UK Supreme Court enables expansive supply chain liability

A parent company’s liability for damage caused by its subsidiary is grounded in control

On 10 April 2019, in Vedanta v Lungowe, the UK Supreme Court confirmed the England and Wales Court of Appeal’s decision that Vedanta may owe a duty of care to neighbours of the copper mine operated by its Zambian subsidiary. The judgment is important in three respects. First, Vedanta v Lungowe marks the first time the UK Supreme Court found that a duty of care vis-à-vis parties other than the subsidiary’s employees may be owed by the parent company (albeit in its capacity of operator). Second, this duty of care is not novel and, therefore, the lenient test for adjudicatory jurisdiction is applicable. Third, in dicta, the UK Supreme Court clarified the legal basis and scope of supply chain liability.

In this post, the UK Supreme Court’s ruling is discussed, including the assessments of jurisdiction at a preliminary stage and the issue of novelty. It also reviews the implications of the Court’s dicta for the doctrine of supply chain liability.

The Issue

Vedanta Resources Plc (“Vedanta”) is an English holding company for a group of metal and mining companies, including a Zambian company, Konkola Copper Mines Plc (“KCM”). The plaintiffs, Zambian citizens, brought proceedings against Vedanta and KCM claiming that KCM’s copper mining operations in Zambia polluted Zambian rivers, which caused them harm. The water from the rivers served the plaintiffs in several ways: as drinking water, for washing, irrigation and food supply.

At this stage, the case is only about adjudicatory jurisdiction over the two defendants, Vedanta and KCM. Vedanta asserted that the plaintiffs had not shown a triable issue against Vedanta, because Vedanta had not been shown to have done anything in relation to the operation of the mine sufficient either to give rise to a common law duty of care in favour of the claimants, or a statutory liability as a participant in breaches of Zambian environmental protection, mining and public health legislation. Vedanta was merely an indirect owner of KCM, and no more than that. The plaintiffs denied these assertions and argued that a Vedanta’s control over KCM had been established.

Under English law, adjudicatory jurisdiction is determined through a two-step analysis. First, the court has to determine whether the claims are novel – if novel, the test for jurisdiction is more stringent. Second, based on the outcome of the first step, the court has to apply the applicable test to determine jurisdiction.

Novelty and the Applicable Jurisdictional Test

Treating the duty of care potentially owed by Vedanta towards the plaintiffs as a novel category, the Court of Appeal had applied the three-prong ‘Caparo-test’, as laid down in the landmark ruling in Caparo Industries Plc v Dickman: (1) the duty of care must relate to a harm that is reasonably capable of being foreseen; (2) it must concern a ‘relationship of proximity’ or ‘neighbourhood’ between the plaintiff and defendant; and (3) the attachment of liability for harm occurred must be ‘just and reasonable’. The Court of Appeal found a duty of care is arguable and allowed the case to proceed to trial.

Because this type of duty of care is a novel category subject to the Caparo-test, Vedanta asserted, the Court of Appeal should have adopted a more “cautious incremental approach by analogy with established categories” and carried out a more “detailed investigation of the claimant’s case”. Had it done so, Vedanta argued, it would have refused to accept jurisdiction.

Parent Companies and Operational Control

The UK Supreme Court confirmed that the English courts have jurisdiction to hear the claims against Vedanta. Contrary to the Court of Appeal, however, it found that the kind of duty of care asserted by the plaintiffs is not novel. The liability of parent companies for damage caused by their subsidiaries, the Court reasoned, does not give rise to a distinct, new category of duty of care. Ownership of the shares merely provides the parent with the opportunity to control, but not actual control. “Everything 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 subsidiary’s operations. To support its ruling, the UK Supreme Court refers to a line of cases dealing with ‘control’. Relevant interventions may involve actions or omissions by the parent, and they may include the adoption and implementation of environmental, health and safety and other corporate policies and guidelines. As the Supreme Court put it:

“Even where group-wide policies do not of themselves give rise to such a duty of care to third parties, they may do so if the parent does not merely proclaim them, but takes active steps, by training, supervision and enforcement, to see that they are implemented by relevant subsidiaries. Similarly, it seems to me that the parent may incur the relevant responsibility to third parties if, in published materials, it holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so. In such circumstances its very omission may constitute the abdication of a responsibility which it has publicly undertaken.”

The Court found that Vedanta’s published materials state that Vedanta had laid down standards of environmental control over the activities of KCM, and implemented those standards by “training, monitoring and enforcement”. Therefore, the Court reasoned, it is arguable that a “sufficiently high level of supervision and control over the activities at the mine” may be demonstrated at trial, which means that the claim cannot be dismissed by summary judgment, and the case may proceed.

Implications for Supply Chain Liability

As Vedanta is to be viewed through the lens of control, there is not necessarily a difference between supply chain liability claims against parents and those against non-parent business partners. The same principles apply to both scenarios.

Under the Vedanta ruling, the circumstances under which a parent company or a non-parent business partner owes a duty of care to the plaintiffs is a function of the degree of control that the parent or non-parent business partner in fact exercised. In addition, in dicta, the Court deals with several important questions that further define the scope of supply chain liability. In the remainder of this post, these dicta will be analysed.

Degrees and Ways of ‘Control’

The Court addressed some of the circumstances in which control may lead to the imposition of liability on a parent company or, by extension, a non-parent business partner:

  • With respect to the adoption of group-wide policies, the Court rejected “a general principle that a parent could never incur a duty of care in respect of the activities of a particular subsidiary merely by laying down group-wide policies and guidelines, and expecting the management of each subsidiary to comply with them.” As the Court noted, in Chandler v Cape, the group-wide policies contained errors, which in turn caused harm when implemented by the subsidiary; a parent that prescribes such erroneous policies breaches its duty of care.
  • With respect to implementation of group-wide policies, the Court observed that “[e]ven where group-wide policies do not of themselves give rise to such a duty of care to third parties, they may do so if the parent does not merely proclaim them, but takes active steps, by training, supervision and enforcement, to see that they are implemented by relevant subsidiaries.” Thus, a parent company’s involvement with the application or implementation of policies may trigger a duty of care.
  • On public statements by the parent about supervision and control of the subsidiary, as noted above, a parent may incur responsibility to third parties if it has publically stated that it supervises or controls the subsidiary, but does not in fact do so. In this case, it is the raising of expectations that triggers a duty of care.
  • The Court explicitly refused to limit the categories of possible duties of care of parent companies, as the Court of Appeal had done in AAA v Unilever:“There is no limit to the models of management and control which may be put in place within a multinational group of companies. At one end, the parent may be no more than a passive investor in separate businesses carried out by its various direct and indirect subsidiaries. At the other extreme, the parent may carry out a thoroughgoing vertical reorganisation of the group’s businesses so that they are, in management terms, carried on as if they were a single commercial undertaking”.

    While passive investors do not have a duty of care towards the tort victims of the company they own, the parent that operates its subsidiaries as part of a single undertaking does have a duty of care towards the victims of the subsidiary’s activities.

Due to the Supreme Court’s ruling, to avoid liability, parent companies or non-parent business partners might become wary not to prescribe and implement policies to subsidiaries and business partners. There is a question, however, whether this strategy will work, given that omission may also be a ground for liability, as discussed below.

Omissions by A Parent As Breach of a Duty of Care

The UK Supreme Court’s ruling raises a question as to whether, and, if so, under which circumstances, there is a duty to control on the part of a parent or non-parent business partner. As referenced above, the Court does not attach importance to ownership as such, but it does allude to the possibility that omission may violate a duty to monitor, supervise, or control. The Court cites with approval the following statements by the judge in AAA v Unilever:

“Although the legal principles are the same, it may be that on the facts of a particular case a parent company, having greater scope to intervene in the affairs of its subsidiary than another third party might have, has taken action of a kind which is capable of meeting the relevant test for imposition of a duty of care in respect of the parent.”

Given that the term ‘action’ may involve a decision to refrain from taking action, the Court apparently believes that the ‘greater scope to intervene’ may ground a duty to intervene. While mere shareholding does not ground a duty of care, a parent or non-parent business partner may be subject to a duty of care if it is or should have been involved with the management of a company. Thus, the UK Supreme Court does not accept enterprise liability theory insofar as it based only on shareholding (ownership), but it appears to accommodate it insofar as it is based on de facto control and the ability to exercise additional control.

Omissions of Non-Parent Business Partner

After the Supreme Court’s ruling in Vedanta v Lungowe, cases like the Rana Plaza collapse may well produce different results. In Das v George Weston, a Canadian class action lawsuit against Loblaws, a major Canadian retailer, the Ontario Court of Appeal ruled in December 2018 that Loblaws did not owe a duty of care vis-à-vis the plaintiffs. The plaintiffs had brought proceedings against Loblaws for failure to ensure the safety of a thousand workers at the Rana Plaza factory, which collapsed in 2013. Plaintiffs argued that Loblaws (responsible for 50% of the garment manufacturer’s output) could exercise control over its sub-supplier, by cancelling its orders. Moreover, as Loblaws was aware of the structural deficiencies of the Rana Plaza building, implemented Corporate Social Responsibility Standards throughout its supply chain, and engaged a consultancy firm to perform social audits at the factory, plaintiffs argue, Loblaws should have exercised its authority to demand building safety

The appellate court disputed the application of an English precedent concerning parent company liability (Chandler v Cape) because Loblaws is not a parent of its sub-supplier. Therefore, “the nature of their proximity is completely different: [the sub-supplier] could contract with any number of purchasers, none of which could have the kind of control present in a parent/subsidiary relationship.” The UK Supreme Court’s ruling in Vedanta, however, does not support this reasoning, since the relevant criterion now is actual control, not ownership. Thus, in hindsight, the Ontario court might have ruled differently after Vedanta.

The Consequences of Knowing

In Vedanta, the UK Supreme Court also alluded to knowledge and the consequences thereof. It references, in apparent agreement, the plaintiffs’ claim of Vedanta’s “sufficient knowledge of the propensity of [its subsidiary’s] activities to cause toxic escapes into surrounding watercourses,” as well as the fact that a report published by Vedanta “made particular reference to problems with discharges into water and to the particular problems arising at the Mine.” Thus, although the Court did not deal extensively with the consequences of knowledge, it clearly played a role in the Court’s ruling.

Under the Caparo-test, the foreseeability of damage is the key criterion to determine whether a duty of care exists. Knowledge, thus, is relevant to the duty of care analysis. As the test turns on foreseeability, not on what was actually foreseen by the defendant, knowledge is to be determined objectively – should the defendant have known that damage would ensue? This is similar to the propensity of an activity to cause damage to which the UK Supreme Court refers. In other words, a parent company or non-parent business partner should know about the risks associated with the activities of its subsidiary or supplier, and determine whether these risks are acceptable (and, as necessary, what it can do to control such risks).

The case law on supply chain liability confirms that knowledge is a strong basis for asserting claims. In Choc v Hudbay Minerals Inc, for instance, the Ontario Superior Court ruled that a parent company had foreseen the damage caused by its subsidiary’s operations, because Hudbay was aware of the risk (in casu, the risk of violence). In this case, the plaintiffs claimed that security personnel of Hudbay’s Guatemalan subsidiaries committed human rights abuses, including murder and gang rape, while forcibly evicting them to start a new mining project, and sued both the Guatemalan subsidiaries and the Canadian parent.

In the UK case of Chandler v Cape, the Court of Appeal held that Cape plc. was liable for the harm Mr. Chandler, an employee of Cape’s subsidiary in the UK, had suffered due to exposure to asbestos while working for Cape’s subsidiary. The court identified four factors which may indicate the existence of a duty of care owed by the parent company vis-à-vis its subsidiary’s employees: (1) the two companies’ businesses are the same in a relevant respect; (2) the parent company has, or ought to have, superior knowledge on relevant aspects of health and safety in the particular industry; (3) the subsidiary’s system of work is unsafe – as the parent company knew or ought to have known; and, (4) the parent company knew, or ought to have foreseen, that the subsidiary would rely on its superior knowledge. These indicia are known and referred to in later judgments as the “Chandler indicia”. The UK Supreme Court has emphasised in Vedanta, however, that “the Chandler indicia are no more than particular examples of circumstances in which a duty of care may affect a parent.”

A parent’s or non-parent business partner’s knowledge is relevant to its duty of care in more than one way. First, actual knowledge of unacceptable risks may be sufficient to ground a duty of care. Second, ignorance does not preclude finding a duty of care – a parent or non-parent business partner may have an obligation to determine what risks its subsidiary’s or supplier’s activities pose, and take appropriate action. Third, a parent or non-parent business partner that possesses expertise and skill superior to its subsidiary or supplier, may incur a duty of care that goes beyond the standard duty of care, and may thus be exposed to supply chain liability if it does not deploy that expertise to remedy problems that may be present. Thus, companies with superior knowledge may have a duty to monitor and assist, as necessary, their business partners with inferior knowledge.

The Consequences of Public Statements

While knowledge is key to foreseeability and, thus, to the existence of a duty of care, public statements may result in proximity of the plaintiffs to the defendant and, thus, in the relevant duty of care being applicable vis-à-vis the plaintiffs. As discussed above, Vedanta’ public statements were deemed to cause Vedanta to incur responsibility to third parties for meeting the promises so made. Even if the law would not otherwise impose such responsibility, companies that voluntarily assume it but do not execute, are exposed to liability if third parties who relied on their promises, suffer harm as a result.

In the Choc v Hudbay’s case discussed above, the Court found that Hudbay’s public statements about its respect for human rights raised expectations on the part of the plaintiffs. Hudbay had made public representations concerning its relationship with local communities and its commitment to respecting human rights, and thereby, brought itself in proximity of the indigenous Mayan people. Hudbay’s public statements, the Court found, are “indicative of a relationship of proximity between the defendants and plaintiffs.”

As illustrated by Hudbay, public statements are an important factor for third parties such as neighbours. They are generally less relevant to workers employed by the subsidiary or supplier, since they tend to have access to documents and other information that are not available to other third parties; in Das v George Weston, the employees relied on the social audits conducted by the non-parent business parent, which had not been published.

Conclusion

In Vedanta, the Supreme Court enabled expansive supply chain liability. Control over the subsidiary’s or supplier’s operations is now the linchpin of supply chain liability. The Court contemplates that control over a company’s activities can be established in several ways other than ownership or shareholding, such as through contract, directorship or actual management. While it states that the opportunity to control in itself does not create a duty to control, it leaves open the possibility that in some cases such an opportunity may ground a duty to control.

In dicta, the Court makes a series of statements that address key issues in connection with supply chain liability. To a substantial degree, its judgment sets out the contours of supply chain liability of both parent companies and non-parent business partners. As such, it provides much food for thought for international corporate groups. They will want to revisit their internal policies and guidelines, and the implementation thereof, as well as their group-wide due diligence and compliance programs. Externally, they should pay attention to their public statements and the implications thereof for their liability exposure. Where parents or other business partners have actual knowledge of problems or possess superior operational knowledge, they may be exposed to incremental liability if they do not take appropriate action.

The level of economic integration of international corporate groups will be another determinant of supply chain liability. If corporate groups operate as one economic unit, the parent of the group will likely be deemed to be in operational control of its subsidiaries and thus have duties of care to prevent harm. Economic integration therefore is also likely to increase a parent’s or other business partner’s responsibility for subsidiaries’ operations in terms of safety, environmental impact and human rights compliance.

The UK Supreme Court will now have to decide whether to grant Okpabi’s request for appeal; its application was deferred until after the Court had ruled on Vedanta. The England and Wales Court of Appeal’s ruling in Okpabi v Shell was previously discussed on Corporate Finance Lab. Given the Court’s ruling in Vedanta, chances are that the Court will grant Okpabi’s request. The Court’s forthcoming ruling in Okpabi could be another seminal case in the evolving English law on supply chain liability.

Stay tuned.

Penelope Bergkamp

 

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