The UK Supreme Court has handed down its judgment in the case of Okpabi and others v Royal Dutch Shell Plc and another.1
Summary of key points
The judgment makes it clear that courts should not conduct a "mini-trial" when determining a jurisdictional challenge, and that at the interlocutory stage the court should be focussed on what is said in the Particulars of Claim – unless it can be shown that the assertions are demonstrably untrue or unsupportable.
The alleged duty of care in this instance was founded on the extent to which Royal Dutch Shell Plc ("Shell") exercised (or purported to exercise) control over the actions of its Nigerian subsidiary ("SPDC").
The Appellants relied on four "routes" established by the Supreme Court in the earlier Vedanta case:
- Management or joint management of the relevant activity by the parent company;
- Defective advice by the parent company and/or promulgation of defective group wide health and safety/environmental policies which were implemented as of course by the subsidiary;
- Promulgation of group-wide compliance (health and safety/environmental) policies by the parent company which took active steps to ensure their implementation by its subsidiary; and
- The parent company holding out that it exercises a particular degree of supervision and control of the subsidiary.
In summary, the Appellants' case was that the Shell parent company had exercised "a high degree of control, direction and oversight in respect of SPDC's pollution and environmental compliance and the operation of its oil infrastructure".
Companies are under increased pressure to exercise such control and oversight to comply with compliance best standards, United Nations Guiding Principles on Business and Human Rights, OECD Guidelines for Multinational Enterprises and other voluntary standards. Furthermore these standards will likely soon be reinforced by human rights due diligence legislation mandating policies, processes and related disclosure which will broaden opportunities for litigation against parent companies for subsidiary company conduct (see our related Blog post and Business and Human Rights webpage).
Background to the appeal
At first instance, the claimants (the Appellants in the present appeal) had sought damages as a result of serious, and ongoing, pollution and environmental damage caused by leaks of oil from pipelines and associated infrastructure in and around the Niger Delta, for which they contended that Shell and SPDC (Shell's Nigerian subsidiary) were responsible.
Shell and SPDC argued that the English courts did not have jurisdiction to hear the case and that the claim had only been brought against Shell to create a connection to the English courts, in circumstances where no other connection existed.
At first instance, the High Court found in favour of the two Shell defendants on the basis that the claimants had failed to present a properly arguable case that Shell directly owed them a duty of care. The judge found that: (i) it was not reasonably arguable that Shell owed the claimants a duty of care; and (ii) that in the absence of a reasonably arguable claim against a defendant domiciled within the jurisdiction, the conditions for granting permission to serve the claim on SPDC outside of the jurisdiction were not satisfied.
The claimants appealed to the Court of Appeal, which (by a 2:1 majority) upheld the first instance decision. For further details please see our previous client alert on the Court of Appeal's decision.
The claimants appealed to the Supreme Court.
Appeal to the Supreme Court
The appeal to the Supreme Court (which took place in June 2020) was heard in the wake of the Supreme Court's decision in Lungowe v Vedanta Resources PLC2, which addressed the potential liability of Vedanta for its Zambian subsidiary in relation to the operation of its copper mine.
For further details relating to the Supreme Court's decision in Vedanta, please see our two previous client alerts: Responsible parenting: UK Supreme Court rules that parent company can be sued for the actions of its foreign subsidiary and Cross-border disputes: Forum/jurisdiction and parallel proceedings. The procedural and the substantive issues in both cases were very similar.
Following the Supreme Court's decision in Vedanta, the Appellants submitted that a duty of care had arisen by way of four "routes"3 established in Vedanta:
- Shell taking over the management or joint management of the relevant activity of SPDC;
- Shell providing defective advice and/or promulgating defective group wide safety/environmental policies which were implemented as of course by SPDC;
- Shell promulgating group-wide safety/environmental policies and taking active steps to ensure their implementation by SPDC; and
- Shell holding out that it exercises a particular degree of supervision and control of SPDC.
In summary, the Appellants case was that Shell had exercised "a high degree of control, direction and oversight in respect of SPDC's pollution and environmental compliance and the operation of its oil infrastructure". In support of the case on direction, control and oversight, the Appellants placed particular reliance on two internal documents: (i) the "RDS Control Framework"; and (ii) the "RDS HSSE Control Framework". It was submitted by the Appellants that the former set out the control framework that applied to all Shell companies, whilst the latter showed the extent of the detailed control which Shell's board exercised over its subsidiaries' health, safety and environmental practices.
The Supreme Court made a point of highlighting that the appeal related to a jurisdictional challenge, which concerned whether it was appropriate to grant permission to serve proceedings out of the jurisdiction on a foreign defendant. Against that context, the Court emphasised that it is not the task of the court at the interlocutory stage to evaluate the weight of the evidence and exercise a judgment based on the evidence – unless an allegation is demonstrably untrue or unsupportable. In that regard, the Supreme Court was critical of both the first instance judge and the Court of Appeal for being drawn into conducting a "mini-trial", which involved an evaluation of the underlying evidence.
The Supreme Court's decision
The Supreme Court unanimously allowed the appeal.
In its judgement the Supreme Court did not consider the factual allegations to be demonstrably untrue or unsupportable. On that basis the Court held that the case as set out in the pleadings (supported by the submissions made in reliance upon the RDS Control Framework and the RDS HSSE Control framework), established that there was a real issue to be tried under Vedanta routes (1) and (3) (as set out above).
In particular, the Supreme Court held that the RDS Control Framework showed that the Shell Group was organised along "Business and Functional lines, rather than simply according to corporate status". Therefore, notwithstanding the fact that "formal binding decisions" were taken at corporate level, such decisions were based on the prior advice and consent from the vertical Business or Functional lines and organisation authority lines – which were directly accountable to Shell's senior management. The Supreme Court did, however, note that "proper disclosure is of obvious importance" in order to establish the extent of Shell's involvement in SPDC's activities.
Consequently, the Supreme Court held that there were triable issues and that the Court of Appeal was wrong to have decided that there was no real issue to be tried. The effect of the judgment is that (subject to certain other outstanding jurisdiction challenges being determined), the Appellants' claim against both Shell and SPDC can proceed in the English Courts.
Following the Supreme Court's decision in Vedanta, this important judgment provides further clarification in respect of how the English courts will approach claims where it is alleged that a parent company owes a duty of care in relation to the actions of its foreign subsidiary. The four routes previously identified in Vedanta facilitate arguments that a parent company has assumed a duty of care.
As to whether that duty of care can be established on the facts, the judgment makes it clear that at the interlocutory stage the court should be focussed on what is said in the Particulars of Claim – unless it can be shown that the assertions are demonstrably untrue or unsupportable. The court should not conduct a "mini-trial" when determining a jurisdictional challenge.
As a result of this judgment and the judgment in Vedanta, companies will need to consider carefully the extent to which they exercise (or purport to exercise) control over the actions of their subsidiaries – for example by way of the establishment and implementation of internal policies (including group compliance programmes). There is, however, a tension for UK-based multinational corporations with respect to the management of their foreign subsidiaries:
- on the one hand, if the parent company is seen to be actively involved in the establishment and monitoring of its subsidiary compliance programme, it could ultimately risk being an "anchor defendant" for a local action relating to the activities of its subsidiary – thereby establishing a gateway for such action to be brought before the English courts (rather than the local courts);
- conversely, if the parent company does not ensure that its compliance programme is properly implemented by its subsidiaries, it runs the risk of civil litigation for such failures and criminal prosecution under the "failure to prevent" type offences.
Litigation risk of this nature exists beyond the English courts, too – for example, in January 2021, and in another case involving Shell, the Dutch Court of Appeal held that Shell’s Nigerian subsidiary was responsible for damage to the livelihood of Nigerian farmers caused by pipeline leaks, as well as holding that the Shell parent company had violated its duty of care towards the Nigerian farmers.
A further important factor is the emergence of mandatory human rights due diligence laws (commented on here) which will require parent companies to undertake human rights due diligence on their supply chain (including foreign subsidiaries) and to report on the risks identified and how those risks are being mitigated.
Ultimately, the most effective way of addressing the risks that arise from this judgment is by having an effective group compliance programme in place (including human rights due diligence) which is properly implemented and audited by the parent company, thereby reducing the likelihood of events occurring which could give rise to similar large-scale group actions. In addition, best-in-class companies are applying the below strategies to continually improve their human rights and environmental risk management:
- closely monitoring legislative developments relating to mandatory human rights and environmental due diligence;
- carrying out human rights and environmental impact assessments and taking proportionate counter-measures, as well as communicating internally and externally on what measures have been taken;
- reviewing and reinforcing complaints mechanisms and speak-up programmes, and ensuring the business is well equipped to deal with "crises";
- reviewing the extent to which their Board is equipped to address supply chain risks, including through training executives and seeking independent support and advice; and
- reviewing the role, resources and expertise of the legal and compliance functions, who should play a key part in addressing these new challenges.