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10/4/19 - Gabrielle Holly, Omnia Strategy LLP

Gabrielle Holly at Omnia Strategy LLP analyses the UK Supreme Court's landmark decision.

This morning, the Supreme Court delivered its much anticipated judgment in Vedanta Resources PLC and anor v Lungowe v and ors. In a unanimous decision, the court found that a claim brought by a group of Zambian villagers against UK-based Vedanta Resources Plc and its Zambian subsidiary, Konkola Copper Mines (KCM), could proceed in the UK.

The duty of care

The claimants in Vedanta and other similar cases (Okpabi and ors v Royal Dutch Shell plc and anor and AAA and ors v Unilever and anor) have all relied on the case of Chandler v Cape Plc to argue that a UK parent company could owe a duty of care to those affected by acts of a foreign subsidiary.

Chandler set out a series of factors which established that the parent company in that case owed a duty of care to the employees of its subsidiary. However, though tried and tested, these factors have not been an easy fit for subsequent claims.

In a significant step, the Supreme Court in Vedanta confirmed that the Chandler factors are not the only path available to prospective claimants. It found that the relevant duty in parent company cases can be established by reference to basic tort principles rather than the “straitjacket derived from the Chandler case” (at [60]).

Evidencing control: Policy-setting and the corporate group

Rather than a distinct category of liability in tort law, the court found that the parent-subsidiary relationship merely provides an opportunity for a parent to exercise a degree of control sufficient to give rise to a duty of care.

The Supreme Court considered a number of examples in which a parent could owe such a duty:

  • Where it has set down group guidelines which contain systemic errors that cause harm to third parties;
  • Where it has taken active steps to implement guidelines in the operations of its subsidiary; and
  • Where it has represented that it has a relevant degree of supervision and control (even where it does not in fact).

It is arguable that these findings may have a chilling effect on companies’ willingness to set or implement policies centrally, or report that they have done so, for fear of exposing themselves to liability.

However, the circumstances in which a parent may owe a duty for the acts of a subsidiary are not limited to these examples. Creating distance between a parent company and the activities of other entities within a corporate group is by no means a guaranteed shield against liability.

Further, states are increasingly taking regulatory action to require reporting on human rights and environmental metrics, with some introducing mandatory human rights due diligence obligations. In light of this developing trend, companies should focus their efforts on exercising due diligence across their operations and in their business relationships, rather than structuring their operations to isolate entities in a group.

Jurisdiction and substantial justice

But it is not all good news for prospective claimants seeking to bring equivalent cases in UK courts. Under the UK court rules, a court must be satisfied that England and Wales is the proper place in which to bring the claim before it will allow service of a claim out of the jurisdiction.

In Vedanta, the Supreme Court found that Zambia was overwhelmingly the proper place for the claim to be tried. This finding would have been insurmountable for the claimants, were it not for the court’s concerns around the availability of funding sufficient for the claimants to bring and properly evidence their claims in a complex class action in Zambia.

For that reason alone, the court found that the claimants would not have access to substantial justice in Zambia, and allowed it to proceed in England.

By emphasising the need to show that England and Wales is the proper place for trial, the Supreme Court clearly sounded a note of caution to future claimants.

Let loose from the Chandler straightjacket: The future of parent company claims

Tort law and its inherent flexibility has proved itself time and again to be capable of adapting to the changing circumstances of the times, and to the boundless creativity of corporate lawyers who devise the management and control structures of corporate groups.

The Supreme Court’s decision in Vedanta demonstrates faith in tort law’s capacity to sensibly evolve alongside these developments without prescribing the elements for establishing a duty.

The relevant duty may be established in many and varied ways, for example, through the centralised setting of policy or process by a parent, active steps to take control, representations in corporate reporting, the involvement of key personnel, or — perhaps more controversially — by examining a group’s finance flows.

All of these avenues are potentially fruitful for prospective claimants who, now freed from the straightjacket of Chandler, have greater freedom to argue their cases in ways that more accurately reflect the reality of the parent-subsidiary relationship, and the complexity of corporate groups.

It is uncertain whether the claimants will ultimately succeed in their claims against Vedanta and KCM. But for now the possibility of parent company liability remains alive and well in the UK. 

Omnia Strategy LLP is a specialist law firm dedicated to resolving complex disputes. Omnia acted for the CORE Coalition and the International Commission of Jurists as Interveners in Vedanta Resources PLC and anor v Lungowe v and ors [2019] UKSC 20.