Parents beware: lessons from Vedanta v Lungowe

The UK Supreme Court’s recent judgment in Vedanta Resources Plc & another v Lungowe & others [2019] UKSC 20 sounds a note of caution for multinational parent companies who intervene closely in their subsidiaries’ activities.

At its heart, this was a judgment about where the trial of this case ought ultimately to take place: England or Zambia. Judgments of this type – where the key issue is the appropriate forum for a case to be heard – are relatively common in the UK and Jersey. The interesting part, from a company law perspective, was the comments made by the Supreme Court concerning a parent company’s vicarious liability for its subsidiary’s actions.

 

Background

The claimants are a group of 1,826 Zambian citizens who allege that toxic matter from the Nchanga Copper Mine (the Mine) which has been discharged into waterways over a number of years has caused damage to their health, crops and livestock. The Mine is said to be the second largest in the world. It is owned by the second defendant, Konkola Copper Mine plc (KCM), a public company incorporated in Zambia.

KCM is majority-owned by Vedanta Resources plc (Vedanta), the second defendant. Vedanta is the ultimate parent of a multinational energy, oil and gas group, and a UK public company listed on the London Stock Exchange. Although the Zambian government has a minority shareholding in KCM, materials published by Vedanta state that Vedanta’s control of KCM is no less than if it were a wholly-owned subsidiary.

The claim against KCM and Vedanta is pleaded in both common law negligence and breach of statutory duty. The claimants argue that Vedanta is liable because of the very high level of control and direction that Vedanta had over the mining operations of KCM and its compliance with health and safety and environmental standards. Both parties agree that the defendants’ liability is ultimately a matter of Zambian law.

KCM and Vedanta both challenged the English courts’ jurisdiction over the claimants’ claims against them. There were a number of issues raised, including Vedanta’s argument that the claim was an abuse of EU law and whether England was a proper place for the claim to be brought.

However, the focus of the Supreme Court’s judgment was primarily on whether there was a real issue to be tried against Vedanta. This was because the claimants had relied on a section of the English procedural code permitting service of proceedings outside the jurisdiction which states that in order to be able to serve a foreign defendant who is a “necessary and proper party” to a claim against an English-domiciled defendant, there must first be a “real issue to be tried” against the English-domiciled defendant. As the Supreme Court noted in its judgment, the test to be applied was the same as in a summary judgment application.

 

Was there a real issue to be tried against Vedanta?

The decision facing the Supreme Court was whether the lower courts had erred in deciding that there was a real issue to be tried against Vedanta which could not be disposed of summarily. The key question was: “whether Vedanta sufficiently intervened in the management of the Mine owned by its subsidiary KCM to have incurred, itself (rather than by vicarious liability), a common law duty of care to the claimants or, (on the claimants’ expert evidence), a fault-based liability under the Zambian environmental, mining and public health legislation in connection with the escapes of toxic materials from the Mine alleged to have caused the relevant harm”.

First, however, the Supreme Court made its displeasure clear regarding the sheer volume of material which had been placed before it for what ought to be a simple, preliminary hearing rather than a mini-trial. Lawyers engaged in disputes over jurisdiction ought to take note: as the Supreme Court said, this is not the first time it has stressed the need for a proportionate approach.

The Supreme Court rejected the defendants’ submission that the claim against Vedanta involved a novel extension of the common law of negligence, and therefore required an in-depth judicial analysis instead of the lower court’s summary assessment.

Instead, the Supreme Court held that “there is nothing special or conclusive about the bare parent/subsidiary relationship…the general principles which determine whether A owes a duty of care to C in respect of the harmful activities of B are not novel at all”. In doing so, it approved of a previous statement by Sales LJ in AAA v Unilever plc [2018] EWCA Civ 1532 that: “A parent company will only be found to be subject to a duty of care in relation to an activity of its subsidiary if ordinary, general principles of the law of tort regarding the imposition of a duty of care on the part of the parent in favour of a claimant are satisfied in the particular case”.

The Supreme Court also explained a previous key decision by the Court of Appeal in Chandler v Cape plc [2012] 1 WLR 3111. The Court of Appeal had set out four factors which could indicate that a parent company might have a duty of care towards third parties harmed by its subsidiary, which the claimants had used to plead their case:

  1. the businesses of the parent and subsidiary were the same (insofar as was relevant);
  2. the parent had, or ought to have had, superior knowledge of some relevant aspect of health and safety in the industry in question;
  3. the parent knew, or ought to have known, that the subsidiary’s system of work was unsafe; and
  4. the parent knew, or ought to have foreseen, that the subsidiary (or its employees) would rely on it using its superior knowledge of that relevant aspect of health and safety for the employees’ protection.

 

The Supreme Court explained that these are merely examples rather than an “unnecessary straitjacket” into which parties seeking to establish a duty of care must fit their case.

In this case, the lower court had found that it was arguable (on a summary assessment) that Vedanta owed a duty of care based on:

  • Vedanta having published a sustainability report stressing its oversight of its subsidiaries at board level and referring specifically to problems with discharges into water and the problems at the Mine;
  • Vedanta having entered into a management services agreement with KCM in which it was obliged, amongst other things, to provide employee training;
  • certain findings in a decision of the Irish High Court about the Vedanta group and its management; and
  • a witness statement from a former KCM employee about the change in culture following its takeover by Vedanta.

 

Lord Briggs, who gave the judgment on behalf of the Court, said that in his own assessment he might have been less persuaded by some of the above material. However, he concluded that the material published by Vedanta in which it asserted its assumption of responsibility for the maintenance of proper environmental standards by its subsidiaries (particularly at the Mine) and its implementation of those standards by training, monitoring and enforcement, was sufficient on its own to show an arguable case of sufficient intervention by Vedanta at trial.

Accordingly, the lower court’s decision on whether there was a real issue to be tried was upheld.

 

How might a parent find itself under a duty of care?

In giving the Supreme Court’s decision on this point, Lord Briggs made a number of comments about the ways in which a parent company may find itself under a duty of care and therefore potentially liable for its subsidiary’s actions.

Lord Briggs noted that there is a wide range of models of management and control in the relationship between parents and their subsidiaries, from a parent merely being a passive investor in its subsidiary’s activities to a vertically integrated group which effectively operates as one company. In short, the risk of a duty of care being incurred is greater the more closely involved a parent is with its subsidiary. The risk is particularly acute where, as in this case, we are talking about a parent that imposes group-wide policies on its subsidiaries.

As Lord Briggs said, there are a number of ways in which doing so could expose the parent to liability, including:

  • where group-wide policies or guidelines contain systemic errors that cause harm to third parties when applied by the subsidiary;
  • where the parent actively ensures the implementation of group-wide policies by providing training and supervising and enforcing their implementation; or
  • if the parent holds itself out publicly as supervising or having control of its subsidiaries when it does not in fact do so.

 

What can parents do to limit their risk?

Although Vedanta v Lungowe is an English case, it contains some valuable insights for offshore parents of English companies who might unknowingly find themselves liable.

In our view, parents should not abandon the implementation of group-wide policies, which can demonstrate good corporate governance and have significant commercial and practical benefits.

There are two main steps parents can take to protect themselves:

  • careful review of group-wide policies and any associated training, implementation and enforcement practices; and
  • effective supervision of subsidiaries’ activities.

 

The first step aims to stop harm to third parties occurring. The existence of a duty of care does not necessarily mean a successful claim against a parent: it must be shown that a third party has suffered harm. Careful review of policies ought to highlight any systemic errors, which can then be corrected.

The second step appears, at first glance, to be somewhat counter-intuitive. If one of the key elements of proving a duty of care is a high level of parental involvement, surely parents ought to avoid closely supervising their subsidiaries? Not necessarily. If a parent institutes group-wide policies – having checked them for systemic errors – then in order to protect itself from liability its best option is to properly supervise its subsidiaries in carrying them out. This can be demonstrated by keeping good records of training, supervisory visits, and enforcement.

The alternative is to give subsidiaries an entirely free rein in the implementation of group-wide policies. This is an unattractive option, especially as any public statement by the parent about group-wide policies may be taken as assuming responsibility for how the subsidiaries carry them out.

Lord Briggs’ comments, as noted above, apply to parent/subsidiary relationships which sit more towards the “vertically-integrated” end of the spectrum. However, the substantive trial of Vedanta v Lugowe is yet to take place, and it may be that further comments are made in the resulting judgment about ways in which a duty of care may be established. This will certainly be one to watch.

 

Eleanor Davies, English Solicitor and Associate

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