling, the day-to-day operations of SPDC.

Dissent

Sales LJ disagreed with the majority. He found that there was a good arguable case that RDS owed the Claimants a duty of care. Notably, he was also more willing than the majority to give weight to the evidence of so-called “whistleblower” witnesses for the Claimants. Based on this witness evidence, and on certain central policies – in particular, the “Shell Control Framework” – Sales LJ concluded that RDS had the means to assert executive power and control aspects of the management of operating group companies, like SPDC, if it wished to do so. In the case of SPDC, it was plausible that RDS had exercised this power.

Comment

On the one hand, the outcome of this case is positive for large international oil and gas companies. The decision confirms that a parent company will not normally be liable for the actions of an operating subsidiary by virtue of ownership or group corporate policies. As noted by Sir Geoffrey Vos C, “it would be surprising if a parent company were to go to the trouble of establishing a network of overseas subsidiaries with their own management structures if it intended itself to assume responsibility for the operations of each of those subsidiaries.”

However, the Court of Appeal’s approach – in considering whether, in fact, the parent had taken control of the operations of the subsidiary – showed a far greater willingness than the TCC to look beyond corporate structure alone, and investigate how a company group is managed in practice. As a consequence, companies should consider carefully the extent to which they are able, in fact, to direct the actions (or do, in fact, direct actions) of their operating subsidiaries, where this might give rise to claims in tort from third parties.

Oil and gas groups might also be well advised to consider whether any emergency response planning might have the unintended impact of spreading potential tortious liability to other group members and invoke the jurisdiction of the English courts.