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In an important judgment relating to the English court’s jurisdiction over an environmental tort claim, the UK Supreme Court has confirmed recent authority that a UK-domiciled parent company can be liable in tort for acts or omissions by a foreign subsidiary.1 The decision rejects a traditional strict approach to corporate separation with the courts looking instead at how a group of companies are managed and operated in practice. In addition, the case highlights that deficiencies in group-level compliance policies and procedures can create liability for UK parent companies where they are implemented by a foreign subsidiary who causes loss to third parties. This point is of particular interest at a time when corporates are coming under increasing scrutiny and pressure regarding their policies and frameworks to address Environmental, Social and Governance (“ESG”) issues. The judgment also raises areas of consideration for private equity, restructuring and similar firms when conducting pre-acquisition due diligence or restructurings involving groups of companies with potential exposure at the subsidiary level to these sorts of mass tort claims.
The key points for groups, companies, directors, shareholders and investors in the light of the Okpabi decision are:
The case arises from two sets of proceedings brought by communities (totalling over 42,000 individuals) in Nigeria. The Claimants brought proceedings in the English courts against Shell Petroleum Development Company of Nigeria Ltd (“SPDC”), a Nigerian company operating oil pipelines in the Niger delta, and its UK-domiciled parent company, Royal Dutch Shell Plc (“RDS”). The Claimants allege that oil spills occurred from oil pipelines and associated infrastructure operated in the vicinity of their communities, causing widespread environmental damage as a result of SPDC’s negligence. The Claimants’ case against RDS is that it owed them a common law duty of care because it exercised significant control over material aspects of the subsidiary’s operations and/or assumed responsibility for the subsidiary’s operations. The Shell Defendants challenged the jurisdiction of the English court on the basis that there was not a real issue to be tried against the UK-domiciled parent company as anchor defendant and, therefore, no jurisdiction as against SPDC as a “necessary or proper party” pursuant to the relevant jurisdiction gateway.2
The judge at first instance concluded that “it is not reasonably arguable that there is any duty of care upon RDS, the ultimate holding company for the Shell Group, for the acts and/or omissions of the operating subsidiary within the Shell Group for Nigeria, SPDC.”3 Accordingly, the judge determined that the claims against RDS and SPDC could not proceed in the English courts. The Claimants appealed the decision and the Court of Appeal considered that the judge at first instance had erred in his approach to reviewing the evidence and, as such, decided to review the evidence itself, including fresh evidence adduced for the appeal. The evidence reviewed by the Court of Appeal included over 40 witness statement and expert reports. The majority of the Court of Appeal ultimately confirmed the first instance decision that there was no arguable case that RDS owed the Claimants a common law duty of care to protect them against foreseeable harm caused by the operations of SPDC. The majority noted that 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. 4
The Claimants’ appeal to the Supreme Court was deferred pending the Court’s decision in Vedanta Resources v Lungowe5 which similarly considered whether a UK-based parent company could be sued by Zambian citizens who alleged that they had suffered as a result of toxic emissions from a copper mine operated by a Zambian subsidiary of the UK parent. The Supreme Court in Vedanta decided that there was a real issue to be tried against the UK parent company and, in doing so, the Court referred to the Court of Appeal’s judgment in Okpabi and noted that there is no ‘limiting principle’ that prevents a parent owing a duty of care in respect of the activities of a subsidiary arising from the promulgation of group-wide policies and guidelines. 6
Following that judgment, the Supreme Court confirmed that it would hear the Claimants’ appeal in Okpabi. The Claimants amended their case in light of the Vedanta ruling, arguing that there were four ‘routes’ by which the parent company could be shown to owe the Claimants a duty of care: (i) by taking over the management or joint management of the relevant activity of SPDC; (ii) by providing defective advice and/or promulgating defective group-wide safety/environmental policies which were implemented as of course by SPDC; (iii) by promulgating group-wide safety/environmental policies and taking active steps to ensure their implementation by SPDC; and (iv) by holding out that it exercises a particular degree of supervision and control of SPDC. The Claimants relied on their allegations that RDS exercised a high degree of control, direction and oversight in respect of SPDC’s pollution and environmental compliance and the operations of its oil infrastructure.
Supreme Court decision
The Supreme Court granted the appeal, finding that the Court of Appeal materially erred in law and that there was a real issue to be tried.
The material error of law identified by the Supreme Court was in respect of the procedure for determining at the interlocutory stage whether the claim was arguable. The Supreme Court held that the Court of Appeal had been drawn into conducting a mini-trial instead of accepting the factual assertions made in support of the claim other than in the exceptional circumstances where it could be shown that they were demonstrably untrue or unsupportable. The Supreme Court also held that another consequence of the Court of Appeal conducting a mini-trial was that it had adopted an inappropriate approach to the documentary evidence in that it had essentially discounted the possibility of further relevant documentary evidence being identified during disclosure. The judgment notes that the relevant test at this stage during a jurisdictional challenge is “are there reasonable grounds for believing that disclosure may materially add to or alter the evidence relevant to whether the claim has a real prospect of success?”7 The judgment highlights that internal corporate documents are important in determining whether a parent company should be liable for the acts or omissions of its subsidiaries and, as such, the Court of Appeal erred when it determined the issue on the basis of the Claimants only having access to two internal Shell documents.
The Supreme Court also identified the following errors of law in the Court of Appeal’s judgment (but did not determine whether these errors were material):
The Supreme Court also held that there is a real issue to be tried as it is reasonably arguable that RDS owed the Claimants a duty of care. The Supreme Court based its decision, in part, on two RDS internal documents showing that the Shell group has a vertical organisational structure which involves significant delegation of authority. It found that whilst ‘formal binding decisions’ are taken at corporate level, they are taken on the basis of prior advice and consent from the business and functional line and organisation authority generally precedes corporate approval.
1) Okpabi and others v Royal Dutch Shell plc and another  UKSC 3.
2) Paragraph 3.1(3) of Practice Direction 6B sets out the test as follows: “The claimant may serve a claim form out of the jurisdiction with the permission of the court under rule 6.36 where – …(3) A claim is made against a person (‘the defendant’) on whom the claim form has been or will be served (otherwise than in reliance on this paragraph) and – (a) there is between the claimant and the defendant a real issue which it is reasonable for the court to try; and (b) the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim.”
3)  EWHC 89 (TCC), at paragraph 122.
4) Sales LJ dissented and was of the view that the Claimants had a good arguable case that RDS did owe them a duty of care.
5)  UKSC 20.
6) The Supreme Court’s judgment stated: “Mr Gibson sought to extract from the Unilever case and from [the Court of Appeal’s decision in the Okpabi v RDS case], a general principle that a parent could never incur a duty of care in respect of the activities of a particular subsidiary merely by laying down group-wide policies and guidelines, and expecting the management of each subsidiary to comply with them…Again, I am not persuaded that there is any such reliable limiting principle. Group guidelines about minimising the environmental impact of inherently dangerous activities, such as mining, may be shown to contain systemic errors which, when implemented as of course by a particular subsidiary, then cause harm to third parties.”
7)  UKSC 3, at paragraph 128.
8) “In Vedanta statements such as these were relied upon to argue that there was ‘a general principle’ that ‘a parent could never incur a duty of care in respect of the activities of a particular subsidiary merely by laying down group-wide policies and guidelines, and expecting the management of each subsidiary to comply with them’. At para 52 of Vedanta Lord Briggs said that he did not consider that ‘there is any such reliable limiting principle’. He pointed out that: ‘Group guidelines … may be shown to contain systemic errors which, when implemented as of course by a particular subsidiary, then cause harm to third parties.’”  UKSC 3, at paragraph 145.
9) See  UKSC 20, at paragraph 50.
10) See  UKSC 3, at paragraph 151 (quoting from paragraph 60 of the Supreme Court’s judgment in Vedanta).
11) Chandler v Cape plc  EWCA Civ 525.