Latest ruling on parent company liability provides guidance on managing risks from overseas subsidiaries

Written on 26 Jul 2018

In the latest in a series of recent cases on liability in relation to activities carried out by an overseas subsidiary, the Court of Appeal has again found that the parent company did not owe a duty towards those affected by the activities of the subsidiary. The court's reasoning provides useful guidance for multinationals on the difficult balance between managing risk on a group-wide level and maintaining the legal separation between group companies when it comes to any liabilities owed.

What was the dispute about?

In circumstances that echo the recent case of Okpabi v Royal Dutch Shell, this claim (AAA v Unilever) was brought by a group of employees, ex-employees and residents against both the local subsidiary of a multinational (in this case, Unilever Kenya) and the English-based group parent company (Unilever Plc). The claimants needed to establish that they had a “good arguable case” against the parent company for jurisdictional reasons – doing so would mean that the parent company could be used as an “anchor defendant”, enabling the claims against both companies to be heard in England.

In this case, the dispute arose from tribal violence at the time of the 2007 Kenyan presidential election. The claimants were targeted by mobs that came onto tea plantations which were owned and operated by Unilever Kenya.

The claimants argued that both Unilever Plc and Unilever Kenya owed them a duty of care in tort, which they claimed each company had breached.

In the High Court, the judge found that no duty of care was owed by either Unilever Plc or Unilever Kenya.

What did the Court of Appeal decide?

Dismissing the appeal, the Court of Appeal found unanimously that Unilever Plc did not owe the claimants a duty of care.

Sales LJ, giving judgment, explained that there is no special doctrine for when a parent company owes a duty in relation to the activities of its subsidiary. They are separate legal entities and the legal test for whether the parent company owes a duty to a claimant affected by the activities of the subsidiary is the same as whether any other third party owes a duty to that claimant.

However, there will be circumstances in which a parent company intervenes in such a way as to assume a duty of care. These fall into two categories:

  • where the parent has in substance taken over the management of the relevant activity of the subsidiary in place of (or jointly with) the subsidiary’s own management;
  • where the parent has given relevant advice to the subsidiary about how it should manage a particular risk.

The claimants accepted that the first category did not apply in this case, but argued that Unilever Plc had given the Kenyan subsidiary advice in relation to the management of risk in respect of political unrest in Kenya. On the facts, the Court found this not to be the case.

Responsibility for risk management

Amongst the evidence that the claimants sought to rely on were certain statements in Unilever’s consolidated group accounts, which they argued indicated a level of control by the parent company over the management of risk relating to the activities of subsidiaries. For example:

“Responsibility for establishing a coherent framework for the Group to manage risk resides with the Boards [of the two parent companies]”;

“Unilever policies are universally applicable within the Unilever Group. They are mandatory and have been developed to ensure consistency in key areas within our worldwide operations”.

However, Unilever also had a global Crisis Prevention and Response Policy, which was based on the principle that “Each crisis is best managed as close to the issue / incident as possible. The most appropriate people to manage an issue / incident are those who know it best.” Accordingly, Unilever Kenya had its own Crisis and Emergency Management policy and had its own crisis management training programme – neither of which were subject to direction by the parent company.

The evidence also showed that Unilever Kenya had been provided with certain information in relation to the 2007 presidential elections by a risk control consultancy engaged by Unilever Plc, but that information related to Kenya at a national level and did not give any specific information or instructions in relation to the tea plantation.

Evaluating these factors, the Court found that Unilever did not provide the subsidiary with relevant advice about how it should manage a specific risk, so did not assume a duty of care towards the claimants.

Osborne Clarke comment

As we discussed in relation to the Royal Dutch Shell case, multinationals are increasingly under pressure, from regulators, public interest groups and even shareholders, to ensure that far-flung subsidiaries are acting as “good corporate citizens”. And in a globalised, connected world, reputational damage arising in one country can spread almost instantly across the whole group. But where that extends to taking direct control of functions or enforcing mandatory policies on aspects such as risk management, this could open up parent companies to claims by those affected by the activities of overseas subsidiaries.

In this case, the Court found that the parent company “did not dictate or advise upon the terms of [risk management] plans, but simply sought and was given assurance that an appropriate policy was in place at the relevant level.” The subsidiary understood that, while it could access support from the wider group, it was ultimately responsible for preparing its own risk management plans and handling the crisis that occurred. That sensible delineation of responsibilities ensured that the parent company did not end up assuming liability in relation to the activities of the subsidiary.

While this delineation worked effectively in this case, there are of course myriad other factors that need to be taken into account when establishing risk management structures, not least the need to be able to respond most effectively in the event of an urgent crisis.  However, the risks and implications of possible parent company liability need to be considered when making the choice of the most effective response in the particular circumstances.