When can a parent company be liable for damage caused by its subsidiary? UK Supreme Court offers insight

Tuesday 16 February 2021

Authors: Jesse Wilson and Richard Massey

​​An important judgment issued by the UK Supreme Court last Friday sheds light on the issue of when a parent company may be liable for damage caused by a subsidiary.1

The judgment raises important issues which will be relevant to corporate groups in New Zealand, particularly where the parent company​ plays an active role in the running of a​ subsidiary's business.

Background to the case

The claimants in Okp​abi comprise more than 40,000 inhabitants of fishing communities in Nigeria. The claim alleges that Royal Dutch Shell Plc (Shell UK), and its Nigerian subsidiary, Shell Petroleum Development Company of Nigeria Ltd (Shell Nigeria), are liable in negligence for environmental contamination suffered as a result of numerous oil spills.

The claim alleges that Shell UK failed to exercise reasonable care in monitoring and controlling Shell Nigeria. It alleges that Shell UK exercised a high degree of control, direction and oversight in respect of Shell Nigeria's pollution and environmental compliance, and that as a result, Shell UK owed them a duty of care directly for the actions of Shell Nigeria.

The High Court struck out the claim, holding that it was not reasonably arguable that Shell UK owed the claimants a duty of care and, therefore, that there was no jurisdiction to try the claims.

A majority of the Court of Appeal upheld this decision, ruling that the practice of parent companies in issuing global safety and environmental policies and supervising subsidiaries' compliance does not mean that the parent has such a level of control so as to give rise to a legal duty of care.

The Court's decision

The United Kingdom Supreme Court unanimously allowed the claimants' appeal and ruled that the claim should not be struck out. It said that Shell UK did arguably owe a duty of care in relation to its subsidiary's actions, and that the claim must be determined at trial.

In reaching that conclusion, the Supreme Court made a number of observations as to when a parent may be liable for the actions of a subsidiary:

  • “Control" of the subsidiary is “just a starting point," and the attention should not be limited to questions of control. Instead, the key question is whether the parent has “de facto management" of the subsidiary's relevant activities.

  • Accordingly, in assessing whether there is a duty, the courts will need to consider “the extent to which, and the way in which, the parent availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations … of the subsidiary."

  • In this case, Shell UK had a control framework of group standards, operating standards, manuals, and technical practices, which was sufficient to give rise to an arguable case that it owed a duty of care for Shell Nigeria's actions.

  • In addition, Shell UK's Chief Executive and Executive Committee had wide ranging responsibilities for the safe condition and environmentally responsible operation of Shell's facilities and assets worldwide, including Shell Nigeria.

The Court highlighted the importance of discovery (that is, the process of exchanging documents during litigation) for cases where the liability of a parent company is in issue. The Court considered that the actual nature and extent of Shell UK's involvement in Shell Nigeria's activities would depend on what the companies' internal documents showed, which could only be obtained through discovery and examined at trial. The Court warned against conducting “mini-trials" based on witness statements at the preliminary strike-out stage, and criticised the lower courts' detailed examination of the evidence. However, even the Supreme Court appears to have been influenced to some degree by the evidence filed by the parties, describing specific aspects of the Shell control framework in detail, before concluding that the framework documents were “clearly material".

The effect of the judgment is that a class action against both Shell UK and Shell Nigeria can proceed, although whether either company is ultimately liable will be a matter for trial.

Relevance in New Zealand

Similar principles apply under New Zealand law, which means that the UK Supreme Court's decision will be relevant here.

In a recent New Zealand case concerning a class action against James Hardie2 (discussed here), the Court of Appeal found that it was arguable that the global parent company in the James Hardie group owed duties of care in respect of the operations of its New Zealand subsidiary. The Court of Appeal therefore let the case go to trial.

Comment

In our view, there is a risk that the approach of the UK Supreme Court will lead to an increase in claims against parent companies that are difficult to strike out prior to trial. In particular, many of Shell Group's key features that were seen as giving rise to an arguable duty of care are features that are relatively common.

For understandable reasons, corporate groups often establish global standards and policies and supervise the operations of their subsidiaries. In doing so, few corporate groups would expect that they are potentially undertaking direct responsibility in tort to persons who might be affected by their local subsidiaries. An important consideration for the development of the law in this area is whether the imposition of tortious liability is likely to discourage such global standards and policies.

The trial outcomes in the Shell litigation in the UK and the James Hardie litigation in New Zealand will therefore be significant in determining the boundaries of parent company liability.

If you would like to discuss the implications of this judgment for your business, please contact your usual Bell Gully adviser or any of the contacts listed.


1 Okpabi & Ors v Royal Dutch Shell Plc & Anor [2021] UKSC 3.

2 James Hardie Industries Plc v White [2018] NZCA 580. The Supreme Court declined leave.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Jesse Wilson

    Partner Auckland
  • David Friar

    Partner Auckland
  • Sophie East

    Partner Auckland
  • Richard Massey

    Senior Associate Auckland
Related areas of expertise
  • Litigation and dispute resolution
  • Class actions