18 Apr Vedanta v. Lungowe Symposium: Duty of Care of Parent Companies
[Robert McCorquodale is a Professor of International Law and Human Rights at the University of Nottingham UK, a barrister at Brick Court Chambers in London, and is the founder and principal of Inclusive Law, a consultancy which aims to bring together business, law and human rights. He was part of the legal team which represented the International Commission of Jurists and The Corporate Responsibility Coalition (CORE) in this case.]
Carlos Lopez has succinctly set out the key elements of the unanimous decision of the UK Supreme Court in Vedanta v Lungowe. The focus of this blog is on the Court’s decision on the parent company’s duty of care in relation to a foreign subsidiary’s actions and some of its implications it has for actions by parent companies. This is important as this case was the first decision by any superior court in the world directly on this issue.
Vedanta’s main arguments were that any duty of care by a parent company would involve a novel and controversial extension of the boundaries of the tort of negligence, beyond any established category, and that it would be contrary to fundamental principles of company law of the separate legal person of each company. The Court rejected these arguments. It held that [para 54]:
[T]here is nothing special or conclusive about the bare parent/subsidiary relationship, it is apparent that 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.
Parent and subsidiary are separate legal persons, each with responsibility for their own separate activities. 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.
By adopting this approach, the Court could find a duty of care and did not need to discuss corporate veil issues. Yet the Court made clear that the indicia given in Chandler v Cape and by others are not necessary to find a duty of care, as courts should not try to create any specific categories of company relationships. In fact the Court was pragmatic about the realities of business in stating [para 51]: “There is no limit to the models of management and control which may be put in place within a multinational group of companies”. The Court, though, extended Chandler v Cape when it held [para 53]:
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.
This latter statement is crucial as it includes where the parent company takes active steps – such as by training, supervision and enforcement – as well as where the parent company makes representations and where it has omitted to act, as all giving rise to a possible duty of care.
In regard to representations, the Court relied on the various published statements by Vedanta [para 61]
[I]n which Vedanta may fairly be said to have asserted its own assumption of responsibility for the maintenance of proper standards of environmental control over the activities of its subsidiaries, and in particular the operations at the Mine, and not merely to have laid down but also implemented those standards by training, monitoring and enforcement, as sufficient on their own to show that it is well arguable that a sufficient level of intervention by Vedanta in the conduct of operations at the Mine may be demonstrable at trial….
These public statements were generally made in the company’s annual report and other documents.
By considering that omissions by a parent company to take action could constitute an abdication of responsibility, the Court has clarified that the duty of care of a parent company does not just require specific actions by the parent company to set out policies or direct its subsidiaries. It also includes where the parent company should have done something and did not. To use the words of Mr Justice Foskett (para 25) in Vilca v Xstrata (in relation to the Voluntary Principles on Security and Human Rights): “something more than lip-service is demanded”.
This statement by the Court of the activities required of a parent company for there to be a duty of care clarified the law considerably. Of course, in each case there will still need to be evidence brought by claimants as to what actions a parent company has undertaken or omitted to undertake to indicate a duty of care of a parent company exists in the particular circumstances.
However, this decision may increase the risk that parent companies may decide not to take any actions that indicate any link between them and their subsidiaries in any decision-making. In particular, it may be a disincentive for parent companies to put in place group wide policies on health and safety, labour, environment and other human rights issues. If so, this would be a move contrary to the developments in human rights due diligence, as set out in the UN Guiding Principles on Business and Human Rights and the very helpful OECD Guidance on Responsible Business Conduct. Yet, the reality of business management is that is usually aims to reduce legal, reputation, operational and other risks, and group-wide policies on these human rights and environmental issues can do this. Indeed, if these policies are appropriately implemented it may be an effective way for the parent company to show that the duty has been discharged by it. In addition, an increasing array of investors, governments, consumers and industry bodies, as well as leading companies, now expect that the companies have effective human rights policies and human rights due diligence in place.
In addition, the reliance on published materials by the parent company (to which the Court referred) may be required by law. For example, section 414C of the UK Companies Act, which clarifies the duties of directors under section 172, requires that the strategic report of a quoted company must include information about “environmental matters (including the impact of the company’s business on the environment)” and “social, community and human rights issues” across its group. Interestingly, this was inserted into the Companies Act in 2013 as part of the UK government’s response to the UN Guiding Principles on Business and Human Rights: Good Business, p.7. This was a point made clear by the intervenors – the International Commission of Jurists and The Corporate Responsibility Coalition (CORE) – in this case.
One final point: this was a decision made very much about English law. Disappointingly, the Court did not refer to the international standards or comparative jurisprudence which was put to it by the two NGO intervenors. Their submission included the argument that the international standards indicated that a reasonable and responsible enterprise will take proper steps to conduct due diligence as to the risks of adverse impacts on human rights and the environment; to prevent or mitigate the risks of such adverse impacts; and to remediate such adverse impacts as may occur. In addition, they submitted that the recognition of a duty of care on the part of parent companies was consistent with the UK’s obligations under treaties to which it is a party, such as the ICESCR. The lack of reference to this submission was surprising as, during the oral hearing, Lord Wilson had expressly referred to this intervention as showing “the direction of travel” of the law. Nevertheless, this is a significant decision by the UK Supreme Court on the parent company duty of care, which will have impacts on other cases across the world.