ESG & Sustainable Business | Environment & Regulatory |

Validation of Vedanta parent company liability case

Overview

In late January 2021, the Court of Appeal of the Hague considered in some detail whether to hold Royal Dutch Shell (UK plc) responsible for the actions of its indirect subsidiary, Shell Petroleum Development Company of Nigeria, in a long-running litigation relating to a significant oil leak in Nigeria.

Although heard in the Netherlands, the Court was interpreting Nigerian law, in the absence of which they looked at the English law position. Therefore there is no guarantee that an English court will in future follow the same reasoning, but such a detailed consideration and statement of the rules arising from English case law, and particularly the Supreme Court decision in Vedanta v Lungowe in 2019, will nonetheless be interesting for multinational companies and their investors.

Briefly, the relevant facts were that the Shell parent companies had set policies on matters common across the group, including on health, safety and environment, supported by standards and manuals implemented by Shell companies, including on Design and Engineering Practice. Compliance was verified through audits by the parent companies.

A Design and Engineering Practice manual contained a recommendation to install an adequate leak detection system (LDS) on pipelines, and commented that pipeline leaks could result in bad publicity and penalties. The Court took this relatively anodyne statement to be an indicator that the group interest was affected by the question of whether or not an LDS was installed. The tying of senior staff bonuses to the number of operational spills, together with witness evidence, also supported the Court's conclusion that the installation of the LDS was a matter in which the parent company had interfered. Shell's defence that it simply did not interfere in the subsidiary's operational activities was rejected as being too general and not substantiated. The corporate and physical lack of proximity between the parent and subsidiary companies did not sway the Court.

In the Nigerian pipeline in question, no LDS had been installed and the Shell parent company was aware of this fact, and also aware that the lack of LDS was reasonably likely to lead to a leak with serious adverse effects on local residents. The Court said that it was "fair, just and reasonable" (within the meaning of the traditional duty of care test) to impose a duty of care on the Shell parent company to ensure a LDS was installed in these circumstances.   

Considering the existing case law, the Court said that the question was whether the parent company owed a duty of care to third parties in some way related to the subsidiary company. Examining both Vedanta and the earlier case of Chandler v Cape, the Court said that the Vedanta rule was that if a parent company knew or should have known that the subsidiary company is unlawfully causing harm to third parties in a matter in which the parent has been involved or interfered, as a starting point the parent company has a duty of care towards the third parties to intervene.

This is not the same as, and there was no claim as to, piercing of the corporate veil which eliminates the false separation of parent and subsidiary, but rather the establishment of a separate duty of care on the parent. As is usual in duty of care cases, and as also seen in Vedanta, the Shell case was heavily fact-dependent. The case may, however, prompt parent companies to consider whether group level interventions are appropriately pitched or whether the level of detail or enforcement may be exposing them to liability risk.  

Friends of the Earth, the Dutch branch of which was directly involved in bringing the case against Shell, is hailing the judgment as evidence that "European companies must behave responsibly abroad" and "a warning for all Dutch transnational corporations involved in injustice worldwide". They also indicate that they will use this ruling to lobby for the EU to adopt rules on mandatory supply chain due diligence. The European Parliament strongly supports such a law and has unusually proposed a draft text; the Commission, which holds a "near monopoly" on proposing EU legislation, launched a public consultation in October 2020 but has not yet committed to a timeline for publication of a draft directive.

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