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When is a parent company liable for the acts of its subsidiary?

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04/04/2017

Please note that the Okpabi and Vedanta cases subsequently went to the Supreme Court.  Please see our briefing on the Supreme Court’s decision.

In His Royal Highness Emere Godwin Bebe Okpabi v Royal Dutch Shell plc [1] the High Court was asked to establish whether a duty of care was owed by a parent company with regard to operations carried out by its subsidiary and therefore whether, in this instance, the English courts had jurisdiction to hear the claim.

The case concerned two sets of proceedings brought by around 42,500 Nigerian citizens against Royal Dutch Shell plc (RDS) and Shell Petroleum Development Company of Nigeria (SPDC). The Nigerians claimed that they had suffered damage as a result of oil spills from the defendants’ pipelines in the Niger Delta.

RDS is the ultimate parent company of the whole Shell group including SPDC and is incorporated in England, where it has its registered office and is listed on the London Stock Exchange. SPDC is registered in Nigeria and is incorporated under the laws of Nigeria.

The claimants’ case was that RDS was responsible for the acts and omissions of SPDC. They alleged that the exploration for oil carried out by SPDC led to environmental damage in the Niger Delta caused by oil pollution and that both companies were legally responsible.

The defendants argued that RDS did not owe a duty of care to the Nigerian citizens. RDS alleged that SPDC was responsible for all operational decisions in Nigeria and that RDS simply acted as a holding company.

Judgment

The court ruled that RDS did not owe a duty of care to the claimants and that there was no real issue to be tried between the claimants and RDS. Therefore it followed that any action for damages against SPDC had to take place in the Nigerian courts and not in the UK.

The court confirmed that RDS and SPDC were two separate legal entities forming part of a group of companies. The court commented that “membership of the same group does not of itself clothe RDS, the ultimate holding company, with responsibility for acts or omissions on the part of subsidiary companies within the group. This is a fundamental principle of the law of England concerning the separate legal personality of subsidiary companies.”

The claimants further argued that public statements regarding the Shell Group’s commitment to environmental issues established a duty of care on behalf of RDS in its own right. However, the judge did not consider that statements made to fulfil RDS’s stock exchange listing obligations were sufficient to establish a duty of care on its part, commenting:

It is highly unlikely in my judgment that compliance with such disclosure standards could, of itself, be characterised as an assumption of a duty of care by a parent company over the subsidiary companies referred to in those statements. There is certainly no authority to this effect and in the absence of any, I would hold that such compliance cannot in itself be a sufficient factor to [find] a duty of care on the part of a parent holding company.”

Duty of care

In determining whether RDS owed a duty of care to the claimants, the court examined the threefold test applied by Caparo v Dickman [2]:

  • the damage should be foreseeable
  • there should exist a relationship of proximity and
  • it should be fair, just and reasonable to impose a duty of care.

The court held that the second and third limbs of the test would be problematic in this case. With regard to the second limb of the test, the court noted that:

  • RDS did not hold shares in SPDC
  • RDS did not conduct any oil operations itself
  • although two officers of RDS sat on the executive committee of the Shell Group of companies, those two constituted a minority of that membership
  • RDS was prohibited by Nigerian law from conducting operations in Nigeria
  • a joint venture was in place that was engaged in oil operations in Nigeria, of which RDS was not a member and
  • imposing a duty of care on RDS would potentially impose “liability in an indeterminate amount, for an indeterminate time, to an indeterminate class”.

With regard to the third limb of the test, the court noted that:

  • Nigeria has established a statutory framework which imposes obligations on companies engaged in the oil business to provide compensation for damages. SPDC had a strict liability for oil spills and therefore concepts of fairness, justice and reasonableness did not require the imposition of a duty of care on RDS
  • there was evidence that the claimants were entitled to claim compensation only from SPDC under Nigerian law
  • RDS was prohibited by Nigerian law from performing operations and had no oil pipelines or associated infrastructure in Nigeria
  • RDS simply held shares in its subsidiaries as if it were an investment holding company and
  • the activities in question were carried out by SPDC as part of the joint venture with the Nigerian state.

Summary

The fact that two companies form part of the same group does not in itself impose responsibility on the parent for the acts of its subsidiary. The level of involvement of the parent in the operations of the subsidiary will be important in establishing whether a duty of care exists.

WM comment

The case is a welcome confirmation that companies, even when part of the same group, have separate legal identities. However, it would be interesting to see whether the case could have been decided differently if it had been shown that the parent company actually had knowledge of the actions and a high level of involvement in the business of the subsidiary.

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[1] [2017] EWHC 89 (TCC)
[2] ([1990] 2 AC 605)

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