Shell: A Tale of Two Courts

Doubtless, Shell Petroleum has been embroiled in litigation throughout its life and as that litigation involves a multinational company it sometimes puts in sharp relief the different approaches of the jurisdictions in which Shell operates to what are essentially similar legal issues. A pair of court decisions, one from each of the two jurisdictions which generated the companies whose merger formed Shell in 1907, shows a sharp contrast between the potential of Dutch law to operate so as to specify the commercial objectives of large companies and, by contrast, the continuing commitment of English courts to the view that the setting of commercial objectives is a matter for the company’s management, not the court. For the English court, public policy apparently continues to be, as Burrough J warned in 1824, ‘a very unruly horse, and when once you get astride it you never know where it will carry you’, whereas the Dutch court leapt enthusiastically into the saddle and cantered straight into the thickets of climate change and fossil fuels.

The Dutch decision was, of course, that of the Hague District Court of 2021 in Vereniging Milieudefensie v Royal Dutch Shell plc while the English case is the permission decision of Trower J on July 23 in the derivative action, Client Earth v Shell plc [2023] EWHC 1897 (Ch) (see OBLB blog post). Both pieces of litigation were initiated by climate change activist organisations with only small shareholdings in the company. The Dutch decision has been appealed by Shell and the latter may be appealed by Client Earth, despite, or perhaps because of, the drubbing it received at first instance. So, the contrast mentioned above may turn out in due course to be less stark, but for the moment the two courts seem anxious to disturb the (doubtless exaggerated) reputations of their respective jurisdictions, ie that civil law courts are mere slot-machines and common law courts develop the law enthusiastically.

In Milieudefensie the Hague District Court ordered the Shell group to reduce its CO2 emissions into the atmosphere by 45%, compared with its 2019 levels, and to do so by 2030. It’s important to note that this reduction target included Shell’s ‘scope 3’ emissions, ie the emissions generated, not by Shell, but the consumers of its products. In fact, the scope 3 emissions account for 85% of Shell’s total. As the court itself said: ‘The court assumes that the reduction obligation will have far-reaching consequences for RDS and the Shell group. [...] This could curb the potential growth of the Shell group. However, the interest served with the reduction obligation outweighs the Shell group’s commercial interests [...]’

The legal basis of this decision was ‘the unwritten standard of care laid down in Book 6 Section 162 Dutch Civil Code, which means that acting in conflict with what is generally accepted according to unwritten law is unlawful.’ As a principle of tort law, it has to be said that it rather leaves Lord Atkin’s UK equivalent, the neighbour principle, standing in the shade. However, the novelty of the District Court’s approach was not its reliance on this principle, but its application so as to produce the specific ruling just mentioned. ‘Unwritten law’ was interpreted so as to permit the court to rely on international standards and soft law which were not binding on Shell, either directly or as a result of legislative action by the Dutch state. It was enough for the court that the standards had been endorsed politically by the UN (or its agencies), the EU and by states generally (notably in the Paris climate change agreement). In particular, the Court relied on the reports of the IPCC (Intergovernmental Panel on Climate Change—a UN body), which had identified the 45% target as necessary to keep global warming within a 1.5% ceiling. The horse was clearly beginning to move.

Shell’s counter-arguments receive short shrift. The suggestion that the matter of greenhouse gas emissions involved so many conflicting interests that it should be left for resolution through the political process was brushed aside by the court by re-stating the unwritten law principle. As the court put it, ‘There is no room for weighing interests’—an approach which simplified the court’s task but glossed over the difficulties within it.

The nature of these difficulties is revealed by the second and third of Shell’s counter-arguments. The IPCC’s figure of 45% applied to the global economy and so, at best, to national economies individually. But the court applied the figure to Shell without amendment, not carrying out, for example, any analysis of the obligations of the state in this process. To the argument that the target was a responsibility of society as a whole, not just of energy companies, the court responded that ‘Shell must do its part.’ This hardly meets Shell’s argument that the court had not accurately identified Shell’s part.

Third, Shell argued that the reduction order would not bring about the result desired by the court. If Shell reduced its supplies to consumers, its place would be taken by competitors. There is evidence that other (non-Western) oil companies have this ambition. See, for example, ‘Aramco bets on being last oil major standing’, Financial Times, 12 January 2023. The court said ‘this argument cannot justify assuming beforehand there is no need for RDS to not meet this obligation.’ This is a fair point as far as it goes but it does not go so far as to absolve the court from investigating the probability of Shell being correct. In fact, the court kicked the argument into the long grass by adopting a ‘wait and see’ approach. The court’s reasons for thinking substitution by competitors might not occur were unconvincing so that ‘wait and see’ was a distinctly weak support for the court order likely to have a significant economic impact on Shell. By the time the court ‘saw’, Shell might have conceded significant ground to competitors, whilst the supply of oil and gas to consumers continued unabated.

By contrast, ClientEarth found the Chancery Division of the High Court a much less welcoming forum. It wanted to bring a derivative claim on behalf of Shell against all its current directors on the ground that those directors were in breach of their duties to the company by adopting an inadequate climate change strategy. Under the UK procedural rules, a shareholder wishing to bring a derivative action must first obtain the permission of the court to proceed with it. At this stage the derivative claimant must establish that there is a prima facie case for granting permission, including therefore a prima facie case that the directors have acted in breach of duty.

In this case, it was alleged that Shell’s inadequate climate change policy amounted to a breach of two duties laid upon directors by the Companies Act 2006. The first was the core duty of loyalty in s 172. ‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: [...] (d) the impact of the company's operations on the community and the environment [...]’ The other duty (s 174) was the tort-derived duty to exercise ‘reasonable care, skill and diligence’ in the conduct of the company’s affairs. Trower J found that there was no evidence of even a prima facie breach of those duties and so he did not permit the case to go further.

ClientEarth wished to build out from these overarching duties a number of more specific obligations in relation to Shell’s climate change policy which, it was argued, the directors had not complied with. The judge, however, was having none of this. In relation to s 172, the elaboration approach ignored the points that the section was drafted in subjective terms (what the director thinks) and the court was not well positioned to engage in the complex balancing exercise the section imposed on the board. ClientEarth’s argument ‘cuts across the well-established principle explained by Lord Wilberforce in Howard Smith Ltd v Ampol Ltd [1974]  AC 821 at 832E/F: ‘There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.’

As to s 174, the test was whether ‘no reasonable director could properly have adopted the approach’ the Shell board had taken. ClientEarth did not allege that Shell had no climate change policy. Rather, the claimant did not like its content. For the court to assess the claimant’s substantive criticisms, however, would drag it back into the business of being a ‘supervisory board’. Only if the claimant could show that Shell’s policy was prima facie one outside the range of reasonable responses of a company to climate change issues would the court let a claim for breach of this duty go forward. And ClientEarth did not make this argument.

In addition to its analysis of the duty issue, the court concluded that the derivative action should not be allowed to proceed because it was not brought in good faith. ‘It therefore seems to me that, where the primary purpose of bringing the claim is an ulterior motive in the form of advancing ClientEarth’s own policy agenda with the consequence that, but for that purpose, the claim would not have been brought at all, it will not have been brought in good faith.’ It is sometimes said that this shows ClientEarth did get what it wanted from the litigation, even though it lost in court. If so, ClientEarth paid a price for its success. The company and the defendants are not required to appear before the court at the permission hearing, and, if they choose to do so, must normally bear the costs of their appearance, unless invited by the court to appear, as was not the case here. However, at a separate costs hearing held at the end of August ([2023] EWHC 2182 (Ch)), Trower J required ClientEarth to pay Shell’s costs—three leading counsel, one junior and Slaughter & May doing the instructing!—subject to taxation. The first reason given for setting aside the normal rule and regarding Shell’s appearance in court as a proportionate response was the publicity ClientEarth was aware would be generated by its application and, consequently, the ‘unusually significant adverse impact on the conduct of its affairs’ a finding of a prima facie case against Shell would have.

Whether one prefers the unpredictable, judicial hyper-activism of the Dutch court or the refusal to engage of the English court probably depends on one’s estimate of what states are likely to do in the climate change area and whether that will be more apposite than the courts’ efforts.

Paul Davies is Emeritus Professor of Corporate Law at the University of Oxford and Senior Research Fellow at Harris Manchester College, Oxford.