When is a Parent Company Liable for a Subsidiary’s Breach of Duty of Care?
The courts are increasingly holding parent companies liable for the actions or omissions of their subsidiaries and a recent ruling has confirmed this in the area of negligence.
The Supreme Court1 recently held that a parent company can be held directly liable for negligence for a subsidiary’s actions. At issue was whether a UK domiciled parent company owed a duty of care to the claimant, thus was there was jurisdiction for the claim to be brought against a foreign subsidiary.
What’s the background?
This was an appeal concerning two sets of proceedings following oil spills affecting a Nigerian farming and fishing community, which caused serious environmental damage which remain unpremeditated. Proceedings were brought against the Nigerian petroleum company which operated the oil pipelines and infrastructure on behalf of the unincorporated joint venture between the state-owned Nigerian National Petroleum Corporation and other companies, including SPDC.
SPDC is a subsidiary of the first respondent, Royal Dutch Shell Plc (RDS), a UK domiciled company and the parent company of the multinational Shell group. The claimants argued (among other things) that RDS owed them a common law duty of care as it exercised significant control over material aspects of SPDC’s operations and/or assumed responsibility for its operations, including by imposing mandatory health, safety and environmental policies and manuals which they said failed to protect them against the risk of foreseeable harm arising from SPDC’s operations.
The English courts usually have no jurisdiction to hear claims of such nature by Nigerian claimants against a company domiciled in Nigeria. However, it was argued that there was a breach of a common law duty of care given that RDS exercised significant control over material aspects of SPDC's Nigerian operations.
For the purposes of the jurisdictional ‘gateway’, permission was sought to serve proceedings on SPDC outside the jurisdiction. For jurisdiction to be established under this gateway, the claimants needed to show that their claims against RDS raised a real issue to be tried (ie that they had a real prospect of success).
The SC overturned the CA decision that there was no real issue to be tried. It emphasised the fact that proportionality in relation to jurisdictional issues was important. The strength of the evidence already presented, including numerous witness statements, were part of the proportionality consideration.
As to the matter of duty of care, it found that there were real issues to be tried. Particularly, it pointed out that Shell group’s vertical corporate structure, with organisational approval generally proceeding corporate approval, allowed for delegation of authority. That included in relation to operational safety and environmental responsibility. How this organisational structure worked in practice and the extent to which authority was delegated, clearly raised triable issues.
What does this mean?
The existence of a duty of care in a specific situation much depends on the extent and the way in which the parent company controls, manages and supervises the management of a subsidiary’s operations.
So, where there are group organisational structures, it is vitally important that UK companies with overseas subsidiaries have a good grasp of their corporate and management governance and the extent of the overall relationship between parent and subsidiary.
Where disputes and potential proceedings arise, these issues will come into play with obvious implications, in light of this ruling.
1Okpabi & Ors v Royal Dutch Shell plc & Anr [2021] UKSC 3
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