Jurisdiction and liability of parent companies for international subsidiaries

7th March 2018

Please note that the Okpabi and Vedanta cases subsequently went to the Supreme Court.  Please see our briefing on the Supreme Court’s decision.

When can a parent company be liable for the acts of an international subsidiary? The question has hit the UK courts several times in recent months.  Malcolm Simpson offers some practical conclusions arising from key cases on the complex questions of jurisdiction and intra-group corporate liability.

Jurisdiction and liability

The question of whether a UK parent company’s duty of care may extend to foreign subsidiaries has arisen recently in the high profile cases of Lungowe v Vedanta Resources and Okpabi & Ors v Royal Dutch Shell plc & Ors, both of which have recently been heard at the Court of Appeal [1].  Each case concerned pollution and environmental damage allegedly caused by the international subsidiary (based in Zambia and Nigeria respectively) and centred on whether, and how, the claimants could make their pollution problem a case for the UK courts, and a liability for the UK parent company.

The law applicable to non-contractual obligations arising out of environmental damage is generally the law of the country in which the damage occurs. However claimants can elect to pursue claims under the law of the country where negligent supervisory acts and omission occur [2].  In addition, claims can, in some circumstances, be tried in the UK where the defendant is domiciled in the UK and is a necessary and proper party to the claim [3].

In order to proceed with a claim in the UK on any of these bases, however, the claimants in Lungowe and Okpabi had to establish that the UK parent companies were liable in tort for the acts or omissions of their international subsidiaries.

Can a parent’s duty extend to an international subsidiary?

Adopting a consistent approach in both Lungowe and Okpabi, the Court of Appeal has confirmed that a UK parent company’s duty can extend to the operations of an international subsidiary.  The correct methodology for ascertaining whether or not that liability will arise is:

• First, to ask whether the damage complained of was foreseeable; whether there a relationship of sufficient proximity between the parent and its subsidiary; and are the circumstances such that it is fair just and reasonable to impose a duty on the parent for the acts of the subsidiary [4]?
• Then, to consider factors identified in the 2012 case of Chandler v Cape plc [5] to determine whether the parent company had superior knowledge/expertise in respect of the harm and whether it was fair to infer that the subsidiary would rely on the parent deploying that knowledge/expertise to avoid the harm.

Practical conclusions

The Court of Appeal has therefore clarified an approach which should enable international corporations to assess their intra-group operations and liabilities more effectively going forwards. However, whether liability will be established, and whether jurisdictional hurdles will be overcome in cases where there are no contractual links on which to base a claim, remains to be dealt with on a case-by-case basis.

In Lungowe, the claim still remains to be determined on its merits and Walker Morris will monitor and report on any key developments to come out of future stages in the litigation.

In Okpabi, the Court of Appeal found, in a judgment handed down on 14 February 2018, that although the Shell group had a centralised system of standards and policies that should apply to all subsidiaries and that should be supervised and overseen, it did not control the subsidiary’s operations or directly enforce those standards and policies.  This did not, therefore, suffice to establish the level of proximity required by the above-stated methodology to impose a duty on the parent for the acts of the subsidiary.  The parent could not, therefore, be an anchor defendant [6] to proceedings in the UK.

For all practical purposes, corporate groups with international operations have a fine balance to strike. On the one hand, businesses today must be seen to be responsible and reputable global businesses, whose brand, employees and customers are closely protected by the imposition of standards and policies and by a certain level of oversight and control.  On the other (and as Sir Geoffrey Vos noted in the Okpabi decision), parent companies generally go to the effort of establishing overseas subsidiaries in circumstances where they specifically do not wish to assume liability for such operations.

The key for many UK multinationals is likely to be ensuring that any group-wide policies are stated to be applicable across the group as a whole, and then designating responsibility for enforcement of standards at the separate, subsidiary company level.

Overall, the Lungowe and Okpabi cases should be welcomed by corporate groups for the clear guidance, and limitations, that they provide as to the approach that the UK courts will adopt when considering the liability of a parent company for the acts or omissions of its subsidiaries.  Whilst every case will be decided on its own facts, the cases demonstrate, fairly clearly, that the English courts will not permit parties to be used merely as anchors, and claims to proceed in England and Wales, where there is no sufficient and genuine factual or legal link to this jurisdiction; and neither will they rush to fix UK parent companies with the liabilities of their overseas subsidiaries.

If your business encompasses overseas operations, please do not hesitate to contact us for further information or advice. Specialist lawyers from Walker Morris can work with you in advising on corporate structures and policy, to minimise the risk of intra-group liabilities.

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[1] [2017] EWCA Civ 1528 and [2018] EWCA Civ 191
[2] Rome II Regulation i.e. European Union Regulation 864/2007 dealing with the law applicable to non-contractual obligations
[3] Owusu v Jackson (Case C-281/02) [2005] QB 801 and Article 4 Recast Brussels Regulation i.e. Regulation (EU) 1215/2012 of the European Parliament and of the Council of 12 December 2012
[4] Caparo Industries plc v Dickman [1990] 2 AC 605
[5] [2012] EWCA Civ 525 – factors: were the businesses of the parent and subsidiary in a relevant respect the same; did the parent have, or ought the parent to have had, superior knowledge or expertise in respect of the harm complained of; did the parent know, or ought the parent to have known, that the subsidiary’s system of work was insufficient or unsafe; and did the parent know, or ought the parent to have known, that the subsidiary relied upon using the parent’s superior knowledge/expertise for the subsidiary’s protection?
[6] an anchor defendant is a person who is made a defendant for the primary purpose of vesting jurisdiction so that the claim may be pursued in a certain court