Responsibility of a parent company for the acts of its subsidiary

The Court provided helpful analysis of the circumstances in which a parent company owes a duty of care with regard to operations carried out by its subsidiary. The case is interesting to examine in the context of the readiness of the English courts to hear claims relating to conduct outside of the jurisdiction brought by foreign claimants.

Summary

In His Royal Highness Emere Godwin Bebe Okpabi and Others v Royal Dutch Shell PLC and Shell Petroleum Development Company of Nigeria Ltd 2017 EWCH 89 (TCC), the Court provided helpful analysis of the circumstances in which a parent company owed a duty of care with regard to operations carried out by its subsidiary.  

In this case, establishing whether a duty of care was owed by the parent company was central in determining whether the English courts had jurisdiction to hear the claim.   The case is interesting to examine in the context of the readiness of English courts to hear claims relating to conduct outside of the jurisdiction brought by foreign claimants.

Background

The judgment concerns two sets of proceedings brought by around 42,500 Nigerian citizens against the Royal Dutch Shell PLC (RDS) and Shell Petroleum Development Company of Nigeria (SPDC).   The Claimants claimed that they had suffered damage as a result of oil spills emanating from the Defendants’ oil pipelines and associated infrastructure in the Niger Delta.

RDS is the ultimate holding company of the worldwide Shell Group and is incorporated in the United Kingdom, where it has its registered office.  It is listed on the FTSE stock exchange in London as well as on other stock exchanges worldwide. 

SPDC is a subsidiary of RDS within the Shell Group of companies and is a Nigerian-registered exploration and production company incorporated under the laws of the Federal Republic of Nigeria.  SPDC operates in Nigeria through a joint venture (JV) with other Nigerian registered oil companies.  RDS is not a member of the JV.

Jurisdiction

As a company registered in England, RDS was served in England as an ‘anchor defendant’.  Following an ex parte hearing the Claimants obtained permission to serve SPDC outside of the jurisdiction under the paragraph 3.1(3) of Practice Direction 6B, on the basis that SPDC was a “necessary or proper party” to the claim against RDS.

The Defendants argued that the claims had nothing to do with the jurisdiction of England and Wales and instead should proceed in Nigeria.   Issuing claims against RDS in England was alleged by the Defendants to be a cynical device used by the Claimants to bring claims that would otherwise have no connection with England. 

The Judge held that the case against RDS should be considered first to establish whether there was a real issue to be tried between the Claimants and RDS, which if proved, would allow the claims to be heard in the English courts. 

Liability in tort of a parent company for the acts / omission of a subsidiary

The Claimants’ case was that RDS was responsible for the acts and / or omissions of SPDC that allegedly led to the damage caused by pollution and environmental damage in the Niger Delta.  The Claimants submitted that RDS was "not a true holding company" and claimed that both Defendants were legally responsible for the oil pollution.

The Defendants argued that the claims against RDS were bound to fail as RDS did not owe a duty of care to the Claimants for the acts and / or omissions of SPDC.  The Defendants alleged that SPDC was responsible for all operational decisions in Nigeria and claimed RDS did not have a supervisory role or any specialist activities or knowledge that would put it in any other position than that which would be expected of an ultimate parent company.

Decision

The Judge ruled that RDS did not owe a duty of care to the Claimants, holding that there was no real issue to be tried between the Claimants and RDS.  The Judge noted that the Claimants’ claims against RDS (rather than SPC) were “[…] extremely thin, bordering on sketchy, and in a great many instances simply not evidence[d] at all”.  

Consequently, the Claimants could not rely on RDS as an anchor defendant to obtain jurisdiction in England over SPDC under the necessary or proper gateway path in PD 6B 3.1(3):

"Absent the existence of proceedings on foot in England against RDS, there is simply no connection whatsoever between this jurisdiction and the claims brought by the claimants, who are Nigerian citizens, for breaches of statutory duty and / or in common law for acts and omissions in Nigeria, by a Nigerian company".

The Claimants will now go to the Court of Appeal in the hope that the decision will be overturned and the claim allowed to proceed in the English courts.

Corporate structure

The judgment confirmed that RDS and SPDC were two separate legal entities forming part of 1,367 companies within the corporate family of Shell companies, which are located in 101 different countries.   RDS did not hold shares in SPDC, but rather held shares in Shell Petroleum NV, which was itself a holding company.   Shell Petroleum NV held shares in other companies, one of which was SPDC. 

The Judge commented that:

“[…] membership of the same group does not of itself clothe RDS, the ultimate holding company, with responsibility for acts or omissions on the part of subsidiary companies within the group.  This is a fundamental principle of the law of England concerning the separate legal personality of subsidiary companies”.

The Defendants submitted that RDS never held a board meeting in the UK, had no employees and did not engage in any operations or provide any services.  It had no oil producing assets and did not have any of the regulatory licenses that would permit it to become engaged in operational activities.   Indeed, RDS was prohibited by Nigerian law from engaging in oil operations.   The Judge accepted these submissions.

The Claimants claimed that public statements regarding the Shell Group's commitment to environmental issues made by the Shell Group and RDS established a duty of care on behalf of RDS.  However, the Judge did not consider that statements made to fulfil RDS's stock exchange listing obligations were sufficient to establish a duty of care on its part, commenting:

“It is highly unlikely in my judgment that compliance with such disclosure standards could, of itself, be characterised as an assumption of a duty of care by a parent company over the subsidiary companies referred to in those statements.  There is certainly no authority to this effect and in the absence of any, I would hold that such compliance cannot in itself be a sufficient factor to [find] a duty of care on the part of a parent holding company”.

Duty of care

In determining whether the RDS owed a duty of care towards the Claimants, the Judge examined the three-fold test applied by Caparo v Dickman, namely:

1. The damage should be foreseeable

2. There should exist a relationship of proximity or neighbourhood

3. It should be fair, just and reasonable to impose a duty of care

 The Judge determined that the second and third limbs of the test would be problematic for the Claimants.  

With regard to the second limb of the test (i.e. proximity or neighbourhood) the Judge commented that:

1. RDS did not hold shares in SPDC.

2. RDSC did not conduct any oil operations itself.

3. Although two officers of RDS sat on the Executive Committee of the Shell Group of companies, those two constituted a minority of that membership.

4. RDS was prohibited by Nigerian law from conducting operations in Nigeria.

5. There is a JV in place engaged in oil operations in Nigeria, of which RDS was not a member.

6. Imposing a duty of care on RDS would potentially impose “liability in an indeterminate amount, for an indeterminate time, to an indeterminate class”.  The Judge held that this was the antithesis to proximity or neighbourhood.

With regard to the third limb of the test (i.e. whether it was fair, just and reasonable to impose a duty) the Judge commented that:

1. Nigeria had established a statutory framework which imposed obligations upon companies engaged in the oil business to provide compensation for damages.  SPDC had a strict liability for oil spills and therefore concepts of fairness, justice and reasonableness did not require the imposition of a duty of care upon RDS.
2. There was evidence that the Claimants were only entitled to claim compensation from SPDC under Nigerian statute.
3. RDS was prohibited by Nigerian law from performing operations and did not have any oil pipelines and associated infrastructure in Nigeria.
4. RDS simply held shares in its subsidiaries as if it were an investment holding company.
5. The activities in question were carried out by SPDC as part of the JV with the Nigerian state.

 The Judge also considered the four factors identified in Chandler v Cape, which identified the circumstances in which a duty of care can be imposed on a parent company responsible for the health and safety of its employees.  The factors were said to descriptive rather than exhaustive, but the presence of some or all of the factors would bring the case more closely within the scope of a duty of care owed by a parent company. 

When approaching the factors identified in Chandler v Cape, the Judge in this case noted that the purpose of the analysis was to establish whether the parent company was better placed, because of its superior knowledge or expertise, than the subsidiary in respect of the harm.  If that parent company was better placed, one must then consider whether it was fair to infer that the subsidiary would rely on the parent.

The Judge here determined that none of the four factors identified in Chandler v Cape were present, the reasoning for which was as follows:  

1. RDS was not operating the same business as SPDC. 

2. RDS did not have superior or specialist knowledge compared to SPDC.  Rather, SPDC had the specialist knowledge of the oil business in Nigeria.

3. RDS could only have a superficial knowledge or overview of the systems of work of SPDC, given the size and scale of companies and activities within the Shell Group.

4. There was no evidence that SPDC was relying on RDS to protect the Claimants.  The Judge noted "SPDC is a wholly autonomous subsidiary with considerable income and sizeable assets of its own […] I do not consider that it would be fair to infer that the subsidiary would rely upon the parent".

Comment 

The Judge's analysis of the circumstances in which a parent company can owe a duty of care with regard to the operations carried out by its subsidiary is interesting for practitioners to examine, particularly those acting for large multinational corporations.   

The fact that two companies form part of the same group does not in itself impose responsibility on the parent company for the acts of its subsidiary.  The level of specialist knowledge and reliance placed on a parent company is particularly pertinent to consider when establishing a duty of care.  The case highlights the difficulties faced when trying to establish a subsidiary's reliance on a parent company that has "no experience whatsoever" of the day-to-day operational business of the subsidiary.

This is not the first case where the location of a parent company has been examined with respect to the jurisdiction of domestic courts (see Young v Anglo American South Africa Limited & Ors, where it was held that claims must be pursued in the place where a subsidiary is based or the wrongdoing occurred).