In cases under Rome II EU Regulation, a parent company’s liability for the actions of its subsidiary is determined strictly according to the applicable national law.
There are two traditional mechanisms: 1) piercing the corporate veil and 2) a parent company’s direct liability for failure to exercise due diligence with respect to its subsidiary.
Piercing the corporate veil
The examples below derive from commercial law and competition law. Analyzing them provides an idea of the principles which could eventually govern a parent company’s liability for human rights violations committed by its subsidiaries.
In the Netherlands, a parent company may be held liable for debts incurred by a subsidiary if:
- The parent company is the subsidiary’s majority shareholder,
- The parent company knew or should have known that the creditors’ rights would be violated,
- The violation is the result of an action by the parent company or the parent company’s heavy involvement in its subsidiary’s actions, or
- The parent company failed to take the creditors’ interests into due consideration. 1
In other words, piercing the corporate veil requires the parent company to be both deeply financially involved in the subsidiary and aware of rights violations committed by the subsidiary.
Belgian courts have rarely pierced the corporate veil, and never in the area of international human rights law.
In considering the economic reality of a multinational group, the Charleroi Commercial Court took the view that the parent company’s influence over its subsidiary’s management was sufficient to lift the corporate veil and face charges. 2
Most Belgian doctrine provides a legal basis for charging a parent company for its subsidiary’s actions in the event that the parent company lacks knowledge of its subsidiary’s interests. To do so, the court interprets both parties’ will, applies extra-contractual liability rules or the principle of good faith. This occurred in the case of a dispute between a subsidiary and its parent company in which the subsidiary wished for the parent company to be held liable for allegations against the subsidiary, on the grounds that it was clear to both the parent company and the subsidiary that the former controlled all of the latter’s activities. Another invokable legal basis is appearance theory. When the third party is misled about the legal personhood of the other party, and the party could justifiably believe that it had contracted with the parent company, but in fact contracted with the subsidiary, the parent company can be held liable for the resulting harm. These same legal grounds allow companies to be declared sham entities and the corporate veil to be pierced in situations where the company has no autonomy from its parent company or where there is confusion regarding the companies’ domicile. 3
From inception, european courts have held the parent company liable for offenses committed by its subsidiary within the EU when the latter despite having distinct legal personhood, “does not determine its market behaviour autonomously, but in essentials follows directives of the parent company” (paragraph No. 15). 4 The Court of Justice previously held that “the circumstance that this subsidiary company has its own legal personality does not suffice to exclude the possibility that its conduct might be attributed to the parent company” (paragraph No. 15). 5
Some authors have noted that in order for that decision to be compatible with commercial law and to not deny the subsidiary’s legal personhood, plaintiffs must “establish the parent company’s direct participation in the actions and conduct in question and demonstrate that the subsidiary acted on specific and binding instructions from the parent company, thus depriving the subsidiary of its independence”. 6
In a later case, the Court found it necessary to consider the economic entity formed by the parent company (in this case CSC, a US company,) and its subsidiary (ICI, an Italian company), which was characterized by an “obviously united action” in the context of its relationship with the company Zoja. The Commission considered CSC and ICI to be jointly responsible for abusing their dominant position over Zoja. 7
More recently, on 10 September 2009, the Court of Justice held in Akzo Nobel 8 that a parent company which owns 100% of a subsidiary’s capital is presumed liable for the subsidiary’s actions without any involvement, be it direct or indirect. In this case, the parent company was presumed to have “a decisive influence on the conduct of its subsidiary” and it is thus the parent company’s responsibility to prove the autonomy of its subsidiary in carrying out its operations. Although this decision applies only in the context of anti-trust law, future decisions by the European Court of Justice may evolve and apply this solution to other situations, including human rights violations.
Several difficulties exist:
- It is difficult to predict whether these commercial and anti-trust teachings can be easily exported to issues of extraterritorial human rights violations,
- In the case at hand, the burden of proof for piercing the corporate veil is borne by the plaintiffs,
- Decisions on whether the corporate veil can be pierced are decided on the facts of the case.
This could encourage parent companies to forgo control over their subsidiaries to avoid the corporate veil being pierced. The less a company is involved in the policy and operations of its subsidiary, the less likely it is to be held liable for the subsidiary’s actions. 9
Another possibility to attribute liability to the parent company for violations of human rights committed in its value chain is based on this company having a duty of care or an obligation to exercise due diligence to prevent harm in its value chain. In this case the liability of the parent company is a direct liability, i.e. based on its own conduct, and not a liability for the acts committed by another entity.
Due diligence is a legal concept in civil cases under U.S., or more broadly, common law. English Law has developed the concept of duty of care through case law. Both concepts sanction physical and legal persons for neglecting their due diligence obligations. In the broad sense, the concept involves taking all necessary and reasonable precautions to prevent harm from occurring. Otherwise, there is a lack of due diligence or duty of care. Cases of human rights abuses committed by companies, recklessness, negligence or a parent company’s omissions with regards to its subsidiaries can constitute a violation of civil liability standards.
However, there is a significant difference between those two concepts that have developed since the adoption of the UNGPs in 2011. The concept of due diligence can be interpreted as more of a procedural requirement whereas the concept of duty of careis a substantive requirement.
Human rights due diligence is a process or tool that assists companies not only in complying with national laws, but also in preventing or mitigating the risk of human rights infringements.
Recurring human rights breaches by business enterprises led former UN Special Representative on Human Rights and Transnational Corporations and Other Business Enterprises, John Ruggie (see Section I), to promote the concept of human rights due diligence through the UN Guiding Principles on Business and Human Rights (UNGPs). The UNGPs encourage business enterprises to adopt measures to assess the impact of their activities, and those of business relationships, on human rights, prevent breaches and remedy adverse impacts. Companies are encouraged to integrate this approach into their managerial policy.
Since the adoption of the UNGPs in 2011, some legal systems have started to embed the concept of human rights due diligence advanced in the UNGPs in their national legislation . These laws range from imposing reporting requirements to concrete due diligence steps. 10 Often, these laws are more focused on the process of due diligence rather than its results, adopting a ’process-based’ regulatory approach rather than a ’result-based’ approach. This is the case, for example, of laws that do not include sanctions or liability for harm. In recent years, some national legislation or legislative proposals have included the liability of the company for its failure to comply with its due diligence obligation and some have gone further by envisaging liability for actual harm.
The French Law on "Devoir de Vigilance"
On 27 March 2017, France adopted a law on ’Devoir de vigilance des entreprises mères et donneuses d’ordre’. 11 The law imposes on large companies 12 domiciled in France or doing business in France a duty to adopt, publish and effectively implement a ’vigilance plan’ ('plan de vigilance'), which should include measures to identify risks to human rights, health and safety, and to the environment, that might be caused by the activities of the company itself, by those of the companies it controls, directly or indirectly, or by the activities of sub-contractors or suppliers with whom the company has a established business relationship (where such activities are linked to that relationship). 13
In French law, a company is considered to ’control’ another company either where it owns enough stock to hold (directly or indirectly) the majority of the votes in that company, or when it is in a position to appoint, for two consecutive years, the majority of the members of the board of directors. Such ’control’ may also result from a contractual agreement between the two companies. 14
As to the ’established business relationship’, this refers, according to established French case-law, to ’a stable, regular commercial relationship, taking place with or without a contract, with a certain volume of business, and under a reasonable expectation that the relationship will last’. 15
The ’vigilance plan’ should be designed in consultation with the stakeholders of the company, and include five elements: a mapping of the risks; a procedure for the regular assessment of the subsidiary companies, the sub-contractors or suppliers with whom the company has an established business relationship; actions for the mitigation of the risks identified or the prevention (i.e., avoidance) of the most serious abuses; an alert mechanism, established in agreement with the representative unions, allowing for the identification of risks; a mechanism to ensure an adequate follow-up of the measures adopted and an assessment of their effectiveness. 16 The vigilance plan has to be made publicly available and every year the company is obliged to update it and publish the implementation of its plan.
Any interested person can formally require the company to comply with the legislation (‘mise en demeure’) and the latter has three months to respond to such request. If it fails to do so the claimant can ask the judge to issue an order asking the company to comply and, if the company failed to comply with the court order, it could be ordered to pay a fine (astreinte) for every day that the company does not comply. 17
In addition, the law includes the possibility of civil liability for harm that the company could have prevented through the vigilance plan. 18 In this way the French law is the first example of a national legislation directly linking the due diligence obligation to ordinary rules governing civil liability for harms. However, some have pointed out the limits of such provision such as for example the difficulty to prove the causal link between the lack of vigilance and the harm and the high threshold for the claimant to prove a civil liability for harm under the French system. 19
Although the French Duty of Vigilance law is very recent, some cases have already been brought in front of French courts claiming both the non-compliance with the obligation to establish and effectively implement a vigilance plan and liability for harm.
Amis de la Terre, Survie et al. v. Total
In 2019, two French organizations (Amis de la Terre France and Survie) and four Ugandese associations (FIEGO, CRED, NAPE/Friends of the Earth Uganda and NAVODA) filed a claim under the Duty of Vigilance law against Total S.A. concerning Tilenga and EACOP, the company’s oil projects in Uganda.
Activities of Total in Uganda and Tanzania
Total is acting in Uganda through its fully-owned subsidiary “Total Exploration & Production Uganda B.V”. The Tilenga project aims to exploit six oil fields on the shores of Lake Albert. In order to do so, Total plans to drill more than 400 wells, including drills within the Murchison Falls National Park (the country’s largest national park home to an exceptional ecosystem), to achieve production of approximately 200,000 barrels of oil per day. This project is part of a larger project which also involves the construction of a giant pipeline (1445 km), the “East African Crude Oil Pipeline” (EACOP), crossing Uganda and Tanzania to transport and export some of the extracted oil. 20
Breach of the obligations imposed by the Duty of Vigilance law
Total adopted a due diligence plan ("plan de vigilance") in 2018, which was reviewed in 2019 (with the addition of the implementation report ). This vigilance plan referred to Total’s Code of conduct, Total’s “Document d’information des droits de l’Homme”, and to international norms which Total undertakes to respect.
According to the applicants, the due diligence plan adopted by Total in 2018 does not comply with the obligations imposed by the Duty of Vigilance law, since the risks caused by its activities, those of its subsidiaries and those of its subcontractors and suppliers are not identified or are insufficiently addressed.
The claimants allege that the Tilenga project causes or risks causing violations of human rights, fundamental freedoms and health and safety of persons as well as environmental damages. The applicants claim that the actions of Total in Uganda infringe or risk infringing the human rights to development, property, food, education, health, life, security and participation of the affected population. They also allege that Total’s projects will pollute or otherwise damage the air, soil, fauna, flora, aquatic life and biodiversity as well as contributing to climate change.
The applicants claim similar harms in relation to t the EACOP project.
First Judgement of TGI Nanterre - The question of competence
On 30 January 2020, the Tribunal de Grande Instance de Nanterre accepted the arguments of the defendant and declared itself incompetent in favor of the exclusive competence of the commercial courts. It based its decision on the fact that the vigilance plan is directly linked with the managing of the company and affects the functioning of the commercial entity. As such, it constitutes a ’commercial act’ which, according to Art. N L.721-3 2 ° of the French Commercial Code, falls under the exclusive competence of commercial courts. 21
If the exclusive competence of commercial courts in these cases is confirmed, victims’ access to justice and the possibility for the French law to strengthen corporate liability for human rights violations may be significantly undermined.
In France, commercial courts were created in the 16th century to respond to the needs of justice ’of merchants for merchants’ and are still constituted by nonprofessional judges elected by peers. As such, they are not impartial judges and might be reluctant to judge against corporate interests. 22
The Versailles Court of Appeal decision
The claimants appealed the decision, arguing that the exclusive competence of commercial courts is contrary to the law’s purpose which is to prevent impacts of corporate activities on society and therefore to manage the external consequences of corporate activities. The Nanterre Court erroneously considered the vigilance plan merely as an internal act affecting the functioning of the company instead of a tool to manage the consequences of the company’s activities on society and external stakeholders 23 .
On 10 December 2020, the Court of Appeal, confirmed the first instance decision that the vigilance plan is a commercial act and that it therefore entails the exclusive competence of commercial courts. 24
In April 2021 the claimants indicated that they had appealed this decision to the Supreme Court. 25
Notre affaire à tous, Sherpa et al v. Total
In January 2020 five civil society organisations, Notre Affaire à Tous, Sherpa, Eco Maires, France Nature Environnement et ZEA and some local public organisations (collectivités territoriales) brought another case against the French multinational company Total under the Duty of Vigilance law. They claimed that Total’s vigilance plan is not able to prevent the most serious risks linked to the company’s contribution to climate change and that Total’s engagement on this matter is not aligned with the objectives set out in the Paris Agreement.
In its first response to the claim, Total questioned the competence of the civil judge and asked that the claim be transferred to the commercial courts.
In February 2021 26 , the court of Nanterre rejected Total’ request and ruled differently from the Versailles Court of Appeal on this point. The judge supported the claimants’ arguments and declared that: i) there is not an exclusive competence of commercial courts in the claims concerning the French duty of vigilance law because the vigilance plan is not a commercial act but a civil act; ii) there is a concurrent competence of judicial and commercial courts that needs to be attributed according to criteria fixed by the law and case-law. In this case, the claimants are representing a general interest and not a commercial interest and they therefore have a right to choose (droit d’option) between judicial and commercial courts.
Importantly, the judge clarified in her decision that the vigilance plan, while surely affecting the functioning of the company, goes well beyond the company’s internal management realm as it pertains to the social responsibility of the company and its impacts on society. 27
The crucial question on the competence of civil or commercial courts in cases concerning the implementation of the vigilance plan will likely be decided by the French Cour de Cassation (Supreme Court) in the coming months. Other cases are pending at first instance and the judges’ decisions in these cases might play a role in the Supreme Court’s final position.
It is worth noting that while the competence question concerns actions relating to non-compliance with the duties to adopt, publish and/or effectively implement the vigilance plan, there is no question as to the competence of civil courts in actions concerning civil liability for damage.
Suez Case, Osorno Chile
In June 2021, FIDH, its member organisations in Chile and France, the Observatorio Ciudadano and LDH, and the Red Ambiental Ciudadana de Osorno brought a legal action before the Court of Nanterre in France against the world’s largest private water provider, French company Suez.
During the evening of 10 July 2019, around 2,000 liters of oil were released at the Caipulli drinking water treatment plant managed by ESSAL, an entity controlled by French multinational SUEZ, which is responsible for the sanitation network in the Chilean city of Osorno. Plaintiffs allege that the leak was due to negligence in the plant’s maintenance and management. The plant’s water source was contaminated with hydrocarbons, thereby affecting the entire water supply of 49,000 households, ie 140,500 inhabitants (97.9% of the population). The contamination also reached two watercourses – the Rahue and Damas rivers. The health crisis could have been avoided if the problems of poor lighting, faulty infrastructure and staff shortage had been properly handled. Ongoing malfunctions, instances of negligence, failures and irregularities at Essal’s facilities had been repeatedly flagged by Chilean inspection bodies.
According to France’s duty of vigilance law, Suez, which controls more than 43% of the water market in Chile, has the obligation to publish a vigilance plan which should include effective measures identified in consultation with local communities and stakeholders to prevent new health crises in Chile from occurring due to the negligent behaviour of its subsidiaries.
In July 2020, the plaintiffs served formal notice to SUEZ demanding them to comply with France’s duty of vigilance law by amending its vigilance plan to take crucial measures to prevent another health emergency in Osorno or elsewhere in Chile 28 . Despite these demands, the company has decided to remain inactive, which led the organisations to bring the case before the French judge who could order the company to take corrective and preventive measures 29 .
Norway’s ’Act on Business Transparency and Work on Fundamental Human Rights and Decent Work’
On 10th June 2021, Norway’ parliament adopted the ’Act on Business Transparency and Work on Fundamental Human Rights and Decent Work’ also known as the Transparency Act. It is expected to enter into force on 1 January 2022.
The law covers all larger companies domiciled in Norway, as well as foreign companies selling products and services in Norway 30 . It obliges them to perform human rights and “decent work” due diligence throughout their supply chains and business relationships in their value chain (as well as with business partners), and to take measures to limit risks and prevent negative impacts. The standards to follow are the UNGPs and OECD Guidelines. Under this new Transparency Act, companies must report on their due diligence policies and practices, their actual human rights due diligence assessments, including cases of severe risk or harmful incidents that they uncover, measures to mitigate risks and cease/prevent impacts and the outcome of these efforts. In addition to reporting to authorities, the information must be made readily available digitally on the company’s website and anyone has the right to request information from a company on how they manage their due diligence, including information about specific products or services the company offers 31 .
The Norwegian consumer authority is responsible for enforcement of the law and may issue injunctions and fines in case of non-compliance. Regrettably, the law does not include liability provisions in case of harm nor does it give victims of human rights abuses seeking for remedy a right to sue in court.
Another drawback of this law is the fact that it does not cover climate change and environmental damage. However, the Norwegian government has stated that it will evaluate the Transparency Act after it has been in force for a period. Among other things, it will consider whether the law should also cover smaller companies in its scope and include environmental impact and possibly other areas in the OECD Guidelines
- ForUMs reactions to the Norwegian due diligence law, http://www.forumfor.no/en/news/2021/forums-reactions-to-the-norwegian-due-diligence-law
- Triponel Consulting, https://triponelconsulting.com/2021/06/14/what-is-the-new-norwegian-human-rights-and-decent-work-due-diligence-law/ and BAHR, https://bahr.no/newsletter/compliance-towards-mandatory-due-diligence-on-human-and-labour-rights-in-norway
Germany’s “Act on corporate due diligence obligations in supply chains”
On 11 June 2021, Germany’s parliament passed the Act on Due Diligence Obligations in Supply Chains, also known as the “Supply Chain Act”. Coming into force on 1st January 2023, this new law provides that companies must establish due diligence procedures to assess human rights-related risks in line with the UNGPs, take measures to prevent and mitigate human rights abuses, and report on their due diligence activities. This obligation will apply to companies employing a minimum of 3000 people, whose headquarters are registered in Germany, and to subsidiaries of companies from foreign countries if they are registered in Germany and employ the same minimum amount of employees in this country 32 . Contrary to the UNGPs, the law establishes a size threshold, therefore applying to a small number of companies only. Although, the scope of application shall be evaluated and expanded after 2024 33 .
The law covers environmental risks insofar as environmental harms can lead to adverse human rights impacts. Companies are also required to comply with certain prohibitions under three selected environmental conventions: 1. the prohibition on the manufacture of mercury-added products under the Minamata Convention on Mercury, 2. the prohibition on the production and use of chemicals under the Stockholm Convention on Persistent Organic Pollutants and; 3. the prohibitions concerning waste movements/disposal under the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal. Nevertheless, an independent and comprehensive environmental due diligence obligation is missing. By limiting itself to an exhaustive list of environmental conventions, the law sets aside other crucial threats to the environment such as biodiversity loss or climate change.
Companies’ due diligence must extend to “own activities” and those of direct suppliers; it may cover the activities of subsidiaries if the parent company exercises determinative influence over the subsidiary. Indirect suppliers are only included insofar as the company has substantiated knowledge of human rights risks/abuses by/in the context of lower-tier suppliers (this knowledge can be acquired through the company’s own risk analysis or third party substantiated complaints). This has been one of the main civil society critiques of the law: the scope of due diligence is very limited, conservative and incompatible with the preventive idea of the UN Guiding Principles since it adopts a reactive approach, which may encourage companies to actively turn a blind seek to “not know”.
Workers’ representatives within the company’s economic committees are entitled to receive information and be consulted on human rights/environmental issues at the centre of the company’s new due diligence obligations. However, the law does not require companies to provide information to/consult with potentially affected rights-holders.
The law is enforced through administrative mechanisms. The German Federal Office of Economics and Export Control (BAFA) 34 is tasked with overseeing compliance with the law, which includes reviewing the annual reports and receiving/responding to substantiated complaints. BAFA can impose fines on companies that fail to meet their due diligence obligations 35 . In addition, companies can be excluded from public procurement for up to three years in the event of serious violations. Victims of alleged human rights abuses resulting from non-compliance with the due diligence duties can file a substantiated complaint with BAFA. This includes foreign claimants, who would be unlikely to be in a position to file lawsuits in German courts. The law also allows domestic trade unions and NGOs to file a complaint in their own name on another’s behalf. Yet, unfortunately, no real channels are available for affected parties to obtain redress: the law does not set any provisions on civil liability and the range of sanctions established is limited.
The absence of civil liability provisions remains a major drawback : the law explicitly states that breaches of the due diligence obligations shall not give rise to civil liability. Nevertheless, companies are still binded by the general rules of the German Civil Code and they could still incur civil law liability.
- Act on Due Diligence Obligations in Supply Chains, Official document: https://www.bmas.de/EN/Services/Press/recent-publications/2021/act-on-corporate-due-diligence-in-supply-chains.html
- German parliament passes act on corporate due diligence in supply chains: https://www.cliffordchance.com/insights/resources/blogs/business-and-human-rights-insights/german-parliament-passes-act-on-corporate-due-diligence-in-supply-chains.html
- German parliament passes mandatory human rights due diligence law: https://www.business-humanrights.org/en/latest-news/german-due-diligence-law/
- What the new SUPPLY CHAIN ACT. delivers – and what it doesn’t : https://lieferkettengesetz.de/wp-content/uploads/2021/06/Initiative-Lieferkettengesetz_Analysis_What-the-new-supply-chain-act-delivers.pdf
The Dutch Child Labour Law
On 14 May 2019, the Dutch Senate adopted the “Child Labour Due Diligence Law” (“Wet Zorgplicht Kinderarbeid”) 36 The law requires companies selling goods and services to Dutch end users to determine whether child labour occurs in their supply chains and to set out a plan of action on how to combat it 37 . The objective of the law is ultimately to protect Dutch consumers from buying products or services that are made with the use of child labour.
Companies covered by the law have to submit a statement to regulatory authorities declaring that they have carried out due diligence related to child labour in their entire supply chains. The statement does not need to be annual and its actual details will be determined by a future General administrative order (GAO). If companies find, after a first assessment, that there is a reasonable presumption that child labour might have been present in the production of a product or service, the company is expected to draw up an action plan in line with international guidelines (the UNGPs or the OECD Guidelines for Multinational Enterprises) to prevent this impact 38 .
Fines for failing to file the statement start at €4,350 and penalties increase exponentially for companies found to have inadequate due diligence or lack of an appropriate plan of action to detect and prevent the use of child labour. In cases of non-compliance, companies risk a fine of up to € 820,000 or, alternatively, 10% of their annual turnover if the fine is not deemed appropriate. However, such fine can be issued by the public authorities only after a complaint is made by a third party and only after the company has failed to respond directly to the complaint. The enforcement by public authorities is therefore not proactive but depends on complaints by third parties.
If a company receives two fines for breaching the law within five years, the responsible company director (feitelijk leidinggevende) is liable for up to two years of imprisonment under the Economic Offences Act (Wet op de Economische Delicten).
The law has not yet entered into force – it could do so in 2022 – ,moreover, many of the crucial aspects of the legislation need to be defined by a General Adminstrative Order that has not yet been adopted.
Given the limitations of the legislation (particularly in scope and enforcement), Dutch civil society organisations have urged the adoption of a broader horizontal due diligence bill. In March 2021, four political parties submitted a legislative proposal on Responsible and Sustainable International Business Conduct in the Dutch parliament. The bill proposes a duty of care for all enterprises in the Netherlands with more than 250 employees and an obligation to conduct due diligence in accordance with the OECD Guidelines for Multinational Enterprises. 39
Legislative proposals on due diligence which include provisions on liability are currently have recently been passed in Germany and Norway, and have been discussed in Switzerland 40 and Finland. 41 , and at European level 42 .
Duty of Care
As mentioned before, the direct responsibility of parent companies (or lead/purchasing companies) for human rights violations committed by or in the context of subsidiaries’ or suppliers’ operations can be established based on these companies’ own duty of care. In this context, if a court recognized that the company had breached its own duty of care, it could deem the company liable and order it to pay compensation. Over the years, common law courts have developed the concept of parent company duty of care through case law. While these cases have provided some clarity as to the scope and applicability of the concept in different factual scenarios, some uncertainty still remains. It is to be expected that new cases and actual legislative interventions establishing and/or clarifying the scope of duty of care and/or due diligence obligations will provide greater clarity as to the contents and contours of parent company obligations and liability, and answers some of those outstanding questions.
Llubbe v. Cape plc 43
A group of South African workers complained that the British parent company which controlled their subsidiary had taken no action to reduce the risks associated with mining. The case constituted a breach of duty of care which required the employer to provide a safe and healthy workplace for its employees.
The Court of Appeal accepted the plaintiffs’ argument that the fact that the operations in question were not illegal under South African law does not mean that the defendant was not negligent. The parent company should have considered the available scientific knowledge in order to reduce the risks it incurred. In addition, even if the event giving rise to damage occurred in South Africa and there were serious reasons to believe the dispute could have been heard in local courts, the British courts held the parent company’s staff director liable for the decisions that led to the deterioration of the workers’ health. Because the company’s violations of its care of duty obligations occurred mainly in the United Kingdom, the court ruled that victims could bring action against Cape plc in the British High Court. 44 In 2001, the case was settled with the company offering compensation to the workers.
Chandler Vs. Cape Plc
In Chandler v Cape plc 45 the Court of Appeal upheld the High Court decision confirming that Cape plc owed a direct duty of care to the employees of its subsidiary, Cape Products, because it had assumed overall responsibility for matters relevant to the plaintiff’s claim.
The plaintiff had been employed by asbestos manufacturer Cape Building Products Ltd (Cape Products), a wholly-owned subsidiary of Cape plc. Due to exposure to asbestos dust, he had contracted asbestosis. Cape Products had ceased to exist by the time of the claim, so Chandler brought a negligence claim against Cape plc, alleging that it had breached its own duty of care.
In 2011, the High Court found that Cape plc had breached its duty of care based on the three-stage test established in Caparo Industries v Dickman, arguing that in the case 1) the damage was foreseeable; 2) there was sufficient proximity between the claimant and Cape plc; 3) it was fair, just and reasonable for a duty of care to exist. Supporting this decision were the key findings that the company: 1 had actual knowledge of Mr Chandler’s working conditions; 2. should have foreseen the risk of injury to Mr Chandler; 3. employed a scientific officer and a medical officer who were responsible for health and safety relating to all employees within the Cape group; 4. dictated policy in relation to health and safety; and, 5. retained overall responsibility for ensuring that its own employees and those of its subsidiaries were not exposed to risk of harm through exposure to asbestos.
In May 2011, the Court of Appeal confirmed this decision, arguing further that responsibility of a parent company for the health and safety of its subsidiary’s employees may be imposed where:
- the businesses of the parent and subsidiary are in a relevant respect the same;
- the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry;
- the subsidiary’s system of work is unsafe as the parent company knew, or ought to have known; and
- the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees’ protection.
Importantly, the Court of Appeal’s decision seems to have gone further than the High Court, in that for purposes of element (4), it clarified that it was not necessary to show that the parent was "in the practice of intervening" in the subsidiary’s health and safety policies. Rather, courts may find element (4) established "where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary”.
This case is significant in that it is the first to reach the merits stage and culminate in a decision establishing the liability of a parent company based on its direct duty of care towards a subsidiary’s employees. Importantly, it is not control, but the assumption of responsibility by the parent company, that grounded the courts’ decisions. While in this case the assumption of responsibility referred to health and safety issues, the principles are formulated in a way that can be equally applied to other areas of group-wide policy and practice.
The OCENSA Pipeline
A group of 70 Colombian farmers brought this case in British courts against BP’s Colombian oil subsidiary, BP Exploration Company (Colombia) Ltd (BPXC). BPXC’s construction of the OCENSA pipeline in the late 1990s severely damaged the farmers’ land by contaminating soil and water resources, rendering the land unsuitable for farming.
On 27 July 2016, the High Court of Justice of the United Kingdom dismissed the lawsuit. It ruled that the plaintiffs did not provide sufficient evidence in order to prove the damage attributable to the OCENSA pipeline works 46 .
Another group of 53 Colombian farmers, however, brought action against BPXC in an earlier case alleging environmental damage resulting from the pipeline’s construction. The case concluded following a confidential settlement agreement between the two parties and BPXC has not admitted its responsibility.
Lungowe v Vedanta Resources PLC
On the 31st of July 2015, 1826 Zambian citizens initiated proceedings in the United Kingdom against Vedanta Resources PLC and Konkola Copper Mines (KCM) because of alleged pollution and environmental damages. 47
The plaintiffs live in Chingola, a city located in the Copperbelt, the world-known rich copper deposit area. The city is the home of Nchanga Copper Mine’s second largest open cast mine in the world. Vedanta Resources’ subsidiary, KCM, operates the mine.
The local population accused KCM of polluting their watercourses which are their only source of drinkable water (for themselves and their livestock) and irrigation for their crops. They stated that “both their health and their farming activities ha[d] been damaged by repeated discharges of toxic matter from the Nchanga Copper Mine into those watercourses, from 2005 to date” 48 .
The claim against Vedanta relied on Article 4 of Brussels I Recast (see above) while in the claim against KCM, the claimants relied upon the “necessary or proper party” gateway of the English procedural code, paragraph 3.1 of CPR Practice Direction 6B 49 .
Vedanta and KCM both challenged jurisdiction.
On 27 May 2016, the English High Court 50 held that the claimants could bring their case to the English courts despite the fact that the alleged harm occurred and was caused in Zambia, where both the claimants and KCM are domiciled. This decision was upheld by the Court of Appeal in October 2017 51 .
On 10 April 2019, the UK Supreme Court 52 dismissed unanimously a further appeal by the defendants reiterating the "long-standing position that an anchor defendant can be sued in the UK in those cases in which access to justice would not be practicably available to the foreign claimants at home” 53
The Supreme Court confirmed the lower courts’ finding that Vedanta could arguably owe a duty of care to the claimants, based on the fact that the company had:
- Published a sustainability report which emphasised how the Board of the parent company had oversight over its subsidiaries.
- Entered into a management and shareholders agreement under which it was obligated to provide various services to KCM, including employee training.
- Provided health, safety and environmental training across its group companies.
- Provided financial support to KCM.
- Released various public statements emphasising its commitment to address environmental risks and technical shortcomings in KCM’s mining infrastructure.
- Exercised control over KCM, as evidenced by a former employee.
Whilst the issue under consideration of the Supreme Court was limited to jurisdiction, Lord Briggs made a number of observations on the substantive issue of parent company liability. For example, he rejected the submission by Vedanta and KCM that a parent company may never incur a duty of care merely by issuing group-wide policies and guidelines and expecting the subsidiary to comply. Lord Briggs’ commentary will no doubt play into how the High Court will assess the question of duty of care in the trial on the substantive issues in this case.
To affirm jurisdiction (see discussion on jurisdiction above), the UK Supreme Court concluded that:
- Zambia would be the proper place for the hearing of the claims, Vedanta having offered to submit to the jurisdiction of the Zambian courts; but
- There was a real risk that claimants would be denied access to justice if they were not permitted to serve English proceedings on KCM out of jurisdiction since 1. The claimants were living in poverty and could not obtain legal aid and would be prohibited from entering into conditional fee agreements under Zambian law; 2. the claimants would be unable to procure the services of a legal team in Zambia with sufficient experience to effectively manage litigation of this scale and complexity of the current claim.
The Court confirmed that, were it not for the claimants’ inability to access substantial justice in Zambia, it would have allowed the defendants’ appeal.
The decision of the UK Supreme Court opened the way for the Zambian villagers’ claim against UK-based Vedanta and its Zambian subsidiary to proceed to a trial of the substantive issues. A critical issue now to be examined is whether Vedanta, as the parent company, can be held liable for the pollution caused by its subsidiary.
More recently, a judgment 54 was handed down on the 27th of February 2020 regarding the application for a Group Litigation Order
The arguments developed by UK courts have been used also by other jurisdictions in similar cases, such as Canadian and Dutch courts and can now constitute a basis for the further development of the direct liability of parent companies in cases involving multinational corporations.
Okpabi v Royal Dutch Shell Plc
Following the landmark UK Supreme Court judgment in Lungowe v Vedanta, in February 2021 the UK Supreme Court reaffirmed in Okpabi v Royal Dutch Shell Plc1 that a UK-domiciled parent company may owe a duty of care towards claimants who allege harm cause by its foreign subsidiary.
Residents of the Niger Delta, Nigeria, brought two claims against UK-incorporated Royal Dutch Shell Plc (RDS) and its Nigerian subsidiary, Shell Petroleum Development Company of Nigeria Ltd (SPDC). They claimed that they had suffered harm as a result of oil spills from the pipelines operated by a joint venture in which SPDC had a 30% interest. In January 2017, the High Court rejected the claim on the basis that the claimants had failed to demonstrate an arguable case against RDS. This decision was upheld by the Court of Appeal in February 2018. 55 In February 2021, the UK Supreme Court reversed these decisions and allowed the claimants’ case to proceed in English courts.
The Supreme Court held that the Court of Appeal had wrongly conducted a “mini-trial” on questions of substance regarding the existence of a duty of care on the part of RDS, instead of concentrating on the jurisdictional challenge. Contrary to the lower courts’ decision, the Supreme Court found that there was a real issue to be tried and that the factual considerations necessary for a determination of this issue and the question of liability would only be determined at a later stage in the proceedings (being matters for the substantive trial).
Invoking Vedanta, the Court made the following useful observations regarding a parent company duty of care:
- No general principle exists that the maintenance of group wide policies or standards by a parent company cannot give rise to a duty of care.
- While a parent’s control over its subsidiary may give it the opportunity to get involved in management, the issue for liability is whether the parent actually did take over or share with the subsidiary the management of the relevant activity. A parent may owe a duty of care to third parties “regardless” of control, if – for example – it “holds itself out” in published materials “as exercising that degree of supervision and control” of its subsidiaries, whether or not it actually does so.
- The threefold test for a duty of care set out in Caparo Industries plc v Dickman is not applicable to this case as the general principles which determine parent company liability are not new. It raises no novel is sues of law and is to be determined on ordinary, general principles of the law of tort regarding the imposition of a duty of care. In the context of a parent/subsidiary relationship, that depends on the extent to which, and the way in which, the parent intervened in, controlled, supervised or advised the management of the relevant operations of the subsidiary.
- Importantly, the Supreme Court emphasised the significance of the fact that the Shell group was organised along business and functional lines, rather than by corporate status. In its opinion, this vertical structure might render the group, in management terms, a single commercial undertaking (regardless of separate legal personality). These issues now await determination on their substance.
- Together with Vedanta, these two cases have lowered the bar for claimants suing UK-based parent companies and their international subsidiaries in English courts for alleged harms caused in other jurisdictions.
The Shell Nigeria case 56
Two Nigerian farmers, Oguru and Efanga, residents of Oruma village in the Niger Delta state of Bayelsa, brought action with Milieudefensie (Friends of the Earth Netherlands) against Shell in Dutch courts. A leaking oil pipeline operated by Shell Nigeria contaminated farmland and drinking water near Oruma. Shell Nigeria also caused other harm, including causing fish farms to be unusable, forests to be destroyed and health problems among people in and around Oruma.
The leak was not the first major oil leak Shell dealt with in its Nigeria operations. Shell noted between 200 and 340 leaks per year between 1997 and 2008. 57 Between 1998 and 2007 Shell Nigeria was responsible for 38% of Shell’s oil spills in the world. 58
On 8 May 2008, the victims notified Shell of their intention to hold the company liable in Dutch courts. On 7 November 2008, Shell was served a subpoena which detailed the disputed facts. Before the court examined the merits of the case, Shell requested a ruling on whether Dutch courts had jurisdiction to hear the case. On 30 December 2009, the Civil Court of The Hague seized jurisdiction. The trial was set for 10 February 2010, but was postponed because the plaintiffs sought more time to prepare. Proceedings resumed on 24 March 2010, at which time the defendantsplaintiffs filed a motion for disclosure, 59 requesting that Shell provides them with a number of key documents. These documents would provide additional evidence to establish Shell’s liability for the actions of its Nigerian subsidiary. The motion also called for the disclosure of specific documents related to oil leaks, information Shell denied to disclose in June 2010.
The relationship between Shell and Shell Nigeria
Royal Dutch Shell plc. (Shell), a multinational, operates as a single entity. Decisions are made at headquarters and all subsidiaries and partners must comply. Shell’s environmental policy, as evidenced by a guide and the adoption of a “Health, Safety & Environment Policy” and “Global Environmental Standards”, is managed and verified for compliance from the company’s headquarters. Thus, all decisions relating to the multinational’s policies have the ability to influence Shell Nigeria’s operational conduct.
As the sole shareholder, Shell exercises direct influence and absolute authority over the nomination of Shell Nigeria’s CEOs. It was Shell’s responsibility to appoint leaders with the experience and ability to repair or at least limit the harm resulting from oil production. This was the basis upon which Oguru, Efanga and Milieudefensie brought legal action against Royal Dutch Shell plc and Shell Nigeria.
The jurisdiction of Dutch courts
Shell Nigeria objected to appearing alongside Shell before a Dutch court and the court held that the two entities were not sufficiently connected for the court to be able to recognize jurisdiction over the subsidiary. Oguru, Efanga and Milieudefensie cited Freeport v. Arnoldsson case in which the European Court of Justice held that a lack of offices or business premises in a particular state does not preclude the company from being brought before the courts of that state. Article 6, paragraph 1 of Regulation No 44/2001, provides that in cases with multiple defendants, a defendant may be sued in the jurisdiction where one of the defendants is domiciled, on condition that “the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings”. According to the ECJ, the fact that claims may be brought against several defendants on different legal grounds does not preclude the application of this provision.
Together with Mileudefensie, two Nigerians, Chief Barizaa Dooh and Friday Alfred Akpan, filed two additional complaints on 6 May 2009. The Goi and Ikot Ada Udo cases accuse Shell of similar offenses in Dutch courts.
On the Ikot Ada Udo case Shell was ordered to pay compensation to the plaintiff, for failing to adequately protect its pipelines from vandalism. However, in the Goi case, the court ruled that Shell could not be held liable for the failures of its subsidiary. An appeal was filed by the plaintiff, resulting in a ruling on the December 18th, 2015, through which the Court of Appeals of the Hague overturned the lower court’s decition considering that Royal Dutch Shell could be held liable for oil spills attributable to its subsidiary. The ruling introduced two important evolutions for corporate responsibility law : (1) Procedurally, the Court ordered for the first time the disclosure of internal documents of the company ; (2) On jurisdiction, the court allowed the plaintiffs to Jointly sue Shell in the Netherlands for oil spills that took place in Nigeria. 60
In January 2021, the Hague Court of Appeal held that Shell’s Nigerian subsidiary SPDC was liable for damages to the livelihood of Nigerian farmers caused by pipeline leaks, and that Shell’s parent company had violated its duty of care towards the Nigerian farmers. 61 Specifically, it held that (i) the Nigerian subsidiary was strictly liable under Nigerian law for the pollution arising from pipeline leaks (since it had not shown that they were caused by sabotage); and (ii) the parent company RDS was not held to have incurred a duty of care with regard to causing the spills (since SPDC had not been found to have acted wrongfully), but the court did find a limited duty of care with regard to the response to the spills and ordered the installation of a leak detection system in the relevant pipelines. Compensation to the plaintiffs (or their next of kin) will be determined after a damage assessment procedure.
Shell Nigeria before UK courts
On 2 March 2016, a UK judge ruled that Royal Dutch Shell can be sued before british courts for its involvement in oil leaks in Nigeria. The case was brought by lawyers from Leigh Day, representing the victims from the two Nigerian towns of Ogale and Bille. The plaintiffs allege that Shell has for decades neglected to clean-up oil spills causing contamination to farmlands and water in their region. On 26 January 2017, the High Court declined its jurisdiction to hear the tort claim 62 . In February 2018, the Court of Appeal upheld the High Court’s ruling, with the majority of the judges stating that the parent company did not have a duty of care towards the local communities concerned 63 . In May 2019, civil society organizations went to the UK Supreme Court to allow the communities to appeal against the 2017 ruling. The UK Supreme Court granted permission to appeal in July 2019 64 .
The economic imbalance between multinationals and individual victims
In terms of financial resources, the inherent imbalance in a dispute between a multinational corporation and an individual victim is a central question which must be taken into consideration. In the context of a multinational corporation’s liability for human rights breaches, a recurrent problem is the length of the proceedings and the resulting cost. Litigation can sometimes last more than 15 years and there is an imbalance between the resources available to a company to avoid court rulings which could adversely affect its reputation and those available to individual victims seeking redress. This inequality can affect the outcome of legal proceedings in favour of the company. The European Court of Human Rights’ 15 February 2005 ruling in Steel and Morris v. United Kingdom illustrates this phenomenon.
Steel and Morris v. United Kingdom 65
Two unemployed British nationals, Helen Steel and David Morris, had ties to London Greenpeace, a small group unrelated to Greenpeace International, which campaigns principally on environmental and social issues. In 1986 London Greenpeace produced and distributed a six-page leaflet entitled “What’s wrong with McDonald’s” which claimed that the multinational sells unhealthy food, hurts the environment, imposes undignified working conditions and abusively targets children with its advertising.
London Greenpeace was not a legal person and it was thus impossible to sue the organisation in court. After investigating and infiltrating the group to identify those responsible for the campaign, McDonald’s Corporation (McDonald’s U.S.) and McDonald’s Restaurants Limited (McDonald’s UK) sued Helen Steel and David Morris for libel and demanded compensation before the High Court of Justice in London. Steel and Morris were refused legal aid and conducted their own defence throughout the trial and appellate proceedings, benefiting only from the assistance of volunteer lawyers. They claim they were severely hampered by their lack of resources, not only in terms of legal advice and representation, but also with administrative matters, research, preparation and the costs of experts and witnesses. Throughout the trial, McDonald’s Corporation was represented by lead and junior counsel with experience in libel law, and sometimes two solicitors and other assistants. The trial took place before a single judge and lasted from 28th June 1994 to 13th December 1996, 313 court days (the longest trial in English legal history). On appeal, the Court of Appeal rejected most of Steel and Morris’s arguments including the lack of fairness but reduced the damages awarded by the trial judge from a total of GBP 60,000 to GBP 40,000. Steel and Morris were not allowed to appeal to the House of Lords and McDonald’s has not sought to collect the damages.
Steel and Morris have filed suit against the United Kingdom before the European Court of Human Rights under Article 6§1 of the European Convention on Human Rights (right to a fair trial). Case law from the court indicates that whether a fair trial requires the provision of legal aid depends on the facts and circumstances of each case, upon the importance of what is at stake for the applicant in the proceedings, on the complexity of the applicable laws and procedures, as well as on the plaintiff’s ability to effectively defend his or her cause. The Court concluded that Article 6§1 had been violated, noting that the “the denial of legal aid to the applicants deprived them of the opportunity to present their case effectively before the court and contributed to an unacceptable inequality of arms with McDonald’s.” 66