UK Supreme Court Allows Nigerian Environmental Damage Claims to Proceed Against UK Parent Company

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CBN

The UK Supreme Court issued its highly anticipated judgment in Okpabi and others v Royal Dutch Shell Plc and another [2021] UKSC 3 on 12 February 2021, following its findings in Vedanta Resources plc and another v Lungowe and others [2019] UKSC 20.

The decision provides helpful guidance on the jurisdiction question of the circumstances in which a parent company may be liable in the English courts for harm caused by the actions of an overseas subsidiary. Together with the Vedanta case, and in the current climate of increased focus on environmental, social and governance (ESG) issues generally, the Okpabi decision is expected to result in an increase of similar international tort claims against multinational companies arising out of alleged human rights and environmental issues.

The decision also demonstrates a distaste for “mini-trials” at interlocutory stages of proceedings, re-emphasising the need for judicial and evidential restraint in that respect.

Facts

The appeal was brought by some 42,500 residents of two Nigerian communities in and around the Niger Delta (the “Claimants”), against Royal Dutch Shell Plc (“RDS”), the UK domiciled parent company of the Shell group, and its Nigerian subsidiary, the Shell Petroleum Development Company of Nigeria Ltd (“SPDC”). The Claimants seek compensation for alleged oil spills from pipelines and other infrastructure operated by SPDC near their communities. Even though SPDC was the Nigerian domiciled company, the claim is brought primarily against RDS on the basis that RDS owed the Claimants a duty of care either because it exercised significant control over material aspects of SPDC’s operations and/or because it assumed responsibility for SPDC’s operations.

SPDC was named as a second defendant, which required the Claimants to apply to the High Court for permission to serve the proceedings out of the jurisdiction, on SPDC in Nigeria. To do so successfully, the Claimants had to establish that:

a. their claims against RDS raised a real issue to be tried (i.e. they had a real prospect of success), and

b. SPDC was a “necessary or proper party” to the claims against RDS.

Following opposing applications by the defendants, the High Court refused to grant the Claimants permission to serve the claim on SPDC on the basis that the Claimants had no arguable case against RDS.

After failing to overturn that decision in the Court of Appeal, but nevertheless splitting the court, the Claimants appealed to the Supreme Court, which had to consider two main issues:

1. whether the Court of Appeal materially erred in law; and

2. if so, whether the Court of Appeal was wrong to decide that there was no real issue to be tried.

1. Material errors of law

The Supreme Court found that the Court of Appeal had made several errors of law, including:

a. The Court of Appeal had erred in its approach to the “real prospects of success” test. It had conducted a “mini-trial” and reached its decision based heavily on the evidence, which was untested. This was an incorrect approach; this was not a full trial (or a partial trial) of the case on its merits. All the claimants needed to show was that the claim was at least arguable.

The Supreme Court found that, to determine the arguability of the claim, the Court of Appeal should have referred to the case as pleaded, and should have accepted factual assertions made in support of the pleaded claim unless they were “demonstrably untrue or unsupportable.”

b. That misguided “mini-trial” led the Court of Appeal to make inappropriate findings of fact on disputed issues, and on the documentary evidence. The Court of Appeal preferred the evidence of RDS’ witnesses, but that evidence was untested; the witnesses had not been cross-examined and there had been limited disclosure.

c. The Claimants identified specific internal documentation that the defendants had not yet disclosed, but the Court of Appeal gave minimal weight to the possibility of future disclosure. The Supreme Court emphasised the significance of internal corporate documents for determining whether the parent company had intervened in the management of the subsidiary.

d. The Supreme Court made a number of observations on the wider principle of parent company liability:

It disagreed with the Court of Appeal’s assertion that group-wide policies or standards cannot, in and of themselves, give rise to a duty of care. The Court of Appeal’s approach in that respect had been inconsistent with the Supreme Court’s decision in Vedanta, which was not appropriate.

The Court of Appeal had focused inappropriately on the issue of control. Control, according to the Supreme Court, is just a starting point. The relevant question is the extent to which the parent did take over or share with the subsidiary the management of the relevant activity (in this case, the pipeline operation).

The Court of Appeal also erred by relying on the test for the existence of a duty of care set out in Caparo Industries plc v Dickman. The Court treated the liability of a parent company in relation to the activities of its subsidiaries as a “distinct category of common law negligence”, which was inconsistent with Vedanta: liability of a parent company in relation to the activities of its subsidiaries does not require an “added level of rigorous analysis beyond that appropriate to any summary judgment application in a relatively complex case”.

2. Existence of a real issue to be tried

The Supreme Court held that the facts asserted by the Claimants in their pleadings could not be dismissed as “demonstrably untrue or unsupportable.” On the basis of the pleaded case, alongside points made on the basis of two key RDS internal documents on direction and control within the Shell group, and the “very real prospect of relevant future disclosure,” the Supreme Court decided there were in fact real issues to be tried. In this context, the Supreme Court referred to the Shell group’s corporate structure and found that Shell’s organisational structure clearly raised triable issues.

Comment

By its decision in Okpabi, the Supreme Court has affirmed its approach in Vedanta as to when a parent company may be liable for damage caused by the operations of its overseas subsidiaries. The Supreme Court’s statements in both Okpabi and Vedanta show that group-wide policies, models of management, control or decision-making could trigger a duty of care for a parent company in a group.

Multinational companies are already paying closer attention to the human rights and environmental impacts of their overseas operations in the context of ESG responsibilities, but, underlining the need to continue that task and strive for improvements, the Supreme Court’s decision might be considered a warning that, in the event of shortcomings, it cannot be assumed that claims will be played out in a foreign field, potentially out of the international eye.

Although both decisions emphasise that the legal principles which determine the liability of parent companies are “not novel at all,” they do spotlight the issue, which may prompt companies to reconsider the effectiveness of their structural attempts to maintain separation between companies in their corporate groups.

In addition, the Supreme Court’s stern criticism of “mini-trials” at the interlocutory stage is significant. From a costs and efficiency point of view, this must be a step in the right direction. Moreover, this is likely to lower the evidential threshold for similar interlocutory applications and result in more cases reaching trial.

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