The Supreme Court finds that English holding companies may be responsible for the wrongs of their overseas subsidiaries17 Feb, 2021 - Other | by Grosvenor Law
In Okpabi and others v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd,  the Supreme Court considered the proper application of the “necessary and proper party” gateway for the purposes of granting permission to serve a claim form out of the jurisdiction. In doing so, they have given a judgment which may have far reaching consequences for multinational groups operating with a holding company in England and with operating companies in other jurisdictions.
The Appellants (approximately 42,500 individuals from the Niger Delta region of Nigeria) brought proceedings in the English courts against: (a) Royal Dutch Shell Plc (“Royal Dutch Shell”), the ultimate holding company of the Shell Group incorporated in England; and (b) Shell Petroleum Development Company of Nigeria Ltd (“SPDCN”), a Royal Dutch Shell subsidiary incorporated in Nigeria.
The Appellants allege that: (i) numerous oil spills have occurred from oil pipelines and associated infrastructure operated in the vicinity of the Appellants’ communities; (ii) these oil spills have caused widespread environmental damage, including serious water and ground contamination; and (iii) these oil spills have not been adequately cleaned up or remediated.
The Appellants’ case is that the oil spills were caused by the negligence of SPDCN, and that Royal Dutch Shell owed them a duty of care which arose from the significant control which Royal Dutch Shell allegedly exercised over SPDCN and its business.
Royal Dutch Shell and SPDCN challenged the jurisdiction of the English court on the basis that there was no arguable case against Royal Dutch Shell as the “anchor” defendant (such that the claim against Royal Dutch Shell should be struck out), and therefore no jurisdiction as against SPDCN as a “necessary or proper party” under the relevant jurisdictional gateway.
The High Court found in favour of Royal Dutch Shell and SPDCN that there was no jurisdiction, and the Court of Appeal upheld that decision. The Supreme Court disagreed.
What the decision means
In summary, the Supreme Court held that:
- Parent companies may have a duty of care arising out of their subsidiary’s actions, if they exercise sufficient management and control over the subsidiary;
- Whether a parent company exercises sufficient management and control over a subsidiary is not simply a matter of legal control, but of a parent company actively involving itself in the management and operations of its subsidiary;
- Decision making through functional business lines, rather than based on corporate structure, may indicate that it is arguable that a parent company has sufficient management and control over the subsidiary to assume a duty of care; and
- Courts should not conduct mini-trials when determining arguments relating to jurisdiction.
Whether there is sufficient management and control is likely to be sensitive to fact and witness evidence; consequently whilst all cases will turn on their own facts, there is a real risk that there may be an arguable case to be tried such that jurisdictional thresholds may be met, and such matters may not be vulnerable to summary judgment applications.
Potential claimants will likely be considering the extent to which they are able to bring claims against parent entities with deeper pockets, and based in more favourable jurisdictions, than their operational subsidiaries. Conversely, multinational groups may well consider re-shaping their internal structures and decision making processes to mitigate some of the risks raised by the judgment.
Analysis: Proportionality and jurisdiction
The Supreme Court has addressed complex issues relating to the English court’s jurisdiction on more than one occasion in recent years, including recently in the case of Lungowe v Vedanta Resources plc.  The Court has expressed concern that such cases have devolved into “mini-trials”. Lord Hamblen, giving the Court’s judgment in Okpabi, noted that, in the jurisdiction phase, “it is generally not appropriate for a defendant to dispute the facts alleged through evidence of its own” and that such an approach “may well just show that there is a triable issue.”
The Respondents had asserted that the claims turn on “the meaning and construction of a plethora of complex corporate documents and literature which span many decades” and “a welter of evidence incapable of summary determination”. In those circumstances, the Supreme Court held that the Court of Appeal had erred in proceeding to a summary determination, rather than allowing this “welter of evidence” to be properly assessed.
Accordingly, the Supreme Court determined that the Court of Appeal (and the High Court) had made a material error in their approach to the jurisdiction challenge, and revisited the Appellants’ arguments in light of this.
Analysis: Liability of parent companies for acts of their subsidiaries – Control, Direction and Oversight
In Vedanta, Lord Briggs held that “the liability of parent companies in relation to the activities of their subsidiaries is not, of itself, a distinct category of liability in common law negligence” and went on to state that whether a duty of care is owed by a parent company “depends on the extent to which, and the way in which, the parent availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations (including land use) of the subsidiary”. The Supreme Court in Okpabi agreed with this approach, and it was on this basis that arguments were put to the Court by the Appellants.
In short, the Appellants argued that Royal Dutch Shell exercised such a high degree of control, direction and oversight in respect of SPDCN’s operations, that Royal Dutch Shell had assumed a duty of care towards the Appellants. The Appellants’ case was strongly disputed by the Respondents who argued that all relevant operational decisions were made by SPDCN.
The Appellants placed particular reliance upon two internal Shell Group documents, arguing that they show that the Shell Group is organised along “Business” and “Function” lines which are directly accountable to Royal Dutch Shell and its executive committee. Whilst subsidiaries are required to take formal binding decisions, those decisions, the Appellants said, are made after advice, consent and approval is provided by the relevant Business or Function.
The Appellants also contended that these features demonstrate that Shell has deliberately structured the Shell Group in a way that enables Royal Dutch Shell to direct, control and intervene in the management of subsidiaries’ operations. Further, they argue that the exercise of such direction, control and intervention is borne out by the existence of extensive and detailed mandatory policies, standards and technical requirements which bind its subsidiaries.
Lord Hamblen concluded that how the Shell Group’s structure worked in practice, and the extent to which delegated authority was involved and exercised in relation to decisions made by SPDCN, are very much in dispute on the face of witness evidence, and that this was an issue in relation to which proper disclosure is of obvious importance. There was, therefore, a real issue to be tried and the High Court and Court of Appeal had erred in declining jurisdiction to hear the case.
What comes next
The Respondents disputed the jurisdiction of the English courts on other grounds, which were not addressed at first instance as a result of the Court declining jurisdiction on the basis of the failure to meet the jurisdictional gateway. It seems likely that the Respondents will pursue these other grounds before the High Court, meaning that further hearings on jurisdiction are to be expected.
Richard Coopey is a Partner at Grosvenor Law and specialises in substantial, high-value commercial disputes.