Update on Parent Company Liability: Okpabi v Shell Reinforces Risks for Companies with Offshore Subsidiaries

The United Kingdom Supreme Court has released its much anticipated judgment in Okpabi v Royal Dutch Shell Plc. The Supreme Court unanimously overturned the Court of Appeal’s previous finding that the English courts did not have jurisdiction over a claim against Royal Dutch Shell Plc (Shell) and its Nigerian subsidiary, Shell Petroleum Development Company of Nigeria Ltd (SPDC).

Relying heavily on its 2019 decision in Vedanta Resources v Lungowe, the UKSC held that there was a real issue to be tried, paving the way for the claim to proceed in the lower courts.

Factual and Procedural Background

We have previously addressed the background to Okpabi on this blog here. The claimants alleged Shell owed a duty of care to communities based in the Niger Delta who had been affected by oil leaks from SPDC’s pipelines. The Court of Appeal upheld the High Court’s finding that there was no properly arguable case for such a duty, given the relationship between Shell and SPDC.

After the Court of Appeal’s decision, the Supreme Court determined the seemingly similar case Lungowe v Vedanta Resources. In a landmark judgment, the Supreme Court found in Vedanta that it was conceptually possible for a UK-domiciled parent company to owe a duty to overseas claimants, including for environmental damage caused by the foreign subsidiary. Following the Supreme Court’s clarification of the law in this area, the claimants in Okpabi were granted permission to appeal.

How Should Parent Company Liability Claims be Considered at an Interlocutory Stage?

At its core, the Supreme Court was keen to underscore that the proceedings were interlocutory proceedings focused on jurisdiction. Both the High Court and Court of Appeal had erred by making findings on factual matters, and in effect conducting a mini-trial. The factual disputes between the parties should have been appropriately dealt with at trial, and there was no need for the courts below to address these issues, particularly in the absence of cross-examination. 

In particular, the Supreme Court found the Court of Appeal had erred by not considering the potential importance of future disclosure of internal company documents, which were likely to be material.  Indeed, the Supreme Court considered such documents to be of ‘obvious importance’ to these sorts of claims, underscoring the importance that a company’s internal policies and procedures may play in proceedings of this nature and the need for early consideration of environmental, social and governance (ESG) issues.

Re-emphasising Vedanta in Practice

This ground alone was a sufficient error of law to determine the appeal, although the Court also commented on other errors of law made by the lower courts. The Court re-emphasised that parent company liability was not a distinct category of tort law. The existence of a duty of care would depend on the extent and way in which a parent availed itself of the opportunity to take over, intervene, control, supervise or advise the management of a subsidiary. 

As a result, the Court noted that there was no set test or circumstances which would give rise to parent company liability since it would require evaluation of the particular facts. It was possible a duty of care could arise through a parent company issuing group-wide policies or standards. Likewise, the exercise of ‘control’ by a parent company over a subsidiary was a starting point and not an overriding factor in establishing a duty of care.

The Court referred to four possible ‘Vedanta routes’ to parent company liability, as identified by the claimants, although reiterated again that these categories were not to be treated as definitive:

(1) Shell taking over the management or joint management of the relevant activity of SPDC;

(2) Shell providing defective advice and/or promulgating defective group-wide safety/environmental policies which were implemented as of course by SPDC;

(3) Shell promulgating group-wide safety/environmental policies and taking active steps to ensure their implementation by SPDC; and

(4) Shell holding out that it exercises a particular degree of supervision and control of SPDC.

The Court held that there was a real issue to be tried in respect of categories (1) and (3), declining to make a finding in respect of the other categories. In that regard the Court preferred the dissenting conclusions of Sales LJ, who had been in the minority in the Court of Appeal, which had observed that the vertical business structure of Shell (which the claimants contended showed the businesses were managed as a single commercial undertaking) were at least capable of establishing a duty of care, with the issue to be determined at trial.

Can We Expect to See More of These Claims?

The Okpabi decision may well reinforce the perception of England as an attractive forum for bringing claims against parent companies or similar entities. The principles the Supreme Court first established in Vedanta are wide-ranging; indeed, an ‘equity relationship’ is not necessary for liability to arise. Beyond the parent-subsidiary relationship, in principle it is possible that policies or public statements in non-equity business relationships, for instance in the context of a supply chain, could give rise to a duty of care for a business to take measures to prevent human rights impacts in the context of that business relationship. However, prospective claimants should be cognisant of the long-drawn nature of such claims before the English courts. The Court hints in Okpabi that further jurisdictional challenges may still be forthcoming in the lower courts, and even in the seminal case of Vedanta, the claimants have opted to reach a settlement in lieu of continuing with what would likely have been lengthy substantive proceedings in the English courts. 

The Supreme Court’s approach in this area re-emphasises the need for businesses to proactively comply with the United Nations Guiding Principles on Business and Human Rights and other international ESG standards. The decision also makes clear the importance of Vedanta in establishing this area of law: as well as Okpabi, a recent decision in the Netherlands also relied on Vedanta to make similar findings of parent company liability against Shell’s Dutch arm. Alongside the prospect of mandatory human rights due diligence laws coming into force in Europe, companies are likely to need to be more conscious than ever of their subsidiaries, and supply chain relationships, to avoid future liability.

This post comes to us from Quinn Emmanuel, and has been authored by Julianne Hughes-Jennett.