Parent liability for international subsidiaries and jurisdiction disputes: An update

15th April 2019

Following the Supreme Court’s recent decision in the high profile Vedanta Resources v Lungowe litigation, Walker Morris’ Commercial Dispute Resolution specialists Nick Lees provides an essential update on parent company liability for international subsidiaries and jurisdiction disputes.

Why is this case important?

Whether a UK parent company’s duty of care may extend to foreign subsidiaries has hit the legal headlines a number of times recently [1].  The Lungowe case concerns pollution and environmental damage allegedly caused by an international subsidiary based in Zambia.  It centres 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 case has gone all the way to the Supreme Court on jurisdictional issues.  The decision has important implications for international corporations, which need to be able to understand and assess intra-group liability and may need to navigate jurisdictional hurdles when it comes to the hearing of any claim.

What are the practical implications?

Following both the Court of Appeal’s and the Supreme Court’s judgments in this litigation, international corporations should more confidently be able to assess their intra-group operations and liabilities.  They should also be better able to understand the jurisdictional hurdles which will need to be overcome before litigation can be pursued in the UK in cases where there are no contractual links or English law jurisdiction clauses on which to base a claim.

The Supreme Court’s decision in Lungowe demonstrates that, whilst every case will be decided on its own facts, the UK 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, but neither will they readily turn away proceedings where that could result in injustice in a foreign jurisdiction.

The decision also clarifies that, whilst the UK courts will not rush to fix UK parent companies with the liabilities of their overseas subsidiaries, the liability of parents in relation to international subsidiaries is not a distinct category of negligence which requires detailed judicial analysis, and no special rules apply.  If a claimant can establish a sufficient level of managerial intervention and control in relation to a subsidiary by its parent, then it has taken the crucial first step through the necessary jurisdictional gateway.

Finally in this case, the Supreme Court warned litigants to conduct jurisdiction disputes in an economical and proportionate manner.  Jurisdiction disputes must be confined to issues of law; and complexity of legal debate, as well as voluminous and tactical disclosure, should be avoided.  The Supreme Court suggested that if proportionality warnings are not heeded, litigants and their professional advisers may face costs consequences.

The story so far

In 2017 [2] the Court of Appeal stated that the correct methodology for ascertaining whether or not a UK parent company will be liable for the operations of an international subsidiary is:

• first, to ask whether the damage complained of was foreseeable; whether there is 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 [3]?
• then, to consider factors identified in the case of Chandler v Cape plc [4], which could help 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.

Because the Court of Appeal found that the UK parent company in this case could be found liable for the negligence of its international subsidiary, it followed that the substantive claim could be pursued against the parent in the UK courts.  The UK parent defendant raised a jurisdictional appeal to the Supreme Court on the following grounds:

1. that it was an abuse of EU law to rely on Article 4 of the Brussels Recast Regulation [5], as the claimant had done, to establish the ‘necessary or proper party’ jurisdictional gateway which allowed the UK parent to be sued as an anchor defendant [6] in the UK.
2. that, contrary to the lower courts’ findings, the claimant’s pleaded case and supporting evidence showed no real triable issue against the UK parent defendant.
3. that England was not the proper place to bring the claim.
4. that there was no real risk that the claimant would not obtain access to substantial justice in the Zambian jurisdiction.

What did the Supreme Court decide?

The Supreme Court held:

1. Article 4.1 of the Brussels Recast Regulation confers a right on claimants to sue an English-domiciled defendant in England, free from jurisdictional challenge. Any express or implied exceptions to that right, plus any abuse of law allegations, must be construed narrowly.
2. The summary judgment test [7] applies to determine the question whether there is a real triable issue against a UK parent defendant. The liability of parent companies in relation to activities of their subsidiaries is not a distinct category of negligence but a matter for consideration on the facts in each case, possibly at trial following disclosure having been given.  On the facts in this case, there was sufficient evidence supporting the view that the claimant’s case was arguable.  The decisions of the lower courts therefore stood.
3. To determine whether or not England is the proper place to bring the claim requires a summary examination of connecting factors to other potential jurisdictions. The search is for a single jurisdiction in which the case may most suitably be tried.  Where there is a risk of irreconcilable judgments resulting from separate proceedings, that is a relevant factor, but it is not a ‘trump card’ in favour of UK jurisdiction (as the lower courts had held).  In this case the UK parent defendant had offered to submit to the Zambian jurisdiction (along with the subsidiary), so the whole of the case could be tried there.  That meant that England was not the proper place after all.  However…
4. …Even if a court concludes that a foreign jurisdiction is the proper place, UK proceedings may still be permitted if cogent evidence shows that there is a real risk that substantial justice may not be obtainable in the foreign jurisdiction. There were access to justice issues in Zambia, so proceedings in the UK would be allowed.

The UK parent defendant’s jurisdictional challenge therefore failed.

In addition to its findings on the particular issues before it, the Supreme Court took the opportunity to provide judicial comment at the highest level on the conduct of jurisdiction disputes.  Echoing sentiments that were also expressed by the Court of Appeal earlier this year in another jurisdiction dispute [8], the Supreme Court warned litigants to conduct jurisdiction disputes in an economical and proportionate manner.  Jurisdiction disputes are, of course, the ‘fight before the real fight (that is, the substantive dispute) begins’.  They must be confined to issues of law (and not the re-exercise of a lower court’s discretion); and complexity of legal debate, as well as voluminous and tactical disclosure, should be avoided.  The Supreme Court suggested that if proportionality warnings are not heeded, litigants and their professional advisers may face costs consequences.

Further advice

If your business encompasses overseas operations, please do not hesitate to contact us for further information or advice. Specialist lawyers from Walker Morris can advise you on corporate structures and policies to minimise the risk of intra-group liabilities, and in relation to the resolution of local or international disputes.

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[1] See our earlier briefing for more detailed information
[2] [2017] EWCA Civ 1528
[3] That is, the ‘three-stage test’, established in Caparo Industries plc v Dickman [1990] 2 AC 605, for imposition of a duty of care in tort
[4] [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?
[5] That is, Regulation (EU) 1215/2012 of the European Parliament and of the Council of 12 December 2012
[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
[7] That is, the court considers that the claimant has no real prospect of succeeding on the claim; or that the defendant has no real prospect of successfully defending the claim or issue; and there is no other compelling reason why the case or issue should be disposed of at a trial
[8] Kaefer Aislamientos SA de CV v AMS Drilling Mexica SA de CV and Ors [2019] EWCA Civ 10, and see our briefing for further information