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Anchor defendants - Court of Appeal confirms effective control requirement

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Can a parent company domiciled in the UK be held liable for the acts of its subsidiaries overseas? Since our spring 2017 Smart Contracting seminars, the Court of Appeal has had its say on the case we discussed back then: Okpabi and others v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd [2018] EWCA Civ 191.

Background

The claimants were a group of Nigerian citizens who sought damages based largely on negligence claims, resulting from pollution and environmental damage caused by oil spills emanating from pipelines and infrastructure in the Niger Delta. The claims were brought against Royal Dutch Shell ("RDS"), the ultimate holding company of the Shell Group, domiciled in England, and Shell Petroleum Development Company ("SPDC"), a Nigerian company responsible for the group’s onshore operations in Nigeria. RDS held shares in Shell Petroleum NV which, in turn, held shares in SPDC. RDS itself did not have any operations in Nigeria; the relevant pipelines and infrastructure in Nigeria were owned and operated by SPDC.

The claimants brought proceedings against RDS directly in England, as the anchor defendant, and also sought permission to serve SPDC out of the jurisdiction.

The claimants had to establish that their claims involved a real issue against RDS which was reasonable for the English courts to try - ultimately they had to convince the court that RDS owed them a duty of care because it controlled the operation of the relevant pipelines and infrastructure, or had assumed responsibility to prevent the damage. There was no debate between the parties about the fact that SPDC was a necessary party.

The High Court held the claimants had no arguable case that RDS owed them a duty of care. As a consequence, the English court did not have jurisdiction to try the claims against SPDC as there was no real issue between the claimants and RDS which was reasonable for the court to hear.

The majority decision of the Court of Appeal

The Court of Appeal held that the claimants failed to satisfy the second and third limbs of the Caparo Industries Plc v Dickman [1990] 2 AC 605 test:

Proximity

The claimants specifically referred to these factors to demonstrate RDS’s alleged control over SPDC’s operations:

(i)    the issue of mandatory policies, standards and manuals which applied to SPDC;

(ii)   the imposition of mandatory design and engineering practices;

(iii)   a system of direct oversight of the implementation of RDS’s standards;

(iv)   the imposition of financial control over SPDC in respect of spending; and

(v)    the high level of direction and oversight of SPDC’s operations.

The Court of Appeal rejected the claimants’ argument that RDS controlled SPDC’s operations. In doing so, the court drew an important distinction between (i) a parent company with any control of the material operations of its subsidiary; and (ii) a parent company which issues mandatory policies and/or guidance to ensure conformity within a group of companies to particular standards. Only the former could be viewed as exercising control over the operations of its subsidiary, such as to give rise to a duty of care in favour of persons affected by the policies. On the evidence, the claimants did not come close to demonstrating the level of proximity upon which the court might find a duty of care to exist.

Fair, just and reasonable

The court held that it was inherently unlikely that an international parent company like RDS would undertake a duty of care to all those affected by the operations carried out by all of its subsidiary entities. Such an argument was a doubtful foundation for the imposition of a duty of care and none was held to exist.

Minority decision

Sales LJ disagreed with the majority decision. In his opinion, if it could be shown that RDS took control of the management of the operation and security of the pipeline and facilities, by exercising practical control of the management of SPDC or even by exercising joint control, then RDS would be in a relationship of proximity with the claimants. In his opinion, the internal standards were capable of providing a mechanism for the projection of real, practical executive control by RDS over the affairs of SPDC.

Practical significance and conclusion

The case highlights the need for multinational companies in the UK to be alive to the possibility of claimants bringing claims against them in the English courts for issues arising out of acts or omissions of their overseas subsidiaries.

The Court of Appeal decision confirms that the English courts will only accept jurisdiction in cases where the anchor defendant can be said to have assumed a material degree of responsibility for the operations of its subsidiary. This requires more than just the existence of mandatory standards across the group, but rather effective control of that subsidiary, very possibly via the active supervision and oversight of the enforcement of policies and standards issued in respect of the daily operations of the subsidiary.

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