Lack of parent company duty of care over subsidiaries in Ogale community v Royal Dutch Shell

The Court of Appeal considered the circumstances where a parent company can be held liable for the acts of its subsidiaries in the judgement Okpabi and others (on behalf of themselves and the people of Ogale Community) v Royal Dutch Shell Plc and another [2018] EWCA Civ 191 (the “Judgement”). In particular, the Judgement considered the effect of the implementation of the parent company’s group policies by the subsidiary and whether this made it more likely or not that a parent would be held liable for the actions of its subsidiary.

In the Judgement, the Court of Appeal ruled that the English courts did not have jurisdiction to hear a claim brought by two Nigerian communities against the company Royal Dutch Shell Plc (“RDS”) and its Nigerian subsidiary, Shell Petroleum Development Company of Nigeria (“SPDCN”) as there was no arguable case that the parent company owed the claimants a duty of care. The claim was brought on behalf of the Ogale Community in the Niger delta on the grounds of environmental pollution, as they had been severely impacted for many years by oil leaks caused by pipelines owned by RDS and SPDCN in the area.

The test for establishing a duty of care is laid out in the Caparo case[1] and is a three-stage test whereby: (i) the harm must be foreseeable (“foreseeability”); (ii) there must be a relationship of proximity between the defendant and the claimant (“proximity”); and (iii) the imposition of the duty of care must be fair, just and reasonable (“reasonableness”). Out of the three elements of the test, there was no “proximity”. While case law has shown a duty of care can arise between group companies, the courts have set a high threshold that needs to be met. The Court of Appeal distinguished between a parent company that has significant control or shares control in material operations versus a parent company that issues mandatory policies and procedures to ensure compliance and conformity across the group.

The Judgement concluded that RDS did not have a sufficient degree of control over the operations of SPDCN to establish the necessary degree of proximity and therefore did not owe a duty of care towards the claimants. This was because RDS did not have any appreciable level of oversight or control over SPDCN’s operations. Moreover, RDC did not own shares in SPDCN directly, but only though another subsidiary. As such it could not be proved that SPDCN was relying on RDS’s knowledge, expertise and oversight to protect the claimants from the harm potentially suffered. The policies and procedures were standard across all countries in the group and crucially lacked any detailed policies and practices tailored specifically for the subsidiary.

This case is significant in determining whether multinational companies can face legal action in England over their subsidiaries’ actions abroad. This judgement upholds the strong commercial principles of English law that does not impose liabilities on companies simply due to their common membership of the same group owing to the doctrine of separate legal personality. This is good news for large parent companies who have subsidiaries abroad that have group wide corporate policies and procedures. This case confirms that a parent company will not normally be liable for the actions of its subsidiaries by simply having control over group corporate policies. The courts will go beyond simple corporate structures to determine in practice how each subsidiary is managed and operates on the ground. Therefore, parent companies should consider the extent of their control in day to day management of their subsidiaries, policies should be applicable to all group companies rather than specific companies. Each subsidiary entity should be primarily responsible for the implementation of a corporate policy in order to mitigate risk for the parent company assuming liability for their actions.

NEXT STEPS

For more information, and any guidance or advice on your obligations towards your subsidiaries, Cleveland & Co External in-house counsel, your specialist outsourced legal team, are here to help.

[1] Caparo Industries v Dickman [1990] 2 AC 605

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