The English High Court recently considered whether a parent company could be held liable for acts and omissions of one of its subsidiary companies.
Proceedings were raised by various Nigerian citizens against the ultimate holding company of the Shell Group, Royal Dutch Shell plc (the “parent company”), together with its Nigerian subsidiary, Shell Petroleum Development Company of Nigeria Ltd (the “subsidiary”).
The claim was in respect of damage caused by pollution and environmental damage due to oil spills from Shell’s pipelines and infrastructure in the area.
Shell argued that the claimants were bringing the claim against the parent company simply to get the case tried in the English courts, despite the claim having no connection with England. The decision therefore centred around whether Shell could in fact be held liable for acts and omissions of its subsidiary.
The court decided that it was not reasonable in this case to impose a duty of care between the parent company and the people living in the area of Nigeria in which the subsidiary operates.
This meant, therefore, that the claims against both the parent company and subsidiary would not be allowed to proceed in the English courts.
The starting point was whether the court could impose a duty of care between the parent and the people of the Niger Delta area. Applying the three-fold test set out in Caparo v Dickman, this would depend on whether there was a proximate relationship between the two, whether the damage was foreseeable, and ultimately, whether it would be fair, just and reasonable in the circumstances to impose such a duty.
The court stated that there would be certain circumstances where it would be appropriate to hold a parent company liable for its subsidiary’s acts and omissions. These were where:-
- the parent and subsidiary carry on the same business (in appropriate respects);
- the parent, in comparison with the subsidiary, has superior knowledge or expertise;
- the parent also has an in-depth knowledge of its subsidiary’s system of work; and/or
- the parent knows (or ought to know) that the subsidiary is dependent upon it to ensure that such damage is avoided.
Although not exhaustive, it was noted that the presence of a higher number of these factors would make it more likely that a duty of care would be owed.
Applying the relevant tests, the court held that the relationship between the parent and subsidiary was not close enough to imply a degree of proximity in the circumstances. Importantly, imposing such a duty would potentially impose ‘liability in an indeterminate amount, for an indeterminate time, to an indeterminate class’. An important factor here was the fact that the Shell Group operates over 101 different countries and consists of over 1,366 companies.
As a result, Shell only had a very superficial overview of the business of the subsidiary, as many holding companies, by definition, will have. Shell did not carry on any work in the area (and did not have the relevant license to allow it to do so) and it did not hold shares directly in the subsidiary (but instead through another company). The subsidiary’s knowledge was more specialist than any knowledge Shell would have had. Additionally, there was nothing to suggest that the subsidiary relied on Shell’s knowledge in any way.
Another important point from the case was that public disclosures made by a Group, for example, about their policies on corporate and environmental social responsibility, are not sufficient themselves to impose a duty of care on a parent company. The court considered that often these disclosures are made in the context of listing regulations, and even if they could be construed as imposing responsibility regarding the group’s policies on parent companies, this could be refuted by an appropriately worded disclaimer.
Although this is an English decision (and so not legally binding in Scotland), it may be considered persuasive in Scottish courts. The case highlights that the imposition of a duty of care on a parent company for acts of its subsidiary will rest on the facts of each case, and whether these meet the various criteria detailed above in the circumstances.
The simple fact that two companies are part of the same group does not itself impose responsibility on one for the acts of another. However, the case does highlight the importance of observing in practice a division of corporate activities throughout the group.
In addition, as there has been an increased focus on transparency in many respects of late, and in the context of making public announcements about corporate social responsibility policies, the wording of these announcements will be important, as will any disclaimers that apply to them.
It does however seem that a third party will have a lot of hurdles to jump through in order to persuade a court to impose a duty of care on a holding company of a large multi-national group.