Court confirms parent not liable for overseas subsidiary’s acts
The Court of Appeal has confirmed a decision of the High Court that an English holding company was not liable for the acts of its overseas subsidiary.
The decision happens to be the culmination of a line of judgments relating to the operations of subsidiaries in Africa. You can read more about how this affects the African market more broadly in our recent African Insights article and our subsequent update.
AAA and others v Unilever plc and another concerned Unilever plc, an English-registered joint holding company of the Unilever group, and Unilever Tea Kenya Limited (“UTKL”), a Kenyan subsidiary of Unilever plc that operated a tea plantation.
Around the time of the 2007 Kenyan presidential election, there was an upsurge in inter-tribal violence. Mobs entered the tea plantation run by UTKL and targeted workers and residents on the site, ultimately resulting in deaths.
Those workers and residents (or their personal representatives) subsequently claimed against both UTKL and Unilever plc, claiming that both companies owed them a duty of care to protect them from the violence and that, by failing to comply with that duty of care, they were liable in negligence.
In order to impose a duty of care on a person, a court must be satisfied that three tests are satisfied. Those tests are set out in the seminal case of Caparo v Dickman. They are:
- It must be reasonably foreseeable that the person’s conduct would lead to the loss in question.
- There must have been sufficient proximity between that person and the injured person.
- It must be fair, just and reasonable to impose a duty of care.
The question of interest in this case was whether UTKL’s parent company – Unilever plc – could be liable for matters that were essentially local issues in Kenya and arguably more properly attributable (if attributable at all) to its subsidiary, UTKL. In other words, could Unilever plc be liable for its Kenyan subsidiary’s acts?
The High Court initially found (albeit reluctantly) that the second test above was satisfied. The judge felt that Unilever plc’s activities, or omission to act, was sufficiently connected with the damage suffered by the tea plantation workers and residents.
However, she said that neither Unilever plc nor UTKL could have foreseen the inter-tribal unrest, and it was not fair to impose a duty on them when they were both entitled to rely on the Kenyan authorities to maintain law and order. On that basis, she found that there was no claim against either company.
The individuals appealed against the High Court’s decision that there was no duty of care. Unilever plc and UTKL appealed against its finding that there was sufficient proximity.
Where does this leave us?
The court agreed with Unilever. It said there was clear evidence that UTKL managed its own local risks independently, without help from Unilever plc. Indeed, it found that the managing director of UTKL’s operations was effectively the only person within the Unilever group who was able to assess and appraise effectively the risks arising in the context of the business in Kenya.
In the words of the leading judge, the individuals were “nowhere near being able to show that they have a good arguable claim against Unilever”. The court therefore dismissed the claim.
The decision is not ground-breaking but underscores comments in recent cases, including the High Court’s original decision in this case and the recent judgments in Lungowe v Vedanta Resources plc and Okpabi v Royal Dutch Shell plc.
The combined upshot of these cases is that a parent company is not automatically liable for its subsidiary’s acts, and that a company does not assume a duty of care to third parties merely by virtue of being a parent company. In the court’s words in this judgment:
There is no special doctrine in the law of tort of legal responsibility on the part of a parent company in relation to the activities of its subsidiary, vis-à-vis persons affected by those activities. Parent and subsidiary are separate legal persons, each with responsibility for their own separate activities.
In reality, if a person wants to bring an action in negligence against a parent company on account of its subsidiary’s actions, that person must prove that the parent company had assumed a “stand-alone” duty of care. Again, as the court said:
A parent company will only be found to be subject to a duty of care in relation to an activity of its subsidiary if ordinary, general principles of the law of tort regarding the imposition of a duty of care on the part of the parent in favour of a claimant are satisfied in the particular case. The legal principles are the same as would apply in relation to the question whether any third party (such as a consultant giving advice to the subsidiary) was subject to a duty of care in tort owed to a claimant dealing with the subsidiary.
What this means is that, although a court may attach liability to a parent company in select cases, this will happen only if the parent company has become so involved in its subsidiary’s affairs that it has assumed its own, separate duty of care to third parties. The group relationship between the parent company and the subsidiary may be important evidentially, but legally it is essentially irrelevant.
The court repeated two instances where a parent company might become so involved in its subsidiary’s affairs that it assumes its own duty of care to third parties:
- Where the parent takes over the management of its subsidiary’s activities
- Where the parent gives advice to its subsidiary about how to manage a particular risk
In this case, the court said it was clear that UTKL had managed its own affairs completely independently and had taken no advice from Unilever plc on how to manage its risks locally.
The decision reinforces certain existing points that commercial groups should bear in mind.
- It is acceptable (and, indeed, advisable) to apply risk policies, including safety and compliance policies, “globally” across an entire group. However, parent companies should be careful they do not effectively administer those policies on behalf of their subsidiaries.
- It is sensible to vest decisions regarding the ultimate strategy and direction of a group in the board of the holding company. However, when considering matters that revolve around a particular subsidiary, it is important to demonstrate that decisions are taken independently by the subsidiary’s board.
- Parent companies should think carefully about advising a subsidiary on risk matters. In some cases, this will be natural and unavoidable, especially if the parent possesses experience that the subsidiary lacks. However, groups should give careful consideration to obtaining external advice from third-party risk consultants as a way to mitigate potential parent company liability.