UK Supreme Court allows Nigerian claimants to continue UK litigation against Shell companies over pollution claims

On 12 February 2021, the United Kingdom Supreme Court issued its highly anticipated judgment in Okpabi and others v. Royal Dutch Shell Plc and another [2021] UKSC 3. The Supreme Court followed its findings in Vedanta Resources PLC and another v. Lungowe and others [2019] UKSC 20 and held that the victims of alleged oil spills in Nigeria could bring claims against both the UK parent of the Shell group, Royal Dutch Shell Plc (“RDS”), and its Nigerian subsidiary, the Shell Petroleum Development Company of Nigeria Ltd (“SPDC”).

The decision provides guidance on the circumstances in which a parent company may be liable in the English courts for harm caused by the operations of its subsidiary. As the Vedanta decision before it, the Okpabi judgment will likely result in an increase of similar transnational tort litigations over alleged human rights and environmental abuses by multinational corporations.

Background

The claims were brought by more than 40,000 residents of two Nigerian communities, the Ogale Community and the Billie Community (the “Claimants”), against RDS, the UK domiciled parent company of the Shell group, and its Nigerian subsidiary, SPDC. The Claimants sought compensation for oil spills that allegedly occurred from oil pipelines and associated infrastructure operated by SPDC in the vicinity of their communities.

The Claimants argued that RDS owed them a common law duty of care because it exercised significant control over SPDC’s operations. With respect to SPDC, they relied on paragraph 3.1(3) of Practice Direction 6B of the Civil Procedure Rules, which allows for service out of jurisdiction under specific circumstances. To establish jurisdiction against SPDC under this gateway, the Claimants had to show that their claims against RDS raised a real issue to be tried, which means that they had a real prospect of success, and that SPDC was a “necessary or proper party” to the claims against RDS.

In January 2017, the High Court held that there was no arguable case that RDS owed the Claimants a duty of care and consequently refused to grant permission to serve the claim on SPDC. The Court of Appeal considered that the High Court had erred in certain respects in his approach to the evidence before the court and, on that basis, decided to review the evidence for itself. In February 2018, the majority of the Court of Appeal upheld the High Court’s decision, finding that there was no arguable case against RDS and that there was no real issue to be tried between the parties.

Key findings

In considering the appeal, the Supreme Court had to analyse two principal issues: 1) whether the majority of the Court of Appeal materially erred in law; and 2) if so, whether the majority was wrong to decide that there was no real issue to be tried.

1) Court of Appeal’s material error of law

The Supreme Court found that the majority of the Court of Appeal had made a number of errors of law. Most significantly, the Claimants established a material error of law in the approach of the Court of Appeal to the determination of the arguability of the claim. The Supreme Court found that the Court of Appeal was wrong in conducting a “mini-trial” at the jurisdictional stage and reaching a decision on the basis of the evidence produced. As this was not a full trial on the merits, the Claimants only needed to show that a duty of case was arguable. To determine the arguability of the claim, the Court of Appeal should have referred to the pleaded case and accepted factual assertions made in support of the claim unless, exceptionally, they were demonstrably untrue or unsupportable.

Conducting a mini-trial also led to the Court of Appeal making inappropriate determinations on contested factual issues and the documentary evidence. In relation to the factual issues, the Court of Appeal preferred and accepted the evidence of RDS’s witnesses, although there had been no opportunity for cross-examination. With respect to the documentary evidence, the Supreme Court emphasised the importance of internal corporate documents for the purposes of determining whether the parent company had sufficiently intervened in the management of the subsidiary, which was a “pure question of fact”. The Court of Appeal disregarded the value of future disclosure of internal corporate documents, although the Claimants identified specific internal documentation likely to be material that had not yet been disclosed.

The Supreme Court identified other errors in law by the Court of Appeal, making a number of observations on the principle of parent company liability:

– First, the Supreme Court rejected the Court of Appeal’s indication that the promulgation by a parent company of group-wide policies or standards can never in itself give rise to a duty of care. This was inconsistent with Vedanta, in which Lord Briggs considered that there was no such limiting principle and that corporate guidelines may contain systemic errors that, once implemented by a subsidiary, could cause harm to third parties.

– Second, the Court of Appeal focused inappropriately on the issue of control. Following the reasoning in Vedanta, the Supreme Court established that control is just a starting point. While a parent’s control over its subsidiary gives it the opportunity to get involved in management, the question relevant to liability is to what extent a parent company was involved in the de facto management of the material activity (in this case, the pipeline operation).

– Finally, the Court of Appeal’s reliance on the threefold test for a duty of care set out in Caparo Industries plc v. Dickman [1990] 2 AC 605 was incorrect and contrary to the guidance subsequently provided in Vedanta. Liability of a parent company in relation to the activities of its subsidiaries was not a distinct category of common law negligence and did not require an “added level of rigorous analysis beyond that appropriate to any summary judgement application in a relatively complex case”.

2) Existence of a real issue to be tried

The Supreme Court held that it had not be shown that the facts asserted in the Claimants’ submissions could be rejected as patently unsupportable or untrue. On the basis of the case set out in the pleadings, two key internal documents on direction, control and oversight within the Shell group, and the prospect of relevant future disclosure, the Supreme Court decided that there were real issues to be tried. In this context, the Supreme Court referred to the Shell group’s vertical corporate structure, which generally provided for organisational approval before corporate approval and allowed for delegation of authority, including in relation to operational safety and environmental responsibility. The Supreme Court found that this organisational structure clearly raised triable issues and that the Court of Appeal had therefore been wrong to decide that there was no real issue to be tried.

Commentary

With its judgment in Okpabi, the Supreme Court has reaffirmed its approach in Vedanta with respect to the circumstances in which a parent company may owe a duty of care to claimants harmed by the operations of its overseas subsidiaries. The Supreme Court’s statements in both Okpabi and Vedanta may serve as guidance for groups of companies as to how their group-wide policies, models of management, control or decision-making could trigger a duty of care for the parent company. The Okpabi decision is also significant for the Supreme Court’s criticism of “mini-trials” at the jurisdiction stage, which will likely lower the evidentiary threshold and make it easier for future similar cases to reach the merits stage.

It is also noteworthy that the Okpabi judgment comes just two weeks after a Dutch appeals court issued a similar decision, this time on the merits, in a case brought by four Nigerian farmers and Friends of the Earth, concluding that SPDC was liable for damages arising out of the same oil spills. The Dutch court also found that RDS had a limited duty of care to prevent oil spills and was ordered to install a leak detection system in its Oruma pipelines.

These latest decisions should serve as a reminder for multinational companies to assess and mitigate the human rights and environmental risks of their overseas operations carefully. Human rights litigation seeking redress from parent companies for actions of their subsidiaries look set to continue in a variety of jurisdictions, constituting a significant financial and reputational risk for companies. It is probably no longer premature to say that, given the Business and Human Rights issues being decided in the English and a number of other courts, it will be increasingly considered reckless and not diligent behaviour for enterprises with overseas operations to ignore these developments and not seek advice from suitably experienced lawyers as to how to manage their operations so as to limit their exposure to such claims. Businesses will be well-advised to ensure that their subsidiaries act in compliance with local laws and regulations, proactively engage with the relevant business and human rights guidelines and establish adequate procedures and mechanisms throughout their corporate structure to monitor compliance, conduct investigations and address grievances and establish BHR audits.

For further information about these developments and other issues related to Business and Human Rights, please contact:

Robert Volterra (robert.volterra@volterrafietta.com); or

Graham Coop (graham.coop@volterrafietta.com).

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