The Implications of the UK Supreme Court's Decision in Vedanta for the Management of Human Rights Risk in Overseas Operations and Supply Chains

Since the US Supreme Court effectively closed the door to foreign, human rights related claims against businesses under the Alien Tort Statute, courts in the UK, Canada and beyond have seen an increase in claims against multinational companies based on the common law of negligence for the acts or omissions of subsidiaries. The UK Supreme Court's (UKSC) recent, landmark judgment in Vedanta Resources PLC and anor. v Lungowe and others [2019] UKSC 20 will undoubtedly have an impact on such claims.  This post looks at how the law has changed and how responsible businesses can respond, reducing human rights risk to affected communities while also minimising legal risk.

At the outset, it is important to stress that it remains the case that a parent company will not automatically be liable for the actions of a subsidiary purely because of its shareholding.  The UKSC reaffirmed that there is no special doctrine of parent company liability; the equity relationship between a parent and subsidiary may enable the parent to take control over the operations or land relevant to the harm but it does not, in and of itself, impose a duty of care.  The existence of a duty will hinge on whether the parent voluntarily assumes such responsibility in the particular circumstances of the case.  Logically, the same principles will also apply in the context of non-equity business relationships, such as the relationship between a purchaser and a supplier or between a financial institution and a borrower, which, as discussed below, could be significant when looking at responsibility for human rights under the UN Guiding Principles on Business and Human Rights.

The UKSC dismissed case law which had been interpreted to limit the circumstances in which a duty could be assumed by a parent, referring, for example, to the four indicia in Chandler v Cape as imposing ‘an unnecessary straitjacket on claimants and courts’.  Instead, it clarified that a duty might be assumed where a parent holds itself out in published materials as exercising a degree of supervision and control over its subsidiaries or where it avails itself of an opportunity to take over, intervene in, control, supervise or advise the subsidiary on risks relating to the relevant operations or land at the heart of the claim.  Accordingly, rather than trying to shoehorn claims into the four indicia in Chandler, in future, claimants can seek to demonstrate that a duty arises in this, significantly wider, set of circumstances.  Whether this represents a change in the law or simply a clarification, in practice, it will likely make it easier to bring claims like those in Vedanta in circumstances where the harm takes place in a common law country. 

This also leads to some potentially problematic policy consequences.  The UN Guiding Principles which the UK Government was among the first to support and encourage UK businesses to implement, sets out the expectation that businesses will adopt public policy commitments and implement human rights due diligence throughout their value chains.  However, in the UK at least, this responsibility remains essentially voluntary.  This means that a company which elects to publish a human rights policy and take steps to implement it will, according to the judgment in Vedanta, assume a duty of care where a competitor which wilfully disregards its responsibility under the UN Guiding Principles will not.  It is unfortunate that the UKSC did not take the opportunity to avoid policy incoherence and send a message to businesses encouraging them to implement the UN Guiding Principles.

However, this policy concern should not be overstated.  Businesses adopt and implement human rights related policies at a group level for a number of reasons – including to satisfy the expectations of consumers and investors; strengthen their social licence to operate; and, in some cases at least, out of a genuine sense that it is the right thing to do.  None of these reasons has anything to do with the law and none of them is diminished by the judgment in Vedanta. Further, there is a shift (albeit slow and somewhat ad hoc) in the legislative landscape towards mandatory reporting and human rights due diligence (as demonstrated by the French Duty of Vigilance Law, Australian Modern Slavery Act, proposals to strengthen the reporting requirements under the UK Modern Slavery Act, the requirement under s.414C of the UK Companies Act and plans for a new EU law requiring companies to carry out human rights due diligence in relation to their supply chains).  Forward leaning businesses recognise that their interests are best served by anticipating and responding to this shift, now.  So, jettisoning a group human rights policy or watering down commitments in a Modern Slavery statement is unlikely to be the preferred course for responsible, future focussed global businesses.

Instead, if businesses accept that a duty may arise (either because it is assumed under the law as it currently stands or comes to be imposed by the law as it develops in the future) they can meet the expectations of stakeholders and reduce the risk of harm to affected communities while managing their legal liability by taking the following steps:

First, identify those group policies, reports and statements which could be read to assume responsibility for a human rights related risk.  This will include anything called a human rights policy but also Modern Slavery statements and those policies and reports linked to labour rights, the environment and sustainability more broadly.  Attention should also be paid to the relevant sections of annual reports and stock market announcements. 

Second, ensure that any responsibility which the company undertakes (or could be read to undertake) in these documents is clearly defined, focussed on process rather than outcome and is feasible in practice.  Generic or vague commitments will rarely satisfy stakeholders.  It is now clear that they may also give rise to a broad assumption of a duty which cannot realistically be discharged.  For example, where a business has a complex overseas supply chain and makes a commitment to ‘zero tolerance’ of Modern Slavery, consider whether this could be read to assume responsibility for ensuring an outcome which is not within the company's control.  This is not what the UN Guiding Principles or the UK Government expect, still less require.  The appropriate and legally safer course of action is to commit to having in place appropriate systems and processes to identify, mitigate and prevent instances of Modern Slavery.

Third, ensure that policy commitments are implemented in accordance with industry standards – these may well inform the court's assessment of what could be expected of a reasonable and prudent company in the same circumstance, i.e. the relevant standard of care.  Where this involves human rights due diligence, this will mean carrying it out in accordance with the operational principles of the UN Guiding Principles.

This post comes to us from Hogan Lovells, and has been co-authored by Julianne Hughes-Jennett, partner and head of the Business and Human Rights Group, and Peter Hood, Business and Human Rights Consultant at Hogan Lovells.