I. The UK's Emerging Approach to Parent Company Liability
This week, the UK Supreme Court is set to issue its highly anticipated judgement in Vedanta and another v. Lungowe and others, and the business and human rights community is paying close attention. The case is expected to define the scope of parent company liability for harms caused by acts of their subsidiaries abroad, and will have wide-ranging consequences on human rights litigation in the UK, including whether victims of human rights violations and grave environmental harms caused by subsidiaries of UK-based companies can avail themselves to UK courts.
The claimants in the Vedanta case are members of Zambian fishing and farming communities who allege that the mining activities of Konkola Copper Mines (KCM), a subsidiary of UK-based Vedanta, have polluted their land and waterways, resulting in personal injury, damage to property and loss of income, amenity, and enjoyment of land. KCM and Vedanta are both named as defendants; although it is a holding company that does not directly engage in any mining activities, the claimants argue that Vedanta owes them a duty of care, which it breached when it failed to properly ensure that KCM’s mining operations do not cause harm to the local communities or environment.
The inclusion of the parent company as a defendant is a crucial aspect of the Vedanta case, as well as other similar cases brought in UK courts against parent companies for harms caused by their subsidiaries, most notably Okpabi and others v. Royal Dutch Shell and another and AAA and others v. Unilever Plc and another. As discussed in a previous blog post, there are a number of compelling reasons why human rights cases might best be brought in courts of the global north such as the UK, including better judicial resources and a higher capacity to handle complex human rights cases involving a multitude of victims. Yet without the UK-based defendant, these types of cases run the risk of being thrown out of UK courts on grounds such as forum non conveniens or lack of personal jurisdiction. On the other hand, if a defendant is incorporated or headquartered in the UK, then EU jurisdiction regulations impose obligatory jurisdiction on UK courts, and the courts do not have discretion to dismiss the case.1 The case against the foreign subsidiary, which likely arises out of the same set of facts, will inevitably be joined with the case against the parent company. Thus, the inclusion of a UK parent company as an “anchor defendant” is a key component of establishing jurisdiction in UK courts for cases arising out of foreign harms, including cases involving human rights violations arising out of international business activity.
In order for claimants to secure jurisdiction in UK courts, they must plead a “real issue” with the parent company. In other words, they cannot include the parent company as a defendant without also asserting an actionable claim against them. The aforementioned cases all plead that the parent companies owe the victims a duty of care, and that they are directly liable to the claimants in negligence because they have breached that duty by failing to adequately oversee and monitor the conduct of their subsidiaries, despite assuming responsibility or exerting control over operations that are the subject of the claim.
The Vedanta, Shell, and Unilever claimants derive their arguments on the parent’s duty of care from, inter alia, two seminal cases. First, in Caparo v. Dickman, the House of Lords set out a three-part test to establish a duty of care. A defendant will owe a duty to the plaintiff if: 1) the harm was a reasonably foreseeable result of the defendant’s conduct; 2) the parties are in a relationship of proximity; and 3) the imposition of liability is fair, just and reasonable.
In Chandler v. Cape, the Court of Appeal found that a parent company was liable to the employee of a subsidiary for harms caused by asbestos exposure because the parent company had assumed responsibility for preventing the risk of asbestos exposure, and controlled the mechanisms intended to monitor and mitigate the risk. In particular, the court observed that the parent company had actual knowledge of the working conditions and risk of asbestos exposure, and had employed a scientific and medical officer to be responsible for health and safety issues. By doing so, the parent company took responsibility for ensuring that the employees were not harmed, and owed them a duty of care if they were.
Drawing on these cases, the claimants in Vedanta, Shell, and Unilever have used the degree of oversight and control by the parent company over the subsidiary, particularly in relation to their environmental and human rights compliance standards, to support their argument that they are owed a duty of care. For example, in Shell, the claimants highlighted that the parent company, concerned about reputational harm and loss of oil revenue, assumed responsibility for the effective management of the operation of pipelines and facilities in Nigeria, and that by doing so it assumed a duty to protect the surrounding area from environmental harms which were the basis of the claimants’ case. In that case, two of three of the justices ruled to dismiss the claims against the parent company, finding that the degree of involvement and oversight was not enough to create a duty of care.
In Vedanta, the claimants alleged that the parent company exerted control over the subsidiary by publishing a sustainability report emphasizing how the board of the parent company had oversight over its subsidiaries; entering into a management and shareholders agreement under which it was obligated to provide various services to KCM, including employee training; providing health, safety and environmental training across its group companies; providing financial support to KCM; and releasing various public statements emphasizing its commitment to address environmental risks. The Court of Appeal allowed the case against the parent company to go forward, because the claimants’ allegations supported the possibility that the parent company owed them a duty based on the degree of control it exerted over KCM.
In Unilever on the other hand, the Court of Appeal dismissed the case against parent company Unilever because the claimants failed to show that the subsidiary received advice from the parent company about security procedures, and “evidence also show[ed] clearly that [the subsidiary] understood that it was responsible itself for devising its own risk management policy and for handling the severe crisis” which gave rise to the claimants’ injuries.
II. Will the Court Create Perverse Incentives?
The Vedanta, Shell, and Unilever illustrate how UK courts, in contemplating parent company liability for human rights and environmental harms caused by subsidiaries abroad, have based the determination of an existence of duty on the extent of control the parent company exercises over its subsidiaries. By using the extent of control and assumption of responsibility by the parent company as a metric, however, the court is creating perverse incentives. If a parent company opens itself up to liability by exercising oversight over its subsidiaries’ human rights and environmental compliance, it will surely be less likely to continue monitoring the conduct of its subsidiaries. Parent companies are often well situated to push for increased human rights due diligence among their business partners, and are able to devote resources and collect best practices that result positive steps forward for the promotion and protection of human rights. However, if their efforts directly result in them assuming a duty of care and thus creating a possibility of liability, then the consequences of the risk of litigation may outweigh their interest in preventing violations by their foreign partners and subsidiaries.
By pinning the duty of care on the extent of parent company control, UK courts are in danger of setting a problematic precedent. However, this does not mean that efforts to assign parent companies duties vis à vis those affected by acts of their subsidiary should be abandoned; that conclusion would fly in the face emerging international norms on business and human rights, and allow parent companies, which are arguably well-positioned to prevent grave business-related human rights violations, to skirt liability that can be justly and reasonably assigned.
The responsibility of business enterprises to monitor and address human rights challenges is now regarded as a well-established international norm. For example, the responsibility to conduct human rights due diligence was widely endorsed by the UN Human Rights Council when it unanimously adopted the UN Guiding Principles on Human Rights.2 The UK itself has drawn on international standards to define its own expectations of UK-domiciled enterprises, including through the policy document, Good Business: Implementing the UN Guiding Principles on Business and Human Rights, which refers to the UN Guiding Principles as well as the OECD Guidelines for Multinational Enterprises.
III. An Alternative Approach to Parent Company Duty
It is largely undisputed that according to international norms, as iterated in the UN Guiding Principles and OECD Guidelines, parent companies owe a duty to victims of human rights violations even if they are the result of the conduct of their subsidiaries. This duty is not dependent on the closeness of the relationship between the parent and subsidiary enterprises; instead, it arises out of the parent company’s obligation to conduct human rights due diligence. There are pragmatic reasons why holding parent companies liable for violations committed by their subsidiaries make sense. First, parent companies are often in a better position to ensure that human rights are respected and protected, because of their access to greater resources and expertise. Furthermore, parent companies profit enormously from the business activities of their subsidiaries, and precluding them from liability for wrongs committed during the generation of that wealth flies in the face of our notions of justice. Finally, because of the far reach and influence many large parent companies exert worldwide within their respective industries, parent companies are the starting place in changing existing practices within a given industry, and the risk of liability can be an important way to shape behavior.
Even though parent company liability is desired by human rights advocates, the approach the UK courts purport to take is not proper given the potential chilling effect it will have on companies’ willingness to conduct human rights due diligence lest it results in the creation of a duty of care. Instead, the duty of a parent company should arise out of a due diligence obligation as such. International norms recognize that parent companies must inquire into the human rights compliance of their business partners, including subsidiaries. Instead of focusing on the Chandler factors of control or assumption of responsibility, UK courts could recognize the general duty of care to exercise human rights due diligence. This is in line with the UN Guiding Principles, which do not limit a parent company’s scope of responsibility by the degree it controls its subsidiaries. Instead, it recognized that parent companies enjoy leverage over subsidiaries even if it does not control them,3 and requires them to reasonably identify and remedy and risks of human rights violations. Furthermore, it supports the UK’s commitment to realizing the UN Guiding Principles’ call to provide an effective judicial remedy for victims of business-related human rights violations.
By defining the duty of parent companies as arising out of their due diligence obligations rather than degree of oversight or control, UK courts would avoid potential perverse effects while staying within the bounds of factors that are considered important for defining a duty of care, namely foreseeability, proximity, and reasonableness or fairness. The UK’s support and domestic incorporation of international norms relating to human rights due diligence by business enterprises means that liability arising out of a failure to do so would be foreseeable. The flow of profits from the subsidiaries to the parent or holding companies is strong support of proximity between the enterprises, regardless of the degree the parent is involved in the subsidiaries’ day-to-day activities. Finally, because parent companies, with their deep pockets and domicile in global north jurisdictions, are often better able to respond to human rights claims than their subsidiaries are, and in light of the international norms, precluding parent companies from liability would be wholly unjust and unreasonable. By basing the scope of the parent company’s duty on due diligence, a parent company will only face liability for breaches in the duty of care for harms that are reasonably foreseeable by the exercise of due diligence, and which could have been avoided by the reasonable exercise of due diligence.
The Vedanta case was argued on the basis of Chandler, that a parent company incurs a duty to the victims of its subsidiary depending on whether it availed itself to that duty by exercising control or assuming responsibility over the operations of its subsidiary. However, in relation to violations of human rights and environmental standards, this test will surely lead to perverse consequences that result in more environmental and human rights harms as parent companies become less inclined to oversee their subsidiaries. The test is contrary to international norms which call on parent companies to oversee, to the greatest extent possible, the human rights and environmental performance of all entities they do business with. Instead, whether a parent company owes a duty to victims abroad should derive from the parent company’s general duty to conduct due diligence. If harms result from activities by their subsidiary that they reasonably could have prevented or mitigated as a result of human rights due diligence, the parent company should be held liable, regardless of the degree of control or oversight they chose to exercise directly over the subsidiary. Thus, the wisest course of action would be for the UK Supreme Court to reject Chandler in the context of human rights and environmental harms, and instead recognize the duty of care that has already been defined internationally.
- Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, notwithstanding any developments of Brexit.
- Human Rights Council, ‘Human Rights and Transnational Corporations and Other Business Enterprises’, A/HRC/RES/17/4 (16 June 2011).
- UN Guiding Principles, note 1, Commentary on Principles 19.