Parent company liability: organisational structures and policies can erode company distinctions
Published on 19th Feb 2021
The latest significant decision on whether a global parent company owed a duty of care for the operations of its subsidiary highlights the challenges of controlling group-wide risks.
The Supreme Court has allowed an appeal against a Court of Appeal ruling that there was no arguable case that a UK parent company owed a duty of care to those affected by the actions of its subsidiary. The decision will make it more difficult for UK-headquartered groups to defeat at a preliminary stage claims brought by claimant groups in relation to the actions of overseas group companies.
We have previously written about the various ways in which claimants and regulators are circumventing the "corporate veil" and bringing claims against parent companies in respect of the activities of their subsidiaries (see our articles on: mass tort claims, economic torts, the actions of regulators and specific health and safety and 'failure to prevent' offences).
One of these recent trends involves overseas claimants bringing mass tort claims in the English courts against UK parent companies where the activities of the foreign subsidiary are alleged to have caused loss to those claimants. This is often done because the claimants believe they will have a better chance of recovering significant damages, which they have no real prospect of achieving in their local courts. Sometimes the strategy is driven by a desire to use English court procedures to obtain full document disclosure from defendants; in other instances, the strategy may be simply to find a group company that has sufficient assets to satisfy the claim.
Duty of care
In negligence claims, the principal issue will usually be whether the parent company owed a duty of care to the claimants. In the 2019 Supreme Court decision of Vedanta Resources v Lungowe, it was held that the usual three tests for establishing a duty of care – foreseeability, proximity and reasonableness – apply when establishing whether a parent company owes a duty of care.
The key issue is often that of proximity, which in these circumstances was identified as being: “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”.
Vedanta did not conclusively end the debate on this issue though.
In Okpabi & Ors v Royal Dutch Shell Plc, the Court of Appeal had held (prior to the Supreme Court decision in Vedanta) that there was no arguable case that the parent company had controlled the subsidiary's operations. In so doing, it drew a distinction between a parent company which controls the material operations of the subsidiary, and a parent company that issues mandatory policies and standards, which are intended to apply throughout its group of companies, in order to ensure conformity with particular standards. The latter was found to be the situation in Okpabi and did not amount to the requisite degree of control over the subsidiary.
However, the Supreme Court has now allowed the appeal from the Court of Appeal's decision in Okpabi on the following grounds:
- The trial judge and Court of Appeal erred in being drawn into conducting a "mini-trial" and making decisions on contested factual evidence. They also "made inappropriate determinations in relation to the documentary evidence". In particular, the Court of Appeal had dismissed the potential relevance of any future disclosure.
- The Court of Appeal also erred in finding that a parent company laying down group-wide policies or standards (whilst expecting each subsidiary to comply) can never give rise to a duty of care. Lord Briggs in Vedanta had specifically recognised 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". Furthermore, the Supreme Court noted the Shell group’s vertical corporate structure, in which organisational approval generally came before formal corporate approval; this arguably allowed for a delegation of authority outside the formal corporate structure, including in relation to operational safety and environmental responsibility.
Accordingly, the Court of Appeal was wrong to find that there was no real issue to be tried and the court should not have declined jurisdiction on the basis that there was no properly arguable case.
The Supreme Court did not reach a conclusion (as it was not required to) as to whether or not the parent company did in fact owe a duty of care – merely that there was a properly arguable case that such a duty existed. Nevertheless, the views expressed about group-wide policies will be of significant interest to UK parent companies.
As the Supreme Court recognised (in both Okpabi and Vedanta), "In a sense, all parents control their subsidiaries. That control gives the parent the opportunity to get involved in management. But control of a company and de facto management of part of its activities are two different things".
Accordingly, the issue of whether a parent company will be liable for the negligent acts or omissions of its subsidiary is necessarily an extremely fact-sensitive one.
A delicate balancing act needs to be performed by parent companies: if they adopt too much of a "hands off" approach, this may create an atmosphere in which negligent acts and omissions flourish in the first place: but if they become too involved they increase the risk of being found liable for those acts and omissions.
Group-wide policies and standards are a key element in attempting to mitigate losses which might well cause reputational damage, but Okpabi demonstrates that close attention must be made as to who is ultimately making the decisions. If the parent company is the de facto manager and decision maker, it exposes itself to real risks that it will be held accountable for failings in that management.
In practice, this means that organisational structures, policies and reporting lines should not be established without adequate consideration of the legal implications. Global compliance programmes play a vital role, but must be implemented with care.