Climate disputes – Parent company and supply chain risk

Growth of transnational tort claims means businesses risk liability for environmental failures by subsidiaries and counterparties

In recent decades, there has been a marked increase in the number of actions brought in the UK and elsewhere based on alleged environmental and human rights-based failings by large multinational corporations.

As these claims have developed in the English courts, the typical model is for groups of foreign claimants to allege a UK-domiciled company owes them a duty of care in relation to environmental or other impacts of the acts (or omissions) of another company in another country. For example, a foreign subsidiary, or even an unrelated business partner in the company's supply chain.

These cases, often referred to as transnational tort claims, have risen in prominence in recent years for a number of reasons. Against the background of evolving views on the importance of ESG issues, transnational tort litigation is perceived to fill a gap where local laws or procedures leave no basis for redress or where lawyers cannot act on a no win, no fee basis to enable prospective claimants. Moreover, it may be attractive from a claimant perspective to pursue parent companies or large business partners with the deepest pockets.

Such factors have led claimant law firms and litigation funders to find creative avenues for claims, while local communities are becoming increasingly mobilised to seek redress. With the impacts of climate change becoming ever greater around the world, and in light of the resultant increase in corporate policymaking, climate-related impacts may become a focus for transnational tort claims in the future. While this is a developing area, there are significant hurdles facing any attempt to hold corporations liable for causing or contributing to climate change per se. It is, however, foreseeable that claims could be brought based on activities which allegedly exacerbate the effects of climate change in a particular area or for a particular community.

Parent company liability

It is well-established that each company in a corporate group has a separate legal personality, and a parent company is therefore not generally responsible for the acts or omissions of its subsidiaries. However, as a matter of tort law, the way a parent company operates and interacts with its subsidiaries can lead to it assuming a duty of care to third parties at risk of harm from the acts and omissions of those subsidiaries.

Recent cases where the English courts have considered such allegations against UK-domiciled parent companies at a preliminary stage include Vedanta Resources Plc v Lungowe and Okpabi v Royal Dutch Shell (outlined in our blog post here), both of which were appealed to the Supreme Court on the question of whether it was arguable that a duty of care was owed by a parent company. In Vedanta, some 1,800 Zambian villagers sought compensation from Vedanta Resources Plc, and its Zambian subsidiary, for alleged environmental damage from a copper mine in Zambia. In Shell, around 40,000 individuals from the Niger Delta region sought compensation from Royal Dutch Shell Plc and its Nigerian subsidiary for alleged environmental damage resulting from oil spills off the Nigerian coast. In both cases, the defendants challenged jurisdiction on the basis there was no arguable claim against the parent company as "anchor defendant" and therefore no basis for the court to allow service out of the jurisdiction on the subsidiary as a "necessary or proper party" to that claim.

In both Vedanta and Shell, the Supreme Court found it arguable that a duty of care was owed by the parent company defendants, emphasising that the question will inevitably turn on the facts of each case and the court should not conduct a "mini-trial" at the jurisdictional stage. A key issue will be the extent to which the parent company took over, or shared in, the management of the relevant activity. Relevant factors may include whether the parent company has provided defective advice or policies which were implemented by the subsidiary; promulgated group-wide safety or environmental policies and taken steps to ensure their implementation; or held out that they exercised a particular degree of supervision and control of the subsidiary. But this is not an exhaustive list.

Supply chain risk

Claims are also starting to emerge against companies in relation to the acts or omissions of unrelated entities in their supply chain, or those who have purchased corporate assets.

In Begum v Maran (UK) Ltd, a claim was brought against Maran, a UK-domiciled company, which had acted as agent for a related company in the sale of an oil tanker to a demolition cash buyer. Following the death of a worker dismantling the ship in Bangladesh after the sale, a claim was brought against Maran alleging a duty of care on the basis that it knew the vessel would be broken up in Bangladesh in highly dangerous working conditions.

On an appeal against a summary judgment and strike-out ruling, the Court of Appeal held the claim should be allowed to continue. Despite acknowledging it was an unusual basis of claim, the court found there was an arguable duty of care based on the assumed facts. It noted that claims based on a duty of care in respect of damage caused by a third party were "currently at the forefront of the development of the law of negligence" and described the alleged duty in Maran as being "on the edge of that development". However, the court thought it would be inappropriate to strike out the claim in the circumstances.

It is not clear whether this case has progressed further, but it demonstrates the potential breadth of the bases on which transnational tort cases could be brought in future, the difficulty of striking them out at an early stage and the resulting risks for corporates.

Jurisdiction issues

Vedanta and Shell have shown it will generally be challenging for a UK-domiciled defendant to knock out a transnational tort claim at an early stage on the basis that there is no duty of care since the English courts approach this as a fact-specific question and will not conduct a "mini-trial".

For cases brought before the end of the Brexit transition period (31 December 2020), the European regime for jurisdiction and the enforcement of judgments applied to the UK and accordingly the English courts were obliged to accept jurisdiction in claims against UK-domiciled defendants. They could not decline to hear the claim simply on the basis there was another available forum that was more appropriate. However, following Brexit, that regime no longer applies.

Therefore, a UK-domiciled company may be able to persuade the English courts to decline to exercise jurisdiction over a case which has little or no other connection to the UK. This is illustrated by the recent decision in Limbu v Dyson Ltd, where the High Court declined to exercise jurisdiction over a claim by migrant workers relating to alleged forced labour and exploitative conditions in a factory in Malaysia which manufactured products and components for Dyson branded products.

However, even if the English court has found that England is not the most appropriate forum, it will nevertheless refuse a stay if satisfied there is a real risk the claimant will not obtain justice in the foreign court. In Vedanta, for example, despite the claim's connections to Zambia, the Supreme Court found there was a real risk of the denial of substantial justice if the claim was heard in Zambia, including because of its scale and complexity and the claimants' inability to access litigation funding there.

Moreover, where the English court is prepared to stay the action in favour of a foreign court, this is likely to be on the basis of the UK-domiciled defendant's willingness to submit to the jurisdiction of that court, which may bring risks depending on the jurisdiction in question. In the Dyson case, the UK defendants gave undertakings not only to submit to the jurisdiction of the Malaysian courts but also, for example: not to seek security for costs or an adverse costs order to the extent such costs would not be recoverable under the Qualified One-Way Cost Shifting regime in England; and not to challenge the lawfulness of any success fee arrangement between the claimants and their Malaysian lawyers.

Challenges for defendants

A number of aspects increase the risks and uncertainty for defendants facing these sorts of claims in the English courts.

First, there is limited guidance on how the English courts will approach these claims at trial, including on the question of what level of control or involvement is sufficient to establish a duty of care. To date, while we have Supreme Court guidance as to the circumstances where a duty of care arguably exists, in none of these transnational tort cases has the court had to finally determine whether a duty was owed to those affected by the acts or omissions of the relevant subsidiary, supplier or other third party. What is clear is the question is highly fact-specific, which makes the result difficult to predict in any particular case.

Second, despite these claims being heard in the English courts, the applicable law will usually be that of the foreign country where the alleged tort occurred. In many cases, that means the parties must obtain expert evidence as to the content of the relevant foreign law. This can increase costs and (although the English courts have extensive experience in applying foreign law) may ultimately lead to a more uncertain result than where the court is applying its own law.

Third, defendants may face significant challenges in recovering their costs in these cases where the claims fail. The claimants will often be individuals of few means, each is likely to be liable only for their individual share of the costs, and they may be supported by lawyers acting under a conditional fee or damages-based agreement who will not generally be liable for adverse costs if the claim fails. So, unless there is sufficient after-the-event insurance in place, or a third-party litigation funder is involved, defendants may be unable to recover the costs of a successful defence. Even then, where the claims have a personal injury element, Qualified One-Way Costs Shifting will often prevent a successful defendant from recovering costs in respect of those claims.

And all this is separate from the reputational damage these claims can cause, as well as the negative impact on relations with governments and local communities.

Managing the risks

Companies looking to mitigate the risks of these cases should carefully consider their policymaking process and implementation. Businesses should ask themselves whether their legal teams have sufficient oversight of the formulation of policies, particularly in relation to ESG issues, and whether there are established and effective governance processes for the adoption and implementation of group-wide policies.

It will also be important to consider carefully the language used in public statements, and in particular annual reporting. Considerable emphasis has been placed on these types of documents in the cases seen to date. Where appropriate, care should be taken to draft these documents in a way that reflects the corporate separation between parent and subsidiary.

When considering risk exposure to transnational torts, corporates should also remember to check how their insurance might respond to such scenarios. For example, does current insurance have adequate limits or sub-limits for defence costs? Or, in the event of a claim against them, does the corporate need to consider making a notification to its insurers?

The risks of claims arising due to failings in the supply chain or by those purchasing corporate assets can also be mitigated through prior consideration of risk, undertaking appropriate due diligence of suppliers and other business partners and (potentially) careful contract drafting. Maran signals that a company's knowledge of the relevant risks of harm will be closely scrutinised in determining whether a duty of care has arisen. Where issues are identified with the practices of suppliers or other business partners, it will be crucial to take steps to address them, or (in an extreme case) to put an end to the relevant business arrangements.

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